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In recent years, Mortgage Electronic Registration Systems Inc., or MERS, has been the subject of an onslaught of litigation challenging the validity of the MERS system; the authority of MERS to foreclose; the validity of assignments of mortgage from MERS to the foreclosing party; and the avoidance of recording fees. Because of the structure of the MERS system, borrowers and land recording offices in particular have swiftly been taking cases to court. Though the list of these cases is expansive, the overwhelming majority of courts have thus far decided in favor of MERS. These actions are beginning to define the scope and personality of MERS and, most importantly for practitioners, dictate how MERS is legally allowed to operate.

In this article, we will review the past legal challenges brought against MERS, up through mid-October of this year - but first, let’s quickly review the role MERS plays in the mortgage industry.

 

Background of the MERS system

MERSCORP Holdings is the parent company of MERS, a national electronic registry system that was created in the early 1990s by several large participants in the real estate mortgage industry to track the changes in servicing rights and ownership interests in residential mortgages. MERS uses electronic commerce to streamline the mortgage process, effectively eliminating the need for paper assignments and recordation. Many of the mortgage industry’s biggest loan originators, servicers and investors pay fees to benefit from the ease MERS brings to tracking mortgages.

The process begins at origination when MERS is named on the mortgage as the mortgagee of record, as well as nominee for the lender, its successors and assigns. This language is also clearly set forth in the security agreement presented at the closing and dictates that MERS holds legal title and the authority to exercise any or all interests, including the right to foreclose.

When the mortgage is filed in the county land records, MERS appears as the mortgagee of record. This allows MERS members to transfer beneficial ownership interest or servicing rights amongst themselves internally through the MERS system without the necessity of recording each intervening assignment of mortgage in the clerk’s office. Therefore, MERS members can continue to transfer mortgages amongst themselves into perpetuity without ever having to effectuate an assignment, effectively eliminating recording costs. Alternatively, once a mortgage is assigned outside of the MERS system, a paper assignment to the new entity must be recorded with the county clerk or relevant recording office. It is current industry practice that an assignment of mortgage be executed from MERS to the foreclosing entity and assignee if a loan is in default prior to the commencement of the foreclosure action (Fannie Mae Single-Family Guide, Part VIII, 107).

What follows are some of the major legal challenges MERS has faced since its inception:

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Phase I: The initial onslaught

Starting in 2009, litigants attacked MERS’ standing to commence all foreclosure actions. At the time, Rule 8 of the MERS “Rules of Membership” provided that the “beneficial owner of such mortgage loan or its servicer shall determine whether foreclosure proceedings with respect to such mortgage loan shall be conducted in the name of [MERS] ...” (Perlas v. MERS Inc., 2010). The courts held that MERS had no standing to commence foreclosure actions in its own name based on the interpretations of the term “nominee” and “mortgagee” as defined by state law, as well as limiting language within the governing security instruments.

For instance, where a mortgage names MERS as nominee with the power to “hold legal title,” that language precludes MERS from doing anything but holding title, including bringing a foreclosure action (MERS Inc. v. Johnston, 2009). Likewise, in MERS Inc. v. Saunders (2010), the court relied on the plain meaning of “nominee” in conjunction with the state law definition of “mortgagee” to determine standing. The court found that “a mortgagee is a party that is entitled to enforce the debt obligation that is secured by the mortgage,” and MERS lacked standing because it was never in possession of the note or underlying debt obligation.

By contrast, other jurisdictions have held that MERS has standing to foreclose because MERS has legal and record title to the mortgage (MERS Inc. v. Souza, 2012), as well as the vested authority to foreclose based on the clear language of the mortgage that borrowers explicitly acknowledge (MERS Inc. v. Ralich, 2009). The Superior Court of Pennsylvania held in Ralich that “the mortgage vests MERS with the authority, as nominee, to enforce the loan” and that the borrower’s insistence that the foreclosure proceedings should be set aside “is directly at odds with the explicit acknowledgement by [the] Ralich[s] at the time of refinancing that MERS would have precisely the authority [the] Ralichs[s] now contest.”

