Car Law A to Z: H is for Holder Rule


This is a little known doctrine in federal law that may allow you to withhold payments on a vehicle which is giving you a headache. The Preservation of Claims and Defenses Rule (the “Holder Rule”), 16 C.F.R. § 433.2 was designed to allow consumers to achieve redress from the entities that were collecting their debts—the assignee/holder of the consumer credit contract. The Holder Rule requires all sellers to insert a clause in every consumer credit contract a/k/a finance contract. This all-so-important clause provides that the holder of the contract is “subject to all claims and defenses which the debtor could assert against the seller….”

So to make this simple:  You buy a vehicle from Joe Dealer’s dealership and sign a finance contract.  The finance contract is between you and Joe Dealer but Joe Dealer assigns the contract and the right to receive payments to Vehicle Finance Company.  Vehicle Finance Company is who you make your payments to but if you have any issues with the vehicle Vehicle Finance Company usually points you back to the dealer.  While the consumer’s claims about the vehicle problems are primarily made against the dealer, per the Holder Rule these same claims could possibly be asserted against the lender and allow the consumer to discontinue further vehicle payments until a resolution of the claims.  Powerful remedy huh?

This assignment of a finance contract typically occurs when sign and drive and unsign?you purchase a vehicle from a major vehicle dealership.  Most major dealerships want no part of the financing of the vehicle; they assign the contract to a Vehicle Finance Company and receive a commission for the transaction.

Not all vehicle contracts are assigned.  In a true “buy here, pay here” situation Joe Dealer sells the vehicle to you and you actually make your payments to Joe Dealer a/k/a Joe Dealer is the lender.  In the buy here pay here situation the Holder Rule would not apply but it would not really matter since the dealer and the lender are the same.

Since the Holder Rule is federal law it applies throughout the 50 states including North Carolina. Before you decide to stop making any further vehicle payments, consult with a knowledgeable vehicle law or consumer law attorney to review your vehicle purchase documents, the facts of your situation, and legal options.

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1 Comment

  1. Jeff A.

    Thanks, John. Did not know all this. We need a similar rule in the context of residential mortgages. So many claims and defenses against the seller and original lender are not able to be raised against a holder in due course of the promissory note!

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