Three major banks and Virginia-based MERSCORP, Inc. and its subsidiary Mortgage Electronic Registrations Systems (MERS) were sued Friday by the state of New York.  The suit, filed by the state's Attorney General Eric T. Schneiderman, charges that the creation and use of a privately national electronic registration system, MERS, "has resulted in a wide range of deceptive and fraudulent foreclosure filings in New York state and federal courts, harming homeowners and undermining the integrity of the judicial foreclosure process."  Further, the lawsuit charges that the employees and agents of the three banks, Bank of America, J.P. Morgan Chase, and Wells Fargo, acting as "MERS certifying officers," have repeatedly submitted court documents containing false and misleading information that made it appear that the foreclosing party had the authority to bring a case when in fact it may not have.  The suit also names additional defendants for some of the charges including loan servicing subsidiaries of the three banks.

The lawsuit, filed in the Supreme Court of the State of New York, Kings County levies the following charges:   

  • MERS was created to allow financial institutions to evade country recording fees, avoid the need to publicly record mortgage transfers and facilitate the rapid sale and securitization of mortgages. MERS members log all of their transfers in a private electronic registry rather than in the local county clerk's office.
     
  • MERS is a shell company with no economic interest in any mortgage loan. It is the nominal "mortgagee" of the loan in the public records and remains as such regardless of how often the loan is sold or transferred among its members.
     
  • MERS has few or no employees but serves as the mortgagee for tens of millions of mortgages. It has indiscriminately designated over 20,000 MERS member employees as MERS "certifying officers" expressly authorizing them to assign MERS mortgages and execute paperwork to foreclose on properties and submit claims in bankruptcy proceedings while failing to adequately screen, train, or monitor their activities. Assignments were often automatically generated and "robo-signed" by individuals who did not review the underlying property ownership records, confirm the documents' accuracy, or even read the documents. MERS certifying officers have regularly executed and submitted in court mortgage assignments and other legal documents on behalf of MERS without disclosing that they are not MERS employees, but instead are employed by other entities, such as the mortgage servicer filing the case or its counsel.
     
  • Use of the private database to record property transfers has eliminated homeowners' and the public's ability to track them through the traditional public records system. This data base is plagued with inaccuracies and errors which make it difficult to verify the chain of title or the current note-holder. In addition, as a result of these inaccuracies, MERS has filed mortgage satisfactions against the wrong property.
     
  • This "bizarre and complex end-around of the traditional recording system" has saved banks more than $2 billion in recording fees and allowed the banks to securitize and sell millions of loans, "often misrepresenting the quality and nature of the mortgages being transferred."
     
  • The creation and use of the MERS System by the Defendant Servicers and other financial institutions has resulted in a wide range of deceptive and illegal practices, particularly with respect to the filing of New York foreclosure proceedings in state courts and federal bankruptcy proceedings.

The lawsuit estimates that MERS members have brought over 13,000 foreclosures against New York homeowners naming MERS as the foreclosing property when in many cases MERS lacks the standing to foreclosure.  Even when foreclosures were not initiated in MERS name, proceedings related to their registered loans often included deceptive information.

The lawsuit seeks a declaration that the alleged practices violate the law, as well as injunctive relief, damages for harmed homeowners, and civil penalties. The lawsuit also seeks a court order requiring defendants to take all actions necessary to cure any title defects and clear any improper liens resulting from their fraudulent and deceptive acts and practices.

On January 24 the U.S. Court of Appeals for the 11th Judicial Court upheld an appeal from MERS that contended a lower court had erred in finding that a homeowner had been improperly foreclosed on by MERS on the grounds that:

1).   The assignment of the security deed was invalid because MERS, as nominee of a defunct lender could not assign the documents of its own volition.

2.     The "splitting" of the mortgage and the note rendered the mortgage null and void and therefore notices of foreclosure were invalid as not coming from a secured creditor.

The New York suit differs slightly from the facts in Smith V. Saxon Mortgage, but if Schneiderman wins his case, it could be that the legitimacy of MERS will ultimately have to be decided by the U.S. Supreme Court.


MERSCORP Responds:

Mortgage Electronic Registration Systems, Inc. (MERS) takes its role as a mortgagee very seriously. The MERS® System is an important part of the mortgage industry and the MERS business model has been consistently validated in all 50 states. All of the activities of MERSCORP and MERS are in compliance with state and federal laws. We are confident that as people understand more about MERS and the role we play, they will see that MERS adds great value to our nation’s system of housing finance in ways that benefit not just financial institutions, the broader economy and the government, but—most of all—homeowners.

AG Schneiderman Claim #1:
Defendants have improperly brought New York foreclosure proceedings in MERS’ Name

FACT: The right to bring a foreclosure action is determined by the plaintiff’s relationship to the mortgage loan, which is whether the entity bringing the action is the holder of the note or authorized by the holder of the note to bring a foreclosure action. MERS was authorized by the note holder to bring foreclosure actions in its name, and the borrower agreed that MERS may be the entity who may foreclose on the property in the event of a default. That being said, since July 2011 MERS no longer acts as foreclosing entity. In addition, MERSCORP never received a fee or made any money on foreclosures initiated in MERS’ name.

AG Schneiderman Claim #2:
MERS Certifying Officers, including defendant servicers’ employees and agents, have submitted false, deceptive and often legally invalid documents in New York foreclosure proceedings

FACT: When MERS is the mortgagee and is not the entity foreclosing, MERS executes an assignment of a mortgage that transfers all of the interests in the mortgage to the entity that is foreclosing prior to the commencement of the foreclosure. The courts have held that MERS may assign its interests, as a mortgagee, and that such assignments are valid.

AG Schneiderman Claim #3:
The use of MERS certifying officers by defendants has confused and deceived homeowners and the courts.

FACT: It is perfectly proper for MERS, as the mortgagee, in order to fulfill certain acts required of the mortgagee, to appoint signing officers (or agents) to act on MERS’ behalf. To act as a principal for its signing officers is not a deceptive trade practice. There is no requirement under New York law that a principal must disclose whether its agents are employed by another entity. These agents authorized to act on behalf of MERS are not employees of MERS, but employees of the loan servicers or sub-servicing companies. Signing officers are duly authorized to perform their responsibilities on behalf of MERS who is the mortgagee – in compliance with applicable laws – and to sign their own names and to use the titles “vice president” and “assistant secretary” of MERS.

AG Schneiderman Claim #4:
MERS and defendant servicers through their use of MERS have concealed important information from homeowners about their property and the role that MERS plays with respect to their mortgage.

FACT: MERS does not hide ownership or undermine the integrity of land records. Any mortgage holder registered in the MERS® System can easily access information related to their mortgage on our website or through a toll-free number. Federal law provides that consumers are notified for changes in investors or servicing status. In addition, county land records were not intended to identify the servicer of a mortgage or the current note holder; they are intended to provide notice to purchasers of property that there is a lien on the property and when that lien was perfected.