Assignment of Contracts
This section addresses the relief available to a consumer who has purchased a defective product on credit and whose financing contract has been assigned by the seller to a third party (called the creditor-assignee).
A. Preservation of Buyer’s Rights: The Federal Trade Commission Holder Rule
The Holder Rule is a federal rule intended to protect consumers when their financing contracts are sold to a creditor. The Rule becomes relevant in cases where a consumer buys an item from a seller on credit, which breaks shortly after purchase, but which the seller will not repair or replace. When the buyer attempts to discontinue payments, the buyer finds that the contract has been assigned (sold) to a third party—a bank or finance company—that may know nothing of the defect, that cannot cure the defect, and that demands continued payment from the buyer. Because the buyer no longer has a contract with the seller, the buyer has no recourse against the seller. Thus, the question is what recourse and protection the buyer has against the holder of the contract.
The Holder Rule answers this question by placing the assignee-creditor in the shoes of the seller. In other words, the Rule preserves any affirmative legal claims and any defenses the consumer had against the seller and allows the consumer to assert those claims and defenses against the creditor-assignee.
The Holder Rule does not create any new rights for the consumer; it simply preserves any rights the consumer had when he or she entered into the contract with the seller, no matter who holds the financing contract when the buyer finds the defect. The result is that the buyer may defend against a creditor’s suit for nonpayment by raising a valid claim against the seller as a set-off, or, the buyer may bring an affirmative action against a creditor that has received payments for a return of monies paid on the account.
B. Mandatory Notice Requirements
The Holder Rule preserves a consumer’s rights by requiring the seller to include certain language in the contract that subjects any future creditor-assignee to the same claims and defenses that the consumer could have asserted against the seller. In accordance with federal regulations, 16 C.F.R. §§433.1 and 433.2, in any sale or lease of goods or services to consumers, a seller:
1. Must include the following notice, in at least ten point, bold face type, in any consumer credit contract taken or received by the seller:
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.
2. Must not accept, as full or partial payment for such sale or lease, the proceeds of any purchase money loan (a cash advance that is received by a consumer in return for a finance charge, which is applied to a purchase of goods or services from a seller), unless any consumer credit contract made in connection with such purchase money loan contains the following provision in at least ten point, bold face, type:
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 WITH THE PROCEEDS HEREOF. RECOVERY HEREUNDER BY THE DEBTOR SHALL NOT EXCEED AMOUNTS PAID BY THE DEBTOR HEREUNDER.
C. Consequences of Failure to Include Mandatory Provisions
Any seller who fails to place one of these notices in a consumer credit contract is considered to have committed an unfair or deceptive act or practice under the Federal Trade Commission Act, subjecting the seller to action by the Federal Trade Commission.
In New Mexico, a buyer does not waive the protections afforded by the Holder Rule simply because the seller did not include the mandatory language in the contract. Rather, the law assumes the creditor-assignee takes the contract subject to all claims and defenses the buyer could have asserted against the seller. §55-9-404(d). See also Associates Loan Co. v. Walker, 76 N.M. 520 (1966)(explaining it is a “fundamental rule of law . . . that an assignee . . . acquires by virtue of his assignment nothing more than the assignor had and all equities and defenses which could have been raised by the debtor against the assignor are available to the debtor against the assignee”); Jaramillo v. Gonzales, 2002-NMCA-072, 132 N.M. 459, 50 P.3d 554 (explaining the Holder Rule holds the assignee subject to all claims the consumer might bring against the original seller).