Stephanie Rosenthal 

UNITED STATES DEPARTMENT OF EDUCATION 

OFFICE OF THE UNDER SECRETARY 

January 14,2016 

Chief of Staff, Division of Financial Practices 

Federal Trade Commission 

Bureau of Consumer Protection 

600 Pennsylvania A venue, NW 

Washington, DC 20580 

Dear Ms. Rosenthal: 

This letter follows up on your phone discussion on December 2, 20 l 5 with the Department of 

Education's Office of General Counsel regarding the application of the Federal Trade 

Conunission (FTC)'s Holder Rule to claims brought by student and parent bonowers in the 

Federal Family Education Loan (FFEL) program. Borrower defenses to repayment ofFFEL 

loans that rest on claims against the school attended with the proceeds of the loan will almost 

always be based on the FTC Holder Rule "preservation of defenses" clause, 16 CFR § 433, 

included in the FFEL student and parent loan promissory notes. We seek a determination from 

your office about the effect of applicable statutes of limitation on claims and defenses that might 

be raised by a borrower, relying on the Holder Rule clause in the FFEL loan agreement, as a setoff to a demand for repayment on a FFEL loan. 

We understand that the FTC's 1976 Guidelines on the Holder Rule discuss the impact of statutes 

of limitations on claims and defenses raised by a borrower by stating that: "[t]he words "Claims 

and Defenses" which must appear in the Notice are not given any special definition by the 

Commission .. . Appropriate statutes, decisions, and rules in each jurisdiction will control, and the 

pertinent rules of law and equity, including rules of evidence, procedure, and statutes of 

limitations. will continue to applx." FTC, Guidelines on Trade Regulation Rule Concerning 

Preservation of Consumers' Claims and Defenses, 41 FR 20022, 20023-20024 (May 14, 1976) 

(emphasis added). The Guidelines state, as an example, "Where a local jurisdiction has a twoyear statute of limitations on contract claims, such claims and defenses would be extinguished 

after two years." I d. at 20024 (emphasis added). 

Our question arises in the context of claims against a merchant - here, the school - that are timebarred under applicable state law. We ask if it is the Commission's view that where a borrower's 

claim against a school would be time-barred under state law, the borrower could assert that timebaiTed claim in an action by a lender seeking repayment of the loan, as a defense that would set 

off the amount of the claim against the unpaid balance on a loan. If the Commission considers a 

borrower to be able to assert the time-barred claim as a defense, we also ask whether the 

400 MARY!.AND AVE. SW, WASHINGTON, DC 20202 

www.ed.gov 

The Depc1rtment of Education's mh;sion is to promote student nr:hie1•ement and prepamtionlor global competitiveness 

by fostering educ,1tiona/ excellence and ensuri11g equal access. 
Commission views the Rule as enabling the borrower to assert the time-barred claim 

affirmatively in an action to recover amounts already paid to the lender. 

The language of the FTC Guidelines seems to suggest that under the Rule, time-barred claims, 

for example, for breach of contract, are "extinguished" for all purposes. !d. We understand, 

however, that courts commonly allow a patty to use a time-barred claim defensively if that claim 

arises from the same transaction as the opponent's timely claim, and treat these claims as claims 

for common law recoupment. The FTC Guidelines do not use the term recoupment but appear to 

contemplate that concept when referring to what the Guidelines describe as a "set-off:" 

"(t]he Rule does apply to all claims or defenses cormected with the transaction, 

whether in tort or contract. .. .It is also possible for a consumer to have a claim or 

defense against a seller because of a separate transaction. The provision required by 

the Rule would not allow him to assert such a claim or defense against the 

holder. The holder's obligations arc limited to those m;sing from the transaction 

which he finances. The vast majority of cases, in the staff's opinion. will involve a 

limited right of set-off against the unpaid balance." 

(emphasis added). 

The key similarity between common law recoupment and the set-off desclibed in the Guidelines 

appears to be that the Holder Rule clause allows the consumer to assert only those claims 

connected to the same transaction as that financed with the loan. We understand that that the 

term "setoff" is commonly used to describe a counterclaim that arises out of a transaction 

unrelated to a plaintiffs cause of action against the defendant. Based in these considerations and 

the explanation ofthe scope of the Rule provided in the Guidelines, we question the meaning of 

the statement in the Guidelines that time-barred claims are "extinguished." We ask for 

clarification whether. the Commission intends the Rule to enable the consumer to assert either 

affirmatively or as a defense to the loan only those claims that are within the otherwise 

applicable statute of limitations, or to assert time-barred claims as viable defenses, regardless of 

the applicable statutes of limitations that would bar affirmative recovery on such claims. 

We appreciate your consideration of our request. In order to assist us in a current rulemaking in 

this area, we ask that you provide your response as expeditiously as practicable. Please do not 

hesitate to contact us if you have any questions about our request. 

Sin~vW 

tAppel 

Deputy Under Secretary 

U.S. Department of Education