The notice a financed purchase has to carry

The short answer

A Federal Trade Commission rule titled Preservation of Consumers' Claims and Defenses makes it an unfair or deceptive act or practice for a seller to take or receive a consumer credit contract that does not contain a particular notice, in at least ten point, bold face, type.

The notice reads: 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 HEREUNDER.

Two sentences, and both matter. The first says the party now holding the debt inherits whatever the buyer could have raised against the seller. The second caps what that produces at amounts the debtor has actually paid under the contract.

The rule places the duty on the seller. It is the seller who must not take or receive a contract missing the notice, and it is the seller's conduct that the rule declares unfair or deceptive.

The problem the notice was written for

Credit paper moves. A contract signed with a seller is frequently sold on, and the buyer of that paper is a different company with no involvement in what was sold.

Without the notice, the practical position is that a buyer keeps paying the new holder regardless of anything that went wrong with the goods or services, because the new holder was not the seller. The notice is drafted to travel with the contract and attach to whoever holds it.

The rule's own definitions describe the arrangements it is aimed at. A creditor is a person who, in the ordinary course of business, lends purchase money or finances the sale of goods or services to consumers on a deferred payment basis, provided that person is not acting as a credit card issuer for the particular transaction.

A contract, for the rule's purposes, is any oral or written agreement, formal or informal, between a creditor and a seller which contemplates or provides for cooperative or concerted activity in connection with the sale of goods or services to consumers or the financing thereof. A business arrangement is defined even more loosely, as any understanding, procedure, course of dealing, or arrangement, formal or informal, of the same kind.

Two notices, not one

The rule contains two prohibitions and two notice texts, and the difference between them is one phrase.

The first applies where the seller takes or receives the consumer credit contract itself. That notice covers goods or services obtained pursuant hereto or with the proceeds hereof.

The second applies where the seller accepts, as full or partial payment, the proceeds of a purchase money loan. In that case the notice must appear in the credit contract made in connection with that loan, and it covers goods or services obtained with the proceeds hereof.

A purchase money loan is defined as a cash advance received by a consumer in return for a finance charge within the meaning of the Truth in Lending Act and Regulation Z, applied in whole or substantial part to a purchase of goods or services from a seller who either refers consumers to the creditor or is affiliated with the creditor by common control, contract, or business arrangement.

That referral-or-affiliation condition is the hinge. A loan a buyer arranges independently, from a lender with no relationship to the seller, is not described by that definition.

The cap, and why it is the important sentence

Both notices end with the same sentence: RECOVERY HEREUNDER BY THE DEBTOR SHALL NOT EXCEED AMOUNTS PAID BY THE DEBTOR HEREUNDER.

That sentence is routinely omitted when this rule is described in plain language, and omitting it changes the picture substantially. The notice is not written as a route to open-ended recovery against a finance company. Its own text limits what can be recovered under it to amounts the debtor has paid under that contract.

The practical reading is narrow and worth stating plainly. The notice is about not being made to keep paying for something regardless of what happened, more than it is about extracting a windfall from a party that had nothing to do with the sale.

What that means for any individual situation is not something this article decides. The point here is only that a summary of this rule which stops after the first sentence has described half of it.

Who the rule covers, and who it does not

The definitions set the perimeter, and each one narrows it.

A consumer is a natural person who seeks or acquires goods or services for personal, family, or household use. A seller is a person who, in the ordinary course of business, sells or leases goods or services to consumers. A consumer credit contract is any instrument evidencing or embodying a debt arising from a purchase money loan transaction or a financed sale as the rule defines those.

The credit card carve-out is explicit in two places. The definition of creditor excludes a person acting, for the purposes of a particular transaction, in the capacity of a credit card issuer. And a credit card issuer is separately defined as a person who extends to cardholders the right to use a credit card in connection with purchases of goods or services.

So an ordinary card purchase is outside this rule. A card carries its own separate set of dispute rights under different law, which run on different timing and require different steps. Those are two distinct systems and neither substitutes for the other.

There is also one dated exemption still printed in the rule. A seller who took or received an open end consumer credit contract before November 1, 1977 is exempt from the part with respect to that contract, provided the contract does not cut off consumers' claims and defenses. The rule then defines what a contract that does not cut them off looks like: one that does not constitute or contain a negotiable instrument, and contains no waiver, limitation, term or condition having the effect of limiting a consumer's right to assert against any holder all legally sufficient claims and defenses the consumer could assert against the seller.

What this looks like at checkout

Payment plans presented at checkout come in several shapes, and the rule's definitions distinguish between them rather than treating them alike.

The questions the definitions raise are answerable from the documents themselves. Is there a finance charge, which is what makes an arrangement a purchase money loan under the definition. Is the credit extended by the seller, or by a separate lender the seller refers to or is affiliated with. Is the instrument a consumer credit contract, or a credit card transaction, which the definitions exclude.

And then the simplest check of all: whether the notice paragraph is present in the document. The rule specifies its wording and specifies that it appear in at least ten point, bold face, type, so its presence or absence is visible on the page rather than a matter of interpretation.

None of that establishes whether any particular arrangement is inside or outside the rule, which depends on documents a reader has and this site does not. It establishes what to look for.

Sources

Each document below is named as it names itself, with the date printed on that document rather than the day it was read.

1. Title 16 Code of Federal Regulations Part 433, Preservation of Consumers' Claims and Defenses, read in full — the ten definitions at 433.1 including creditor, purchase money loan, contract, business arrangement, credit card issuer and consumer credit contract; both required notice texts and the ten point bold face requirement at 433.2(a) and 433.2(b); and the pre-November-1977 open-end exemption at 433.3; amendment notes 40 FR 53506, Nov. 18, 1975 and 42 FR 46510, Sept. 16, 1977 — Electronic Code of Federal Regulations, Office of the Federal Register, September 2026