Letter From Stephanie Rosenthal, Chief of Staff, Division of Financial Practices, Bureau of Consumer Protection, To Jeff Appel, Deputy Under Secretary, U.S. Department of Education

Division of Fi nan cial Practi ces
Bureau of Consumer Protection
Jeff Appel
Deputy Under Secretary
U.S. Department ofEducation
Office of the Under Secretary
400 Maryland Ave, SW
Washington, DC 20202
Dear Mr. Appel,
UN ITE D STATES OF Al\1ERICA
Federal Trade Commission
WASHINGTON, D.C. 20580
April 7, 2016
This letter is in response to your request for a staff advisory opinion regarding the
Federal Trade Commission' s Trade Regulation Rule Concerning Preservation of
Consumers' Claims and Defenses, 16 C.P.R. § 433, commonly known as the Holder
Rule. Specifically, you note that courts commonly allow consumers to assert time-barred
claims defensively, even if they would not be able to assert such claims in an affirmative
lawsuit, and ask if such defensive claims would be permitted under the Holder Rule. As
explained below, the Holder Rule would permit the time-barred claims or defenses
against the holder, if state law would permit the time-barred claims or defenses against
the seller.
The Holder Rule protects consumers who enter into credit contracts with a seller
of goods or services by preserving their right to assert claims and defenses against any
holder of the contract, even if the original seller subsequently assigns the contract to a
third-party creditor. In particular, the Holder Rule requires sellers that arrange for or
offer credit to finance consumers' purchases to include in their credit contracts the
following 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.
16 C.P.R. § 433.2.
A creditor or assignee of the contract is thus subject to all claims or defenses that
the consumer could assert against the seller. As you note in your request, the Guidelines
that accompany the Holder Rule explain that "c laims and defenses" are "not given any
special definition by the Commission.. . . Appropriate statutes, decisions, and rules in

each jurisdiction will control, and the pertinent rules oflaw and equity, including rules of
evidence, procedure, and statutes of limitations, will continue to apply." 1
Thus, the Rule protects consumers' existing claims and defenses, and does not
create any new claims or defenses for the consumer. Accordingly, if a statute of
limitations bars an affirmative lawsuit against a seller under state law, that law would
continue to apply. If, however, other applicable state law would still permit the claim
against the seller, then under the Holder Rule, the claim could be used as to subsequent
holders of the contract. Further, if state law allows consumers to assert time-barred
claims as defenses against the seller, then the Holder Rule would allow consumers to
assert such defenses against subsequent holders as well.
Please be advised that the views expressed in this letter are those of the FTC staff.
They have not been reviewed, approved, or adopted by the Commission, and they are not
binding upon the Commission. However, they do reflect the opinions of those staff
charged with enforcement of the Holder Rule.
Sincerely,
Sv~
Stephanie Rosenthal
Chief of Staff, Division of Financial Practices
Federal Trade Commission
Bureau of Consumer Protection
1 FTC, Guidelines on Trade Regu lation Rule Concerning Preservation of Consumers' Claims and
Defenses, 41 Fed. Reg. 20022 (May 14, 1976), available at
http s: //www.ftc.gov/system/files/documents/rules/holder-rule/760504hidcrule.pdf.
2

