I have written several times about the Federal Trade Commission’s Trade Regulation Rule pertaining to the preservation of consumers’ claims and defenses (the FTC Rule). See Enough About Credit Reporting—Let’s Talk About Two FTC Rules!, The Holder-In-Due Course Rule Giveth and Taketh Away, and The Federal Trade Commission regulations that touch every consumer credit transaction. I’ve also written about consumer warranties under the federal Magnusun-Moss Warranty Act (the Act). See The Sale of Service Contracts and the Offering of Warranties and What are Implied Warranties and Who Cares Anyway?. So, what is the connection?

Often a consumer’s purchase of goods through an installment sale contract or a direct loan is accompanied by a consumer warranty from the Seller of the goods. The Act gives rights to the consumer against the seller of the goods who provides such a consumer warranty—either full or limited, as those terms are defined in the law. So, what happens if the Seller fails to perform work required by the warranty? What remedies does the consumer have?

Well, first, the consumer has the remedies specified in the warranty and those provided by the Act. These remedies may be asserted against the Seller-warrantor. And, that is traditionally the first line of recovery used by consumers for warranty violations.

But, there is a second tier of recourse that is available under the FTC Rule. The Rule literally provides that the assignee of a consumer installment sales contract or a consumer direct loan made by a lender who routinely deals with the Seller or under a common business relationship with the Seller, is subject to all claims and defenses that the consumer can assert against the original Seller/creditor. This includes warranty claims. There is a limit on the amount of damages that a consumer can recover from the assignee or lender in this scenario. But, it does provide another means of recovery for consumers. 

Practice Pointer: Creditors who purchase installment sales contracts and those who make direct loans in a “common arrangement” with Sellers, should be mindful that the claims by consumers against Sellers can come back to haunt them. 

Please Note: This is the two hundred-twenty-fourth blog in a series of Back to Basics blogs, in which relevant and resourceful information can be easily accessed by clicking Dentons - Consumer Finance Report.