After completing its investigation of nearly 50 automobile dealers, the Federal Trade Commission reported that it found broad compliance with the agency’s Rule of Concerning Preservation of Consumers’ Claims and Defenses, more commonly known as the “Holder in Due Course” Rule.

The Holder in Due Course Rule protects car buyers when dealers sell the buyers’ credit contracts to other lenders. Specifically, the rule preserves consumers’ rights to raise claims and defenses against purchasers of consumer credit contracts – with automobile sales, it protects consumers who buy cars from dealers on credit. When dealers sell credit contracts to lenders, consumers are obligated to pay the lenders instead of the dealers. Under the rule, if a dealer engaged in fraud or made misrepresentations in selling a car on credit, a consumer could raise the dealer’s conduct as a defense to the lender’s demand for payments.

Without the rule, consumers would not have this protection in states that preclude them from asserting against lenders the claims and defenses they have against dealers if the lenders bought the credit contracts in good faith and without knowledge of these claims and defenses.

The rule requires dealers to include in their credit contracts a notice that lenders who buy the contracts are subject to the claims and defenses consumers may assert against dealers. It effectively makes lenders liable for dealers’ conduct, and gives them an incentive to work with reputable dealers.

In November 2010, the FTC staff asked nearly 50 franchised and independent auto dealers in 45 states, and two large online automobile dealers, for copies of consumer credit contracts executed after October 1, 2009. FTC staff’s review of these contracts found broad compliance with the Holder in Due Course Rule. Because all of the responding dealers disclosed the required Holder Notice in their finance contracts, the FTC staff is closing its investigations of them.

The Commission also reminds auto dealers that their obligations under the Holder in Due Course Rule will expand in the near future. The rule currently does not require dealers to include the notice in credit contracts exceeding $25,000 in the amount financed. However, as a result of the Dodd-Frank Act of 2010, as of July 21, 2011, the rule will require the notice in these contracts up to $50,000. The Commission encourages auto dealers to review their contracts to ensure that they are in compliance with the expanded scope of the Holder in Due Course Rule.

Click here for the Holder in Due Course Rule, and here for more information about the Rule.