Dealer Fraud But Making Payments? Hold Up! The Holder Clause To the Rescue!


Consumers who purchase vehicles and agree to make payments sometimes find the dealer selling the vehicle defrauded them.  Whether it is a failure to deliver title or misrepresenting the condition of the vehicle or failing to disclose prior collision damage or Hold up!  Holder Rule!some other fraud, the dealer’s mistake can be attributed to the lender which MAY mean the consumer may be able to discontinue payments.  Allow me to explain…

The Federal Trade Commission’s “Holder Rule” requires the following language appear in finance contracts assigned by the seller to a third-party lender:

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.

When a dealer sells a vehicle to a consumer and sets the consumer up with financing with a third-party lender, the dealer is assigning the finance contract to the lender.  This is why even though your finance contract lists the dealer as the “seller”, your payments go to the lender which is the entity typically found at the bottom of the standard LAW-553 retail installment sales agreement form used throughout the vehicle industry. This means the lender, not the dealer, has the right to enforce the finance contract and recover the payments from the consumer (ex:  demands for payment, repossession).

In other words, the consumer does not have to pay the lender/bank/finance company if the consumer has a valid claim that the dealer committed fraud or somehow breached the contract.  Powerful eh?  Keep this in your bag of tricks and your mental Rolodex.

As you would imagine, however, one would need to be abundantly certain of the strength of one’s position if one decided to stop making one’s vehicle payments.  Do not try to figure this out by yourself.  If you believe a dealer has committed fraud or otherwise taken advantage of you in a vehicle transaction, contact me or another auto fraud lawyer for an initial consultation.

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