Advisory opinion letter to Mr. Ambrose

Isl
Arlan Greenberg
President

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ADVISORY OPINIO 675

Trade Regulation Rule on Preservation of Consumers' Claims and Defenses, 16 C. R. 433, does not create new rights for the consumer against the seller but merely preserves claims and defenses a consumer may assert against a seller so that he may raise them against the holder of the contract when the contract is negotiated or transferred (File No. 773 7007).

Opinion utter
April 6, 1977
Dear Mr. Ambrose:

This is in response to your letters of January 28, March 17 and May 12 1976, concerning the Trade Regulation Rule on Prescrvation of Consumers' Claims and Defenses , 16 C. R. 433. Specifica11y, you request: (J) that the rule be repealed or amended to conform to thc Commission s authority; and (2) an advisory opinion as to whether the rule confers any rights on consumers to withhold payment either from the original holder of a consumer credit contract or from a subsequent holder of the contract.

In considcring the rule the Commission provided a substantial opportunity for intercsted parties to file written data, views and arguments. In addition ample opportunity was provided for interested parties to testify at public hearings. A history of the rulemaking procceding appears at 40 F.R. 53506 (1975). The rule was promulgated pursuant to and in accordance with Section 6(g) of the Federal Trade Commission Act, Sec. 202( c) of the Federal Trade Commission Improvement Act (Pub. Law 93-637) and a11 other applicable law. A lega11y sufficient Statement of Basis and Purpose for the ruie was published with the rule. See 40 F. R. 53506 - 53529 (1975). Your requests for repeal or amendment of the rule arc accordingly denied. The Tradc Regulation Rule, in pertinent part, provides that it is an unfair or deceptive practice for a se!!er, directly or indirectly, to take or receive a consumer credit contract which fails to provide a notice , as specified , that holders of the contract are subject to a11 claims and defenses which the debtor (consumer) could assert against the se!!er. The rule does not create new rights for the consumer against the se11er. Claims and defenscs of a consumer, asscrtable against a se!!er under state law, remain unchanged under the rule. When a consumer contract is negotiated or transferred, the rule, through the required contract notice, merely preserves the claims and defenses a consumer may assert 676 FEDERAL TRADE COM"'lSSlON DECISIONS

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against a se!!er so that he may raise them against the holder of the contract. Accordingly, if the consumer, under applicable law, is entitled to withhold payment from the seHer, he may, pursuant to the notice withhold payment from the holder.

By direction of the Commission.

ThiTd Letter of Request

May 12, 1976 Dear Mr. Tobin:

Thank you for your telephone ca!! on May 10, 1976 to notify me of the decision to deny the ICCA's petition for repeal of its trade regulation rule on preservation of consumers' claims and defenses. We appreciate that thoughtful effort.

Today I received your lengthy letter of the same date, which misidentified the International Consumer Credit Association as the International Consumer Finance Association. Presuming that this error arose from pressure of time in preparation of the letter rather than actual confusion between our organization and the National Consumer Finance Associe'ion , I and the ICCA's legal counsel are concerned because your letter states that the Commission considered only one letter from the ICCA and only one petition among several under Section 553(e) of the Administrative Procedure Act. Although your letter of May 10 explains reasons for denial of those petitions filed by other associations it names, it does not seem to address itself to any of our petitions. Since we do not regard it as complying with the requirements of Section 555(e) of the Administrative Procedure Act, we hope that you wi!! agree that we have a legitimate concern regarding whether our petitions have received due process of law and that you wi!! therefore act promptly to relieve that concern.

My letter of .) anuary 28, 1976 to Acting Chairman Dixon requested a Commission interprctation of its trade regulation rule on preservation of consumers' elaims and defenses. Failure of the Commission to respond to that petition led to a second petition on March 3 , 1974 addressed to Ir. Christofer W. Keller, urging repeal of or amendment of the trade regulation rule on 6'TOunds of denial of due process of law for this and other statcd reasons.

