Working Paper

Reconsidering the application of the holder in due course rule to home mortgage notes

Abstract: In this paper we investigate the history of negotiable instruments and the holder in due course rule and contrast their function and consequences in the 1700s with their function and consequences today. We explain how the holder in due course rule works and identify ways in which the rule?s application is limited in some consumer transactions. In particular, we focus on laws limiting application of the rule to some home mortgage loans. We investigate Lord Mansfield?s original justification for the rule as a money substitute, the lack of explicit justification of the rule by the drafters of the Uniform Commercial Code in the 1950s, the contemporary justification of the rule as a means of increasing the availability and decreasing the cost of credit, and the concerns of legislators and regulators about lack of consumer knowledge, bargaining power, and financial resources which caused them to limit the application of the holder in due course rule to some consumer transactions. We conclude that changes in policy justification, parties to negotiable instruments and the structure of the home mortgage market call for a reconsideration of the continuing appropriateness of holder in due course protection for assignees of home mortgage notes. We suggest further analysis based on economic theory and review of empirical research in order to formulate policy recommendations.

Keywords: Mortgage loans; Holder in due course;

https://doi.org/10.26509/frbc-wp-200808

Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers (Old Series)

Publication Date: 2008

Number: 0808