The Holder rule says that anyone that holds a financial contract is liable for all of the actions that happened below them in the chain of the contract. This means that if a dealer commits fraud and sells the agreement to a finance company, the consumer can actually sue the finance company for the dealer’s fraud. Watch the following video to learn more about the Holder rule and what it could mean for your dealership.
Below is a transcript of the video:
Now let’s talk about something I may have referenced in a previous video, and that’s called the Holder Rule. That’s a fair trade commission. It’s a federal rule and Holder is short for Holder in due course. The Holder rule says that anyone that holds a financial contract is liable for all of the actions that happened below them in the chain of the contract. This means that if a dealer commits fraud, then sells the agreement to a finance company, and the consumer discovers the fraud and pursues a claim for the fraud, then the consumer can actually sue the finance company for the dealer’s fraud.
That’s why in a lot of financial arrangements, there are indemnification clauses and repurchases because technically speaking, the law allows the consumer to actually sue the finance company for something that they had absolutely nothing to do with. That’s called the Holder rule. Where this gets dealers in a lot of trouble is when they end up with a two-front battle in litigation. On the one hand, they have the consumer suing the dealer because most of the time the consumer’s going to also include the dealer.
On the other hand, the finance company is coming after the dealer as well to either repurchase or indemnify the deal. It becomes very complicated for a dealer and frankly, very expensive for the dealer to fight both battles. So in a lot of cases, the dealer ends up giving in to the finance company, agreeing to repurchase or indemnify just so that we can focus all time and energy on the consumer’s case. I have to also worry about what the finance company is demanding against the dealer.
That’s the Holder rule. It allows consumers to pursue claims against anyone that owns the contract. Now, one quick thing to keep in mind regarding the Holder rule is the limits of liability. So the finance company is actually only limited in liability, in most cases, to the amount that they have received on the contract. Let’s say a consumer buys a car from a dealer, puts $3,000 down, and agrees to a payment schedule. The deal gets sold off to the finance company. The finance company has accepted two payments of $300 each and then the consumer sues. In that case, the limit of liability to the finance company is the amount they have received, so $600, usually. Now, there are some exceptions to that and there are some particulars in certain cases, but generally speaking, there is a limit to liability on the finance company in the Holder rule. They still have to pay an attorney and deal with it.
That’s where they come after the dealer for indemnification or for repurchase.
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