Suppose, hypothetically, that a large manufacturer of automobiles—call them People’s Car, Inc.—has a problem with computer chips in their engines. How might this impact financial service providers?

In 1975, the Federal Trade Commission (“FTC”) promulgated the “FTC Holder Rule,” which was designed to limit the “holder in due course doctrine” that had allowed sellers to employ procedures in the course of arranging financing that separated the buyer’s duty to pay for the goods or services from the seller’s reciprocal duty to perform. FTC Commentary, 40 Fed. Reg. 53,522. The rule prohibits a seller in “connection with any sale or lease of goods or services to consumers . . . [to] [t]ake or receive a consumer credit contract which fails to contain the following provision in at least ten point, bold face, type: ‘NOTICE[.] ANY HOLDER OF THIS CONSUMER CREDIT CONTRACT IS SUBJECT TO ALL CLAIMS AND DEFENSES WHICH THE DEBTOR COULD ASSERT AGAINST THE SELLER OF GOODS OR SERVICES OBTAINED PURSUANT HERETO OR WITH THE PROCEEDS HEREOF. RECOVERY HEREUNDER BY THE DEBTOR SHALL NOT EXCEED AMOUNTS PAID BY THE DEBTOR HEREUNDER.’” 16 C.F.R. § 433.2 (1975). The standard retail installment sales contract for vehicles in California contains the FTC Holder Rule clause.

Might People’s Car’s manufacturing problem reach the holder(s) of those retail installment sales contracts (“RISCs”) under the FTC Holder Rule? It is unlikely that the problem will reach the RISC holders directly because a manufacturer typically is not a “seller.” According to the FTC, the Holder Rule is unambiguous, and it must be applied in accordance with its plain language. FTC Advisory Opinion Letter (May 3, 2012) at 3; Lafferty v. Wells Fargo Bank, 213 Cal. App. 4th 545, 560-61 (2013) (“If there is no ambiguity in the language, we presume the Legislature meant what it said and the plain meaning of the statute governs.”). The FTC Holder Rule’s plain language only permits claims that a consumer “could assert against the seller” as opposed to the manufacturer or someone else. And the FTC Holder Rule, as a contractual term, uses the RISC’s term “seller,” which the RISC defines as the selling dealer, not the manufacturer.

It is possible, however, that the hypothetical computer chip problem could reach the manufacturer indirectly. If consumers can lodge claims against the selling dealer as the “seller” of People’s Car’s problem automobiles, Lafferty is clear: “all claims . . . against the seller” in the FTC Holder Rule means “all claims.” The only limitation is the FTC Holder Rule’s limitation of liability to “amounts paid by the debtor hereunder.” 16 C.F.R. § 433.2, Lafferty, 213 Cal. App. 4th at 560 (“The Holder Rule unambiguously allows the buyer to assert against the holder of a consumer credit contract ‘all claims and defenses which the debtor could assert against the seller of goods or services obtained pursuant hereto or with the proceeds’ of the financing.”) (emphasis omitted). Holders would have indemnity rights against a seller, regardless of whether the assignment is with or without recourse. Cal. Civ. Code § 2983.5(b). So, holders of RISCs would be wise to shore up their dealer agreements and monitor closely the solvency of dealers selling large numbers of vehicles getting publicity about their quality.

For more information on the FTC Holder Rule, please contact Scott J. Hyman at