Stephanie Rosenthal
UNITED STATES DEPARTMENT OF EDUCATION
OFFICE OF THE UNDER SECRETARY
January 14,2016
Chief of Staff, Division of Financial Practices
Federal Trade Commission
Bureau of Consumer Protection
600 Pennsylvania Avenue, NW
Washington, DC 20580
Dear Ms. Rosenthal:
This letter follows up on your phone discussion on December 2, 20 l 5 with the Department of
Education's Office of General Counsel regarding the application of the Federal Trade
Conunission (FTC)'s Holder Rule to claims brought by student and parent bonowers in the
Federal Family Education Loan (FFEL) program. Borrower defenses to repayment ofFFEL
loans that rest on claims against the school attended with the proceeds of the loan will almost
always be based on t he FTC Holder Rule "preservation of defenses" clause, 16 CFR § 433,
included in the FFEL student and parent loan promissory notes. We seek a determination from
your office about the effect of applicable statutes of limitation on claims and defenses that might
be raised by a borrower, relying on the Holder Rule clause in the FFEL loan agreement, as a set-
off to a demand for repayment on a FFEL loan.
We understand that the FTC's 1976 Guidelines on the Holder Rule discuss the impact of statutes
of limitations on claims and defenses raised by a borrower by stating that: "[t] he words "Claims
and Defenses" which must appear in the Notice are not given any special definition by the
Commission .. . Appropriate statutes, decisions, and rules in each jurisdiction will control, and the
pertinent rules of law and equity, including rules of evidence, procedure, and statutes of
limitations. will continue to applx." FTC, Guidelines on Tra de Regulation Rule Concerning
Preservation ofConsumers' Claims and Defenses, 41 FR 20022, 20023-20024 (May 14, 1976)
(emphasis added). The Guidelines state, as an example, "Where a local jurisdiction has a two-
year statute of limitations on contract claims, such claims and defenses would be extinguished
after two years." Id. at 20024 (emphasis added).
Our question arises in the context of claims against a merchant - here, the school - that are time-
barred under applicable state law. We ask if it is the Commission's view that where a borrower's
claim against a school would be time-barred under state law, the borrower could assert that time-
baiTed claim in an action by a lender seeking repayment of the loan, as a defense that would set
off the amount of the claim against the unpaid balance on a loan. If the Commission considers a
borrower to be able to assert the time-barred claim as a defense, we also ask whether the
400 MARY!.AND AVE. SW, WASHINGTON, DC 20202
www.ed.gov
The Depc1rtment of Educa tion 's mh;sion is to promote student nr:hie1•ement and prepamtionlor global competitiveness
by fostering educ,1tiona/ excellence and ensuri11g equal access.

Commission views the Rule as enabling the borrower to assert the time-barred claim
affirmatively in an action to recover amounts already paid to the lender.
The language of the FTC Guidelines seems to suggest that under the Rule, time-barred claims,
for example, for breach of contract, are "extinguished" for all purposes. !d. We understand,
however, that courts commonly allow a patty to use a time-barred claim defensively if that claim
arises from the same transaction as the opponent's timely claim, and treat these claims as claims
for common law recoupment. The FTC Guidelines do not use the term recoupment but appear to
contemplate that concept when referring to what the Guidelines describe as a "set-off:"
"(t]he Rule does apply to all claims or defenses cormected with the transaction,
whether in tort or contract. .. .It is also possible for a consumer to have a claim or
defense against a seller because of a separate transaction. The provision required by
the Rule would not allow him to assert such a claim or defense against the
holder. 	The hol der's obligations arc limited to those m;sing from the transaction
which he finances. The vast majority of cases, in the staff's opinion. will involve a
limited right of set-off against the unpaid balance."
(emphasis added).
The key similarity between common law recoupment and the set-off desclibed in the Guidelines
appears to be that the Holder Rule clause allows the consumer to assert only those claims
connected to the same transaction as that financed with the loan. We understand that that the
term "setoff" is commonly used to describe a counterclaim that arises out of a transaction
unrelated to a plaintiffs cause of action against the defendant. Based in these considerations and
the explanation ofthe scope of the Rule provided in the Guidelines, we question the meaning of
the statement in the Guidelines that time-barred claims are "extinguished." We ask for
clarification whether. the Commission intends the Rule to enable the consumer to assert either
affirmatively or as a defense to the loan only those claims that are within the otherwise
applicable statute of limitations, or to assert time-barred claims as viable defenses, regardless of
the applicable statutes of limitations that would bar affirmative recovery on such claims.
We appreciate your consideration of our request. 	In order to assist us in a current rulemaking in
this area, we ask that you provide your response as expeditiously as practicable. Please do not
hesitate to contact us if you have any questions about our request.
Sin~vW
tAppel
Deputy Under Secretary
U.S. Department of Education