BEFORE THE CONSUMER CREDIT REFORMS OF THE EARLY 1970'S, THE DOCTRINE OF HOLDER-IN-DUE-COURSE GOVERNED CREDIT SALES. UNDER THIS DOCTRINE A BANK OR FINANCE COMPANY WHICH BOUGHT INSTALLMENT LOAN CONTRACTS FROM RETAILERS COULD COLLECT THE MONEY DUE EVEN IF THE GOODS WERE FAULTY. CONSUMERS HAD NO RECOURSE EXCEPT EXPENSIVE LITIGATION. SEVERAL STATES ENACTED CONSUMER PROTECTION LAWS ALLOWING A BUYER THE OPTION OF STOPPING PAYMENT IN CASES OF DEFECTIVE MERCHANDISE AND DISALLOWING THE THIRD-PARTY LOAN HOLDERS' RIGHT TO FORECLOSE. IN 1975 THE FEDERAL TRADE COMMISSION (FTC) PROMULGATED A RULING ON THIRD-PARTY LOANS. HOWEVER, INSTEAD OF CITING THE DOCTRINE OF CONSUMER PROTECTION, IT INVOKED THE ECONOMIC DOCTRINE OF THE OPTIMALITY OF RESOURCES, IN THIS CASE, CONSUMER CREDIT. UNDER THIS THEORY, IF THE LOAN HOLDER MUST BEAR THE COST OF DEFAULT, THE COST OF CREDIT WILL RISE TO REFLECT THE TRUE COST OF INSTALLMENT BUYING, AND LOAN HOLDERS WILL PUT PRESSURE ON DISREPUTABLE SELLERS. A SURVEY OF PRACTICE SINCE THE RULE'S INCEPTION SHOWS THAT MARGINAL SELLERS ARE, IN SOME CASES, FINDING IT HARDER TO GET CREDIT. HOWEVER, THE RULE HAS SO MANY LOOPHOLES THAT UNSCRUPULOUS LENDERS AND RETAILERS ARE INSERTING WAIVER-OF-DEFENSE CLAUSES WHICH LEAVE THE CONSUMER WITH NO RECOURSE. SINCE THE AMOUNTS ARE OFTEN LARGER THAN THE DOLLAR LIMIT SET BY SMALL CLAIMS COURTS, THE BUYER IS ONCE AGAIN FORCED INTO COSTLY LITIGATION. THE LOOPHOLES ARE EXAMINED IN DETAIL. IT IS SUGGESTED THAT THE RULE BE REPLACED WITH NATIONAL LEGISLATION WHICH WOULD BAN THE USE OF NEGOTIABLE INSTRUMENTS AND WAIVER-OF-DEFENSE CLAUSES IN ALL CONSUMER INSTALLMENT SALES AND WHICH WOULD BASE THE REGULATION OF VENDOR-RELATED LOANS ON FACTORS WHICH WOULD MAXIMIZE LENDERS' INCENTIVES TO SET A UNIFORM TRANSACTION COST FOR SCREENING SELLER RELIABILITY. REFERENCES ARE CITED. (GLR)