Almost 45 years after the FTC’s Holder Rule and corresponding FTC staff guidance were issued, the FTC has issued a “staff note” in which FTC staff concludes that the TILA exemption for large transactions does not apply to the FTC’s Holder Rule (which is officially titled the “Trade Regulation Rule Concerning Preservation of Consumers’ Claims and Defenses”).  The Holder Rule requires sellers that arrange for or offer credit to finance the purchase of consumer goods or services to include a specified “holder notice” in the credit contract.  The notice must state that any holder of the contract is subject to all claims and defenses the consumer could assert against the seller of the financed goods or services, with the consumer’s recovery limited to the amount paid by the consumer under the contract.

As originally enacted, TILA exempted transactions, other than real property transactions, in which the amount financed exceeded $25,000.  The Dodd-Frank Act increased the exemption amount to transactions in which the amount financed exceeds $50,000 and directed the CFPB to adjust that amount annually based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers.   As a result, the exemption for 2021 is now $58,300.  In 1976, the FTC staff who worked on the Holder Rule issued guidelines, more or less contemporaneous with the promulgation of the Rule, that stated that the Holder Rule incorporated the then-existing $25,000 TILA exemption amount.  Those guidelines also addressed the nature of the relationship between sellers and lenders that requires the inclusion of the holder notice in loan documents as well as the claims covered by and excluded from the Holder Rule.  Although never formally adopted by the FTC, those guidelines have often been relied upon by courts dealing with Holder Rule issues.

Following a systemic review of the Holder Rule, the FTC published a notice in the Federal Register in May 2019 announcing that it had decided to retain the Holder Rule without modification.  In that notice, the FTC indicated that it would review relevant guidelines in light of comments received in connection with the Holder Rule review.  According to the staff note, such comments prompted the FTC staff to reexamine the issue of whether the TILA exemption amount applies to the Holder Rule.

In the staff note, the FTC indicates that when the Holder Rule was adopted in 1975, the FTC expressly declined to adopt an exemption for large transactions, although such an exemption would have been unnecessary if it was built into the Holder Rule.  The staff observes that the argument that the TILA exemption amount applies to the Holder Rule has arisen, as if it were a new development, because the Holder Rule borrows TILA’s “finance charge” and “credit sale” definitions to identify the credit agreements in which the “holder notice” must appear.  The staff notes that these definitions do not contain a limit based on the transaction amount, ignoring the fact that they have no relevance in connection with transactions that are excluded from TILA.  They also note that the Holder Rule does not incorporate the TILA exemption amount explicitly or by cross-referencing the TILA section containing the exemption amount.  However, the staff does not provide a satisfactory explanation as to why the contrary conclusion would have been reached in 1976.

Accordingly, the staff rejects the longstanding, contemporaneous guidance and concludes that the Holder Rule is not limited to transactions below a certain amount and that the statement in the 1976 guidelines that the Holder Rule incorporated the TILA exemption amount “was not supported by the Holder Rule or canons of construction and was contrary to the intent stated by the Commission when it adopted the Rule.”