Last month, the FTC issued an advisory opinion clarifying that the Holder Rule does not preempt any state laws that put more liability on banks that are the “holders” of a loan contract, and in particular, the rule does not limit recovery of attorneys’ fees and costs when state law authorizes awards against a holder (we previously discussed the advisory opinion in an earlier Consumer Finance & FinTech Blog post here).

The advisory opinion is, in part, a reaction to some courts “misinterpreting the Holder Rule as a limitation on the application of state cost-shifting laws to holders.”  Auto lenders have relied on the Holder Rule to argue that their liability is limited only to what car buyers paid in the original sales contract.  Thus, historically, in many jurisdictions defrauded consumers have been able to file actions and be reimbursed up to the purchase price of the car, but not the legal fees associated with such actions.

The recent clarification of the Holder Rule is likely to result in more lawsuits against banks and larger rewards to plaintiffs where consumers allege fraud by auto dealers.  For instance, in January 2021, the California court of appeals affirmed a trial court’s ruling that permitted a consumer to recover attorney’s fees based on allegations that an auto finance company, as the holder of the loan, was liable for the auto dealer’s misrepresentations about the features of the purchased automobile.  The attorney’s fees amounted to almost $170,000 while the total damages were about $22,000.

While this case is on appeal to the California Supreme Court, briefings filed by both sides have indicated the potential impact of the recent advisory opinion on the results of this case.  The California Supreme Court’s decision will resolve a split among California’s appellate districts, with the courts of appeal in two other districts having issued decisions concluding that the Holder Rule’s limit on recovery does include attorney’s fees.

Putting it into Practice:  Auto finance companies should address the risks that have been shifted in their direction as a result of this advisory opinion by reviewing their agreements with auto dealers to ensure that risks are properly allocated as between the finance company and the dealer.  These companies should also review compliance programs and perform quality checks to ensure that the retail installment contracts that auto dealers send to the finance company are properly vetted.