Preservation of claims and defenses

Question 1

What is the purpose of the Holder-in-Due-Course Rule?

Answer 1

To ensure that consumer credit contracts used in financing retail purchase of consumer goods or services specifically preserve the consumer’s rights against the seller.

Question 2

True or false:

The FTC determined that it constitutes an unfair and deceptive practice for a seller, in the course of
financing a consumer purchase of goods or services, to employ procedures which make the consumer’s duty to pay
independent of the seller’s duty to fulfill its obligations.

Answer 2

True

Question 3

What two things are prohibited under the holder-in-due-course rule?

Answer 3

The holder-in-due-course rule prohibits a seller from:

• taking or receiving a consumer credit contract that does not contain a prescribed notice which preserves the consumer’s claims and defenses in the event the contract is negotiated or assigned to a third party creditor.
• accepting the proceeds of a purchase money loan unless the evidence of the loan contains the prescribed notice preserving as against the lender, whatever claims and defenses the consumer may have against the seller.

Question 4

What does the rule apply to?

Answer 4

The notice must appear in all written obligations defined as “consumer credit contracts”, which includes any written instrument used:

• under TILA
• is used to finance a sale
• in connection with a purchase money loan

Question 5

True or false:

Banks who purchase consumer paper containing the notice required of sellers can use/benefit from the holder-in-due-course doctrine.

Answer 5

No they cannot

If banks accept consumer paper which fails to contain the notice required of sellers, they may be considered to be a
participant in the seller’s violation of the Rule.

Question 6

True or false:

Banks that make purchase money loans containing the notice will be subject to all claims and defenses which the consumer could assert against the seller.

Answer 6

True

Banks making purchase money loans must include the prescribed notice in their contracts.

Question 7

What is the required notice to be included in all applicable credit contracts?

Answer 7

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.

This notice must be in 10pt bold font.

Question 8

What is exempt from the rule? (6)

Answer 8

Exemptions include:

• All credit card contracts
• sales for commercial use
• sales involving real property, commodities, or securities
• sales greater than $54,600 (2021)
• lease agreements that don’t constitute a credit sale under reg z
• Seller referrals on purchase money loans that are not an established pattern (isolated)