University:
Indiana University Bloomington
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

156

Pages:

2
Author:

bratrochanter

Federal Trade Commission (FTC) Rule on Consumer Credit Contracts The FTC has established a regulation to protect consumers from the potential downsides of the holder in due course (HDC) rule, especially in cases involving defective goods or services. This rule applies to sellers who extend credit directly or arrange for third-party financing. Mandatory Notice for Consumer Credit Contracts Sellers must include the following clause in consumer credit contracts, including promissory notes: 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. Effect of the FTC Rule This notice ensures that:   Any subsequent holder of the instrument (even if they would otherwise qualify as an HDC) is subject to all claims and defenses that the consumer could assert against the original seller. Consumers can withhold payment or reduce their liability on the note if the goods or services are defective or the seller breaches the contract. Case Example: Music Acceptance Corp. v. Lofing In this case:     Lofing bought a defective Steinway piano using financing from Music Acceptance Corp. (MAC). The promissory note included the mandatory FTC notice. When Lofing stopped payments due to the piano's defects, MAC sued to enforce the note. The court ruled in favor of Lofing, holding that the FTC rule allowed him to assert his breach of warranty defense against MAC, even though MAC might have otherwise qualified as an HDC. State Consumer Protection Laws Many states have enacted laws to further limit HDC protections in consumer transactions. Examples include: 1. Labeling Requirements: Some states require instruments to be marked as “consumer paper,” making them ineligible for HDC status. 2. Prohibitions on Assignment: Certain states prohibit sellers from transferring consumer debt instruments to third parties without consumer consent. Impact on Consumers The FTC rule and similar state laws shift the risk of seller misconduct to lenders and third-party finance companies, which are often better equipped to handle such risks. This ensures that consumers are not unfairly burdened with payment obligations for defective or undelivered goods and services.