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Loan and Mortgage Terms Glossary

Holder In Due Course:

Any subsequent owner of a negotiable instrument such as a check, note or other document. The holder must have accepted possession of the financial instrument in good faith and given something of value for it. The holder is presumed to be unaware that the financial instrument previously may have been overdue, been dishonored when presented for payment, or had a claim against it, if in fact such were the case. For example, someone who accepts a third party check or now draft is a holder in due course, as are all subsequent holders of the instrument. Likewise, the holder of a note or loan agreement concluded by two other parties (the original consumer and the seller who first extended credit) is also a holder in due course. Until 1976, the uniform commercial code held that a holder in due course was not liable for any prior claims made against the instrument held. However, in 1976, the federal trade commission ruled that holders in due course could be liable in some cases. For example, if the original customer stops making loan payments because the merchandise purchased on credit is faulty, and the original seller refuses to honor the terms of the guarantee, all subsequent holders of the note may be subject to claims against the seller. While claims may be made against holders of a note, innocent holders of a check or now draft generally have the right to collect the face amount from the payer or drawer, regardless or prior claims.


 
     
 
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