The Hunt for Noncompliant Dealers

The FTC has been poking around at some dealerships in recent months. What is the agency looking for? 

By Tom Hudson

My dealer client called in a blind panic. He had arrived at his dealership that morning to find a letter lurking in the mail from the Federal Trade Commission, or, more specifically, from the FTC’s Division of Financial Practices, Bureau of Consumer Protection.

The letter announced that the FTC was conducting a “nonpublic investigation” to determine whether the practices of my client’s dealership complied with the FTC’s Trade Regulation Rule Concerning Preservation of Consumers’ Claims and Defenses. The letter requested that the dealer voluntarily provide, “in lieu of compulsory process” (hint, hint), a boatload of information, and requested copies of a number of documents, including copies of all consumer credit contracts executed by the dealership on or after Oct. 1, 2009.

A little background is in order at this point. The rule referenced in the FTC’s letter is commonly called “The Holder Rule.” It has been on the FTC’s books since the Pilgrims landed at Plymouth Rock. The Holder Rule was the FTC’s response to a particular abuse it had identified in the credit sale of consumer goods.

See, way back when, a merchant who sold a shoddy refrigerator on credit could assign the consumer’s installment contract to a finance company. When the consumer quit making payments to the finance company because the refrigerator was a piece of junk, the finance company could claim that it was a “holder in due course” of the customer’s obligation and, by virtue of that status, was immune from the consumer’s claims.

The FTC’s Holder Rule brought those practices to a grinding halt. The rule required credit sellers to include a provision in their contracts stating that the holder of the contract was subject to the claims and defenses of the consumer. Problem solved.

I was a new lawyer when the Holder Rule took effect, and I still recall the anguished screams of banks and finance companies who bought retail installment contracts from car dealers and who thought they would become targets for all of the car buyers who had claims or defenses against the dealers who sold them their cars.

It never happened. Dealers and finance companies stuck the required language in their credit contracts, and banks and finance companies amended their dealer agreements so that dealers would be on the hook for any consumer claims and defenses asserted under the Holder Rule. Sure, there were a few problems here and there, but the world didn’t end.

So, why did the FTC suddenly get its shorts in a twist about dealer compliance with the Holder Rule? The short answer is, I have no idea.

About the only thing that I can come up with is that the members of the FTC’s newly formed Auto Dealer Task Force were sitting around a table trying to figure out a good first move to show how serious they are about curbing abuses. So, they decided to gather some facts about one of their early consumer protection initiatives to see how it was working. To my knowledge, the FTC has never taken any steps, formal or otherwise, to assess the Holder Rule’s effectiveness.

If that is what is going on, I predict that the FTC will be mightily pleased with what it finds. I haven’t seen a retail installment contract printed since the Holder Rule went into effect that didn’t contain the language mandated by the rule.

So, let’s get back to my dealer client. After he recovered from his panic, I told him that unless he had encountered a specific problem lately, it was not likely that the FTC had a particular interest in his dealership, and that it was more likely than not that such a letter was sent to a random sampling of dealers in an attempt by the FTC to test industry compliance with the Holder Rule.

This particular story has a happy ending. The dealer forwarded the letter and we worked with the FTC’s staff to scale down the scope of what our client would produce. Our client does a little legwork for the commission and can rest easy that he isn’t in the FTC’s gunsights.

The next story might take a nastier turn, though. Industry compliance with many of the FTC’s rules and regulations isn’t what it should be, and the next letter might be directed at practices where dealers are much more vulnerable. If you haven’t had lunch lately with your friendly dealership lawyer, now might be a good time.