Insights

New York has reached a partial settlement in a lawsuit it filed barely a month earlier against some of the mortgage lending industry’s largest participants. A few days before the federal government and the state attorneys general agreed to the $25 billion settlement with the nation’s mortgage lenders to address certain alleged servicing and foreclosure abuses, New York Attorney General Eric Schneiderman had sued another popular mortgage industry target—MERSCORP, Inc. Schneiderman filed suit on February 3, 2012 against MERSCORP, Inc. and its subsidiary Mortgage Electronic Registration Systems, Inc. (“MERS”), as well as a number of MERS’s members, including JPMorgan Chase Bank, N.A., Bank of America, N.A., and Wells Fargo Bank (a copy of the complaint is available at http://www.ag.ny.gov/sites/default/files/press-releases/2012/FINAL-SUMMONS-AND-COMPLAINT.pdf).

MERSCORP, the parent company of MERS, was created by mortgage industry participants in 1995 to modernize the land recording process and facilitate securitization. MERSCORP is a membership organization which is owned by the major stakeholders in the mortgage industry (e.g., mortgage originators and servicers, government sponsored entities, and mortgage insurance and title companies). MERS operates an electronic registry system that tracks the ownership and servicing rights of mortgage loans for its members. MERS acts as the nominated mortgagee in the public land records for the mortgages that are registered with its system. As a result, MERS is the owner of record of the security interest of a vast number of mortgaged properties. Once a mortgage loan is registered with MERS, subsequent sales and assignments of the mortgage are not recorded in the public land records but rather on MERS’s electronic system. This eliminates the traditional public recording process and the associated fees.

When a lender seeks to initiate foreclosure proceedings on a delinquent loan, MERS must be involved because, as the nominated mortgagee, it holds the security interest on the mortgaged property and the lender cannot enforce payment of the mortgage note without the security interest. According to the complaint, to facilitate the foreclosure process, MERS has certified certain employees of its servicing and lender members to act as officers that may initiate foreclosure actions on behalf of MERS.

In the suit, the New York Attorney General alleges that employees and agents of the lenders and servicers had no authority to act as “MERS certifying officers” in foreclosure proceedings. The New York suit also asserts that MERS has subverted the ability to track title to property through the public land recording system because MERS stores that information in its private database which the Attorney General alleged is filled with errors and inaccuracies. According to the suit, this has “resulted in the filing of improper New York foreclosure proceedings, undermined the integrity of the judicial process, created confusion and uncertainty concerning property ownership interests, and potentially clouded titles on properties.”

In response, MERS has issued a statement refuting the allegations made in the suit. MERS argues it was properly authorized to bring foreclosure actions by the lenders and by borrowers who generally agree in the loan documents that MERS may act as the lender’s nominee. MERS denies falsifying documents and states that it properly executed assignments transferring its interests in the mortgage to the entity actually foreclosing. MERS also disagrees that its electronic recording system undermines the integrity of land records, stating that the information in its system is freely available and that the intended purpose of county land records was not to identify mortgage servicers and note holders, but rather to provide notice of liens on property and when those liens were perfected.

In the complaint, New York is seeking 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 the defendants to cure any title defects and clear any improper liens that have resulted from the manner in which MERS has maintained its electronic recording system and carried out foreclosures.

Despite the joint federal and state settlement, which was written to allow ample room for further lawsuits, New York did not waive its claims against MERSCORP, Inc. or MERS. Also, the New York Attorney General has repeatedly indicated that this will not be the only attempt to probe major mortgage industry participants for wrongdoing surrounding the collapse of the housing market in 2008. Still, a number of jurisdictions have already addressed the same issues regarding MERS and the decisions so far have been favorable to MERS. In one of the more notable cases, Cervantes v. Countrywide Home Loans, 656 F.3d 1034 (9th Cir. 2011), the Ninth Circuit found that it was not improper for MERS to act as an agent of the lender in foreclosure proceedings.

As part of the settlement filed March 13, New York agreed to drop some specific claims alleged in the complaint. According to the settlement documents obtained by news sources, Bank of America, JPMorgan Chase, and Wells Fargo will each pay $5.9 million. Though not named in the lawsuit, Citigroup and Ally Financial also offered to pay fines for their use of MERS. Citigroup will pay $5.9 million, as well, and Ally will pay $1.25 million.

Although the settlement precludes further monetary penalties against the banks, it does not limit monetary penalties against MERS and the New York Attorney General’s office has been clear that they intend to continue to pursue the other claims set out in the complaint. This includes seeking court-ordered changes to the MERS system. The settlement thus offers little comfort for mortgage lenders in New York, especially considering the following widely reported comment from Schneiderman’s spokesman: “The significant sum of $25 million obtained by this office does absolutely nothing to limit the aggressive posture we will continue to take to protect homeowners and borrowers.”

Peter L. Cockrell is an associate of Hudson Cook, LLP, in the firm’s Hanover, Maryland office. Peter can be reached at 410-865-5418 or by email at pcockrell@hudco.com.