Also in question was the validity of assignments of mortgage from MERS. While the frequency in which this issue was raised in the court increased dramatically, the vast majority of courts readily upheld the assignments from MERS, finding that its authority to assign was granted in the plain language of the mortgage contract, because as mortgagee under the security instrument, MERS “was acting solely as nominee for original mortgage lender and lender’s successors and assigns” (Marjer Inc. v. Ligus, 2013).

On the other hand, “some [courts] require mortgagees, such as MERS, to prove both its nominee relationship with the note holder and the note holder’s authorization of the mortgage assignment in order for an assignment to be valid” (Agard, 2011). Other jurisdictions have taken the position that it is not necessary to establish authority of the assignor to make the assignment, so long as the assignment of mortgage complies with state law (Rosa v. MERS, Inc. 2011; Lindsay v. Wells Fargo Bank, 2013).

This reasoning was upheld in states that allow the note and mortgage to be split or to be transferred separately at different times (Butler v. Deutsche Bank, 2014); those that maintain the proposition that “any assignment of the note automatically transfers beneficial ownership of the accompanying deed of trust” (Dauenhauer v. The Bank of New York Mellon, 2013); as well as those that have held the “use of MERS does not irreparably split the note and deed of trust” (Cervantes v. Countrywide Home Loans Inc., 2011). Even in those jurisdictions that recognize that “the mortgage was assigned without a corresponding assignment of the note, [it has been noted] that this would only affect the ability of the holder of the mortgage to foreclose but would not affect the validity of the mortgage” (Altier v. Fannie Mae, 2013, 2014).

Nonetheless, MERS continues to achieve court rulings in its favor. On Oct. 1, the Supreme Court of Delaware upheld the validity of a mortgage assigned by MERS to BAC Home Loans Servicing LP because, pursuant to Delaware law, an assignment attested by one creditable witness is valid and effectual to convey all rights, title and interest to the assignor (Albertson v. BAC, 2014). Likewise, the Rhode Island state and federal courts recently held that MERS may hold and assign mortgage interests (O’Leary v. MERS Inc., 2014; Alves v. MERS Inc.). In fact, the U.S. Court of Appeals for the Fifth Circuit seems exasperated with the numerous attempts to attack the MERS system, despite the Fifth Circuit’s previous rulings that, under Texas law, MERS qualifies as a mortgagee (see Van Duzer v. U.S. Bank NA, v. MERSCORP Holdings, et al., 2014).

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Phase II: The battle of the land recorders

In addition to homeowner actions, MERS is also being challenged by county clerks who claim, among other things, that the MERS model of privately tracking mortgage transfers between MERS members violates their respective state’s recording statutes, creating a discrepancy in the land records and robbing the counties of their “would-be” share of recording fees. Namely, clerks have brought actions on the grounds of negligent and/or willful violation of state recording statutes; violation of state Consumer Fraud and Deceptive Practices Act; false claim; and unjust enrichment. The clerks’ claims are based on their authority to collect recording fees and mandate recording, which is rooted in state recording laws. States with no duty to record are considered permissive. Some examples are Kentucky, Arkansas, Texas, Iowa, Massachusetts and Florida. Alternatively, states that do require recordation are known as mandatory recording states.

In permissive recording states, courts have consistently ruled that no private right of action exists to assert claims under a state’s statutory regime. For example, in Town of Johnston v. MERSCORP Inc., the Town of Johnson asserted a claim for unjust enrichment against MERS, arguing that MERS violated Rhode Island’s recording law and was unjustly enriched by failing to record and pay recording fees for all mortgages and assignments. This action was dismissed on the basis that Rhode Island is a permissive recording state and, “[a]bsent a statutory requirement to record, there are no damages, and, therefore, there is no cause of action.”

By contrast, Kentucky’s quasi-mandatory recording statute only requires that assignees record. The caveat to this statute is that, due to legislative intent and construction, this right of action exists only for a small class of beneficiaries: existing lien holders seeking to give notice of their secured status, potential buyers and creditors seeking information about prior liens, and property owners. Given that no statutory private right of action exists for county clerks, Kentucky clerks cannot sustain claims against MERS for failure to record in their capacity as assignees of the mortgage (Christian County Clerk, 2012).