As a result of receipt of Ms. Dewey s letter of March 3, 1976 , I V,Tote ADVISORY OPINIONS 677

again to Acting Chairman Dixon on March 17, 1976. That letter again protested denial of due process of law, and it certainly should have been considered by the Commission in connection with both of the earlier petitions, not only because of bearing on the earlier petitions , but because that letter closed with a request for postponement of the effective date by the Commission until it had acted on our other petitions, which we regarded at that time and now as essential in affording us due process of law. Consequently, our request for postponement is quite different from those petitions for postponement filed by other trade associations.

We believe that your letter of May 10 1976 did not provide reasons for denial of our petition for repeal or postponement and did not address itseJf at all to our petitions for interpretation and amendment of the rule.

Section 555(8) of the Administrative Procedure Act states: "prompt notice sha!! be given of the denial in whole or in part of a written application, petition, or other request of an interested person made in connection with any agency proceeding. Except in affirming a prior denial or when the denial is self-explanatory, the notice sha!! be accompanied by a brief statement of the grounds for denial. This letter is not intended as an appeaJ with regard to any denial of our petitions, but rather to seek clarification of the status of the fo!!owing petitions and a brief statement of the grounds for denial of any that have been denied by the Commission with identification of the date of Commission action:

1) Our petition for interpretation by the Commission of whether this trade regulation rule is intended to confer any right on the consumer to withhold payment either from an original creditor or any subsequent holder in due course. We have been informed that the Commission general counsel is preparing an advisory opinion in response to this petition. Weare compelled to comment that delay in the issuance of an interpretation of a rule promulgated so many months ago should not be occurring if the Commission and its staff understand their own rule the purposes for which it was issued , and its probable legaJ effects. 2) Our petition for repeal of the trade regulation rule on grounds of lack of statutory authority to issue it, especially since it is intended to abrogate and/or pre-empt the laws of most if not a!! states. 3) Our petition for amendment of the rule to conform to the Commission s authority to prevent unfair and deceptive acts or 678 FEDERAL TRADE COMMISSION DEC1SIO

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practices, to conform to the requirement of the Magnuson/Moss Act relating to specificity of prohibited acts or practices and to conform to a requirement that the rule incJude a statement of findings and purpose as required by law. This petition a!!eged that the Commission has no authority to preserve consumer c1aims and defenses, per se, nor to issue a trade regulation rule for such a purpose. 4) Our petition for postponement of the effective date of the trade regulation rule was conditioned only on the need of the Commission itself for time to adequately consider and respond to the above three petitions.

This and other correspondence which I have transmitted to the Commission and its staff was written to meet the responsibilities of the Board of Directors of the International Consumer Credit Association to nearly 45 000 American members. May I have an early reply so that can provide an accurate report of the Commission s actions on our petitions as soon as possible. Thanks for your cooperation.

Sincerely yours
/s/ JAMES A. A:vBROSE
Secretary- Treasurer

SecO?ui LettRr of Reqnest

March 17, 1976

Dear Mr. Dixon:

On January 28, 1976, I wrote to you on behalf of the International Consumer Credit Association to formal1y request interpretation by the Commission of its trade regulation rule on preservation of consumers claims and defenses. The purpose of that letter was to raise and hopefuliy sette at least one question of constitutionality as part of the official record of the proceedings.

Failing to receive anything but a form letter acknowledgment of this request by Ylarch 3, 1976 from Mr. Christofer W. Kcller, presiding officer for the proceedings on this rule, I wrote on that date to Mr. Ke!!er to petition the Commission under Section 553(e) of the Administrative Procedure Act, a part of the Commission s statutory authority for promulgation of its rule on consumers' claims and defenses. In response, as of this date, we have received another fill-in form letter from Mr. Kel1er identical to the acknowledgment of my letter January 28.

ADVISORY OPINIONS 679

A ttached is a copy of a letter dated March 3, 1976, which I received on March 8, 1976 from Anne E. Dewey, Division of Speeial Projects apparently as a result of improper referral to her for a reply. ' We asked for an interpretation from the Commission itself, which would be binding thereafter not only on the Commission but on the federal courts as well. We did not ask for an informal staff opinion, which has no legal standing of any kind.

