Holder Rule

Will the Holder Rule Help Me With My Student Loan Debt?

Written by Steve Rhode


Dear Steve,

The holder rule– does this stand only for when your debt is transferred to a 3rd party collection agency and/or does it affect individuals whose loans were sold to a third party where I am now paying the third party instead of where my loan originated from?

I am asking because I have 2 TERI student loans that are considered private student loans (though they were issued by the government from my understanding) and they are managed by AES (American Education services). Just wondering if this is a use case.




Dear Jessica,

The Holder Rule is a Federal Trade Commission (FTC) rule. The FTC does not regulate all entities in the United States. For example, the FTC does not have the authority to regulate banks, savings and loans, Federal credit unions, and common carriers like telephone companies. – Source

That being said, the Consumer Financial Protection Bureau (CFPB) does have the authority to regulate such entities. From its inception till the start of the Trump administration the CFPB was a reliable partner with the FTC to take actions together. However, in a political move, the CFPB has undergone a number of changes and has been neutered in actions against entities.

The bottom line is it will become a technical issue who is actually holding the note you owe. The servicer does not matter. So, if there is an underlying issue with the product or service you financed, the underlying current note holder may still be subject to the FTC and Holder Rule.

For example, was the required Holder Rule notice in your original financing agreement and/or were the services you purchased unfair and deceptive?

As stated in Kilgore v. Keybank:

“Because Defendants had previously partnered with other failed private vocational schools, enforced the student loans even though the fully paid tor education Was not delivered, and either sued or were sued by the students, Defendants knew exactly what they were doing here: They took great pains – in violation of the FTC Holder Rule which is intended to apply to consumer credit transactions such as the ones at issue — to ensure that their Notes and SSII’s Service Contract Agreements omitted the required Holder Rule Notice thereby enabling the Defendants to argue that SSH’s students have no rights under the Holder Rule to assert defenses against them that the students could assert against SSH for failing to deliver the bargained-for educational services. Defendants funding of the loans unlawfully, unfairly and fraudulently facilitated SSH’s violation of the Holder Rule by enabling SRI to 1) take or receive consumer credit contracts without the Holder Rule Notice, and/or 2) accept as full or partial tuition, the proceeds of purchase money loans (as that term is defined in the Holder Rule) without including the required Holder Rule Notice in the consumer credit contracts made in connection with the students’ enrollments and loan.” – Source

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As one consumer affairs director told me, the Holder Rule is effective in actions regarding lemon vehicles when the financing is held by a financing company. The use as a student loan defense is a relatively new approach.

No rule or regulation is going to be perfect or apply in all situations. However, with some investigation and legal research by a competent attorney who is licensed in your state, you may find favorable results.

Here is an interesting look from 2004 at the Holder Rule and how it applied to one particular bank, Key Bank.

“Private lenders have developed business relationships with trade schools, even unlicensed and inferior schools, nationwide. The lenders use the trade schools to solicit loans. Because of the business arrangements between the schools and the lending entities, all students affected by closed computer training schools or other problems with the schools should easily obtain relief under the Federal Trade Commission (FTC) holder rule.

The FTC holder rule is simple and clear: any defense or claim that the student has against the school is a claim or defense against the loan. 70

Many lenders disregard the rule. Recent litigation against SLM Corporation
(commonly known as Sallie Mae), Key Bank, and other defendants challenges these practices. 71

Some of the lawsuits include hundreds of named plaintiffs, some just one or two, and some are class actions. The cases against SLM Corporation allege that in each loan document that included the FTC holder rule SLM included an additional clause negating the rule. 72

The clause stated, in essence, that the student agreed that the loan was enforceable even if the student was unhappy with the services provided by the school. When victims complained, Sallie Mae recited this provision back to them and demanded full payment of the loan, plaintiffs say. 73

The cases against Key Bank describe a similar scheme, but with a twist. The suits allege that Key Bank simply refused to place the FTC holder rule clause in the loan document. In response, Key Bank claimed that because the clause was not in any of the loans, none of the loans was subject to any claims based on the schools’ misconduct. 74

Given that satisfied customers are more likely to repay loans, a bank’s willingness to fund bad loans seems at first glance to be counterproductive for its own bottom line. However, the bank may not intend to hold all the loans during their repayment period. Instead most banks pool and sell the loans to investors. Through a process called “asset-backed securitization,” the bank obtains full value for the loans by selling them to an investment trust. The investors pay full value without a disclosure of the inherent defects in the loan. 75

According to Tom Domonoske, one of the lawyers representing plaintiffs in the cases against Key Bank, the bank’s system “is to create a product (a loan pool), through a series of unlawful transactions (schools violating the FTC holder rule), and sell that product for as much money as possible to an unsuspecting buyer (an investment trust comprising duped investors).” 76

READ  The Holder Rule - A Way to Eliminate Private Student Loans and Service Contract Loans

By refusing to honor the FTC holder rule, these private lenders exercise tremendous power to harm the lives of victims. Some students have been forced into bankruptcy, while others have been forced to refinance their debts to pay the high interest for which they received no benefit. If the victims simply assert the FTC holder rule and refuse to pay the loan, negative information is reported to credit bureaus, thereby ruining their credit score. By supplying liquidity fueling the growth of abuses, the defendants are also harming legitimate training schools that lose potential customers to sham schools.

Litigation against these private lenders and other defendants is complicated by the lenders’ almost universal inclusion of arbitration clauses with anticlass action provisions in the loan documents. The inclusion of the mandatory arbitration clause has made it even more difficult for victims to find counsel willing to represent them. 77


70 For more information about the Federal Trade Commission (FTC) Holder Rule, see NAT’L CONSUMER LAW CTR., UNFAIR AND DECEPTIVE ACTS AND PRACTICES (5th ed. 2001 & Supp. 2003). Notice of the holder rule is required in any instrument evidencing a debt arising from a “purchase money loan” or a “financed sale.” 16 C.F.R. § 433.1(i), 433.2. These definitions are terms of art, often defined differently here from other contexts. For a detailed discussion, see UNFAIR AND DECEPTIVE ACTS AND PRACTICES, supra, at

71 See, e.g., Glassman v. SLM Financial, No. 3:03CV099 ( E.D. Va. 2003). Selected pleadings from this and similar cases are available on the CD-ROM included with STUDENT LOAN LAW, supra note 4. In addition to raising the FTC holder rule issues, the lawsuits raise claims under various statutes, including the Truth in Lending Act, 15 U.S.C.A. § 1666-1666j; the Equal Credit Opportunity Act, id. § 1691-1691f; and state statutes on unfair and deceptive acts and practices. Fraud and conspiracy claims are also included.

72 Domonoske, supra note 61.

73 Id.

74 Id.

75 Id. For an extensive discussion of securitization, see NAT’L CONSUMER LAW CTR., THE COST OF CREDIT: REGULATION AND LEGAL CHALLENGES § (2d ed. 2000 & Supp. 2003).

76 Domonoske, supra note 61.

77For more information on mandatory arbitration clauses, see NAT’L CONSUMER LAW CTR., CONSUMER ARBITRATION AGREEMENTS (3d ed. 2003). – Source

Bottom Line

You may have a completely reasonable position but it’s complicated.

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About the author

Steve Rhode

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.


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