Moreover, MERS “[is] not obligated [under Kansas recordation statutes (KRS) sections 382.360 and 382.365] to record assignments when only the promissory notes secured by those mortgages are assigned under the MERS system (Ellington v. Federal Home Loan Mortgage Corp., 2014).” There, the plaintiffs were a class of mortgagors, who commenced suit against the Federal Home Loan Mortgage Corp. and MERS for failure to file mortgage assignments with the county clerk pursuant to Kentucky’s recording statute. The court dismissed the matter for failure to state a claim, reasoning that Kentucky’s laws specifically set forth the method for recording mortgage assignments, for recording promissory notes, and the permissive nature of the note recording. As such, the transfer was not a mortgage assignment or a recordable event under KRS section 382.360, because the transfer was a transfer of equitable interest in the promissory note by MERS on behalf of another MERS member.

Even in jurisdictions where recording is deemed to be mandatory, clerk claims have been dismissed as unmeritorious. In Board of County Commissioners of the County of Cleveland v. MERSCORP Inc., 2013, the court held that if the legislative construction is not explicit in its intent for the recording statute to act for the benefit of the county clerk, the clerk lacks standing as a party for which the recording statute was intended to benefit along with the appropriate cause of action against MERS.

Similarly, in MERSCORP v. Romaine (2006) the court found that county clerks may not deny recording of mortgages or assignments, as to do so would be to abuse their authority as clerks by looking beyond an instrument that otherwise satisfied the recording statute. Though clerks in mandatory recording states are statutorily required to record mortgage documents, some courts have held that it is not unconstitutional to charge a higher recording fee for MERS-type nominee-held mortgages to discourage this practice or bolster funds collected by county clerks offices (MERSCORP Holdings Inc. v. Malloy, 2014).

Uniquely, in the mandatory recording state of Pennsylvania, the court in Montgomery County v. MERSCORP (2014) found the recorder of deeds had standing on the county’s behalf and other Pennsylvania recorders of deeds for a quiet title action, despite the fact that Montgomery County did not have an interest in the underlying land. There, the recorder of deeds of Montgomery County brought suit alleging that MERS violated state statute by circumventing the need to record transfers and conveyances each time it is sold. The court held that a mortgage assignment is a conveyance that must be recorded and that the recording statute requires the conveyance to be documented in a form suitable for recording and recorded in the land records. The court held that MERS was a proper party to be held responsible as an undisclosed agent of the lenders and that its failure to create and record documents proving the mortgage transfers violated the Pennsylvania Recording Statute. The court reserved decision on the amount of damages to award until a later trial on the issue.

 

Phase III: What battles are next
for MERS?

MERS has been winning the battle against county clerks and homeowners alike in an overwhelming number of states. However, in light of recent Pennsylvania case law, is there another onslaught on the brink?

It is possible that after this holding, judges in Pennsylvania and beyond will be looking to legislative intent to determine the public utility of requiring MERS to record intervening assignments amongst MERS members. State legislatures may consider this new development when crafting recording statutes. This seeming loophole that the Montgomery County clerk found through the quiet title cause of action will likely encourage other litigants to find indirect ways to gain standing to challenge MERS assignments.

MERS has been forced to take a defensive role to protect its business model, including its right to hold, assign, litigate and transfer free of recordation fees. At current, the third phase of litigation against MERS is at a climax, with the Montgomery County clerk being the first of possibly many to bring a hopeful case against the mortgage giant. Though the review of case law regarding the recording fees is limited to this one, isolated incident, it will be interesting to observe how MERS reacts to this ruling.

MERS has already withstood the earlier faces of litigation. With the main force of the attack behind it, MERS is sending a clear message: It is here to stay. s

 

Natalie Grigg is a partner at Woods Oviatt Gilman LLP, and Joanne LaFontant-Dooley is a default services attorney at Klatt, Odekirk, Augustine, Sayer, Treinen & Rastede PC (Klatt Law). They can be reached at ngrigg@woodsoviatt.com and jlafontant@klatt-law.com.

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MERS: Always Up To The Challenge

By Natalie Grigg & Joanne LaFontant-Dooley

MERS has been forced to take a defensive role to protect its business model, including its right to hold, assign, litigate and transfer free of recordation fees.

 

 

 

 

 

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