Under due process of law, our request required either its denial by the Commission itself or issuance of an interpretation by the Commission itself. We recognize that the Commission had an option, but also a duty either to deny our request or to respond to it affirmatively through issuance of an interpretation. Unless the referral of my letter to Ms. Dewey was inadvertent, that referral was denial of due process of Jaw because the Commission did not have the option of a staff opinion letter.

Despite that fact, I am compe!!ed to comment in respect to several statements in Ms. Dewey s letter. A copy of that letter is attached for your convenience. * Any present or even past authority which the Commission has in promulgating trade regulation rules is limited to prevention or prohibition of specific unfair and deceptive acts or practices in or affecting commerce. Any act or practice covered by a trade regulation rule must in fact be unfair and deceptive in a!! instances. Rules promulgated under P. L. 93-637 may include requirements, but only as coronaries to stated provisions of such rules which prohibit specific acts or practices. The Commission has no authority to legislate general1y, nor to pre-empt or repeal or annul either statutory or common (decisional) laws of the states. If the Commission docs not agree with that view of its authority, I wi!! appreciate information on its interpretation of P. L. 93-637 and/or the Federal Trade Commission Act.

The second paragraph of Ms. Dewey s letter specifical1y states that it is the intention of the trade regulation rule on consumers' claims and defenses to repeal the holder-in-due-course doctrine. She specifica!!y used the legal term "abrogate " which means to annul by an authoritative aet, to abolish or to repeal , revoke or cancel. The Commission has no such authority.

Ms. Dewey states that it is the intention of this rule to abrogate the

. Not reproduced herein.

89 F.

doctrine which permits the separation of the duty to pay from the duty to perform in the context of consumer credit transactions. Neither this rule nor any other promulgated by the Commission has declared that failure in performance by a se!!er is an unfair or deceptive act or practice. Further, the promulgated rule would make a holder in due coursc liable for any c1aim or defense which a consumer could assert against a se!!er, cvcn when the seller has not been involved in any unfair or deceptive act or practice, fraud or any other form of misconduct. Consequently, the rule sets a requircment which is not a corollary of any prohibition, other than the taking or receiving of a contract which docs not meet that requirement.

, quite incorrectly,Ms. Dewey s letter, in its third paragraph states that the rule permits a consumer to withhold payment from a subsequent h01der of his contract if state law grants him the right to withhold payment in that situation from his immediate se!!er. It is clearly the intention of the Commission through promulgation of this rule to abrogate, as Ms. Dewey stated, the holder-in-due-course doctrine, which gives a third party holder immunity from all c1aims and defenses which a consumer may have against a seller. The rule even abrogates or pre-empts the laws of those statcs which have either abridged or outlawcd the holder-in-due-course doctrine as codified in the Vniform Commercial Code.

If it is the iniention of the Commission to merely preserve consumers claims and defcnses, then it can do so by amending its rule to prohibit the inc1usion in crcdit contracts or agrcements of any provisions which would grant immunity to any holder in due course from any claim or defense which thc buycr may assert, either affirmativcly or defensively, against a seller under state laws. But even if the Commission would amend its rule in this fashion, it would still lack statutory authority of any kind to promulgate the rule bccause it would not serve to prohibit any specific unfair or deceptive act or practice. The consumer problems which the Commission intends to resolve or alleviate through this rule arc prob1ems which cannot be properly handled through rulemaking, but which the Commission can appropriately handle on a case by case basis where its acts against a seller for unfair or deceptive acts or , Inc., FTC practices, such as in the case of Main Street Furniture Docket No. 2772, announced on January 28 1976. Ms. Dewey s letter asserts that the Commission has both a duty and authority to enforcc state statutes and decisional Jaw through promu1gation of a ruJe which is intended to prcscrve consumer rights and remedies established under such laws. We disagree, and our position is