Kentucky on Wednesday became the latest state to sue MERSCORP Holdings, alleging that the firm's mortgage assignment system cheated the state out of recording fees in hundreds of thousands of transactions.

During a news conference in Frankfort, Ky., hours after the suit was filed in Franklin County Circuit Court, Attorney General Jack Conway said that MERS did not record mortgage assignments in the appropriate county offices as required by state law.

"MERS directly violated that law" said Conway, a Democrat. "The Commonwealth is ripped off when it comes to recording fees."

MERS described the Kentucky allegations as meritless.

"All MERS mortgages are registered in the local land records, and all recording fees are properly paid," the company said in writing. "Our business model is straightforward and transparent, and MERS' role is clearly spelled out in the contract between borrower and lender."

The company's statement also cited a 2010 Kentucky court decision that it said upheld its standing as the mortgagee in the case.

Conway estimated that some 300,000 Kentucky mortgages are part of the MERS system, and he said that each loan is sold an average of three times. Kentucky assesses a $12 fee whenever mortgages are sold or transferred.

Conway did not provide an estimate of how much revenue MERS system has deprived the state of Kentucky, but he estimated that nationally, more than $2 billion in fees have been avoided when MERS reassigns loans among lenders but does not record the actions as sales.

MERS was created by mortgage industry firms in an effort to simplify the process of transferring property titles. Critics allege that the system shrouds property records in secrecy.

"MERS claims that it's the mortgagee," Conway said at Wednesday's news conference. "However, MERS is a ghost."

"This whole process undermines the integrity of Kentucky's public land records," he argued.

Kentucky's 36-page complaint also alleges that the MERS system contains significant inaccuracies. Conway's office conducted a review of 43 foreclosed properties, and found that data in the MERS system was inconsistent with court records in 19 of those cases, according to the complaint.

Before filing the suit, Conway received a pledge to provide assistance in the case, he said Wednesday, from Housing and Urban Development Secretary Shaun Donovan and New York Attorney General Eric Schneiderman. Those two men are co-chairs of a federal-state task force that is charged with investigating mortgage fraud.

In a news release from the Kentucky Attorney General's office, Schneiderman said that the MERS system makes it harder for troubled homeowners to request a loan modification and to defend themselves in a foreclosure case.

"Attorney General Conway's lawsuit is an important step towards accountability for these abusive practices," stated Schneiderman, also a Democrat.

Other states have sued MERS. A case filed by the state of Massachusetts is still pending. Another case filed by the state of Delaware was settled out of court on terms that were seen as lenient for MERS.

Conway said at Wednesday's news conference that Kentucky has stronger laws than Delaware, implying that he has more leverage to extract a stronger settlement with the company.

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