Reconsidering the Application of the Holder in Due Course Rule to Home Mortgage Notes

65 Pages Posted: 21 Nov 2008

See all articles by Mark B. Greenlee

Mark B. Greenlee

affiliation not provided to SSRN

Thomas James Fitzpatrick

Federal Reserve Bank of Cleveland

Date Written: November 15, 2008

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: assignee liability, holder in due course, home mortgage note, negotiability, negotiable instruments, Lord Mansfield, Miller v. Race, Uniform Commercial Code, UCC, securitization, FTC holder rule, Home Ownership and Equity Protection Act, HOEPA

JEL Classification: G20, G21, K12, L14

Suggested Citation

Greenlee, Mark B. and Fitzpatrick, Thomas James, Reconsidering the Application of the Holder in Due Course Rule to Home Mortgage Notes (November 15, 2008). FRB of Cleveland Working Paper No. 08-08, Available at SSRN: https://ssrn.com/abstract=1304716 or http://dx.doi.org/10.2139/ssrn.1304716

Mark B. Greenlee (Contact Author)

affiliation not provided to SSRN ( email )

Thomas James Fitzpatrick

Federal Reserve Bank of Cleveland ( email )

PO Box 6387
Cleveland, OH 44101-1387
United States

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