The Holder Rule: When You Take Out a Loan, and the Product is Defective or Fraudulent

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Consumers often purchase items or services through financing arrangements offered or arranged by sellers. Sometimes the item turns out to be defective, or it is never delivered.  Other times, services are shoddy, incomplete, or not performed at all.  For consumers who find themselves in this position, a federal regulation known as the Holder Rule may help. 

If the Holder Rule applies, a consumer may be able to stop making payments on a loan and may even be able to get a refund of payments already made.  Whether the Holder Rule applies requires a careful analysis of the relationship between the seller and the lender.

What Is the Holder Rule?

The Holder Rule is a federal regulation intended to help consumers when a defective or fraudulent product or service is purchased with credit extended directly by the seller or arranged by the seller.  If the seller (1) provided your financing directly or (2) has a certain type of relationship with the provider of your financing, you may be able to stop paying on the loan and possibly obtain a refund of any payments you made on the loan if a product or service is defective or not provided. 

When a credit agreement is entered into as part of the sale, it is supposed to include a statement like this:


(Absence of this language in your contract, however, does not necessarily mean the Holder Rule is unavailable to help you.)

Does the Holder Rule Apply to My Contract?

Several facts must exist for the Holder Rule to apply to your loan.  Some of those factors include:

The Holder Rule does not apply to loans you obtain on your own without the help of or referral by the seller.

When May I Stop Paying on My Contract?

Generally speaking, if the Holder Rule applies you should be able to answer “yes” to the following:

  1. Was the credit agreement entered into as part of your purchase?
  2. Is the seller the creditor, or does the seller regularly refer customers to the creditor, or is the seller affiliated with the creditor?
  3. Do you have a valid reason to stop paying on your loan and/or request a refund of payments you have made (for example: the seller misrepresented the product/service; the product was defective; the service was not performed)? And do you have evidence to show why you should not have to repay the loan or receive a reimbursement?

If the Holder Rule applies, you may be able to stop making payments on your loan and even recoup previously paid amounts. You may even be able to assert claims that are otherwise barred by the statute of limitations if state law permits those claims to be raised as defenses to payment. Be cautious about stopping payment to a creditor!  If your claim is unsuccessful, collection proceedings and negative credit reporting may result.  You should consult an attorney before taking such an action.  Please note that the Minnesota Attorney General’s Office cannot provide legal advice to individuals in private legal matters.  Our Office cannot tell you whether the Holder Rule may apply to your situation.  You may wish to consult this Office’s publication, Hiring an Attorney, for guidance in looking for an attorney.

What If the Holder Rule Language Does Not Appear in My Contract?

If the Holder Rule applies and the Holder Rule statement is not in the contract, the creditor has violated federal law.  If your credit contract does not include the statement and you have reason to believe it should, you should consult an attorney to explore your legal options.  You may still have legal rights under the Holder Rule even if the Holder Rule statement is not in your contract.

Where Can I Go for Help?

The Consumer Financial Protection Bureau (CFPB) is the federal agency that has authority to enforce the Holder Rule.  If you believe the creditor has violated federal law, you may contact the CFPB as follows:

Consumer Financial Protection Bureau
1700 G Street NW
Washington, DC 20552
(855) 411-2372

You may also wish to contact the FTC to report the possible violation:

Federal Trade Commission
Consumer Response Center
600 Pennsylvania Avenue NW
Washington, DC 20580
(877) 382-4357
TTY: (866) 653-4261

Does the Holder Rule Apply to My Student Loans?

The FTC has stated that student loans are within the scope of the Holder Rule. The Department of Education also has regulations applying principles similar to the Holder Rule to many federal student loans. For private loans, the borrower may be able to cancel existing debt if a school fraudulently induced the student to enroll and had some relationship with the lender. For federal direct loans, the promissory notes include a statement about your rights and will tell you to contact your direct loan servicer if you believe you should not have to repay the loan.

For federal student loans, the “Borrower Defense to Repayment Rule” offers relief from debt based on fraudulent, misleading, or other illegal acts by the school and related to the enrollment. Different versions of the Rule, however, exist and may apply depending on the time in which the student was enrolled.

For more information about the Department of Education’s most recently announced “borrower defense” rule, consumers should review the website for the Office of Federal Student Aid, which is part of the U.S. Department of Education, at

 Please note this Office has no authority over the Department of Education’s review of the borrower defense claims it receives, the timeliness of its review of such claims, or its decision to grant or deny such claims.

More Information

Further information about the Holder Rule is published by the FTC at the following address: You may also contact the Attorney General’s Office for more information:

Office of Minnesota Attorney General Keith Ellison
445 Minnesota Street, Suite 1400
St. Paul, MN 55101
(651) 296-3353 (Twin Cities Calling Area)
(800) 657-3787 (Outside the Twin Cities)
(800) 627-3529 (Minnesota Relay)

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