County and state officials are turning up the heat on MERS, as recent lawsuits filed in Michigan, Florida, Delaware and Texas challenge the validity and accuracy of the mortgage industry-controlled loan registry.
Merscorp Inc.'s private loan registry has become a lightning rod for foreclosure litigation, and is increasingly facing scrutiny over how it tracks the ownership of mortgage loans. Critics argue that banks frequently failed to update the registry's records of how they bought and sold the underlying loans and notes, calling into question the underlying accuracy of MERS information.
MERS has successfully staved off many of the challenges, but that has not daunted many state and county officials. On Tuesday, two Michigan counties filed a lawsuit alleging that MERS has avoided paying state and county "transfer taxes" on property deeds filed within the last decade.
"MERS has transformed the entire mortgage industry into a giant shell game," Ingham County clerk Curtis Hertel Jr. said in a press release. "The current servicer of a mortgage is no longer a matter of public record, and once a property is foreclosed, the real games begin, as deeds and other paperwork are filed in such a way as to avoid transfer taxes at every step."
Merscorp spokeswoman Janis Smith declined to comment on the Michigan lawsuit on Tuesday.
The complaint comes on the heels of a similar lawsuit filed last month by a county clerk in Florida, seeking class action status to represent the state's 67 counties. The Florida lawsuit alleges the use of MERS does not comply with state property laws and has cost municipalities millions in unpaid recording fees.
Jim Fuller, the clerk of Duval County, filed suit against Merscorp and its wholly owned subsidiary, Mortgage Electronic Registration Systems, Inc., on Oct. 31, claiming civil conspiracy, unjust enrichment and fraudulent and negligent misrepresentation. The suit also seeks a hearing to determine the validity of tracking note transfers on the MERS System and a court injunction to prohibit the use of MERS in Florida.
"MERS has usurped the rights and privileges of the Florida Clerks of Court by establishing, maintaining and inducing lenders to use its private recording system, which unlawfully interferes and competes with the public recording system," the suit, filed in state circuit court, reads.
Merscorp spokeswoman Smith said the suit's allegations are inaccurate and false.
"The MERS System is not a legal system of record or a replacement for public land records. No interests are transferred on the system — they are only tracked," Smith wrote in a response to emailed questions. "MERS does not have or maintain any document recording system, public or private, and does not do anything to compete with or supplant the public records for land located in the County records."
Tim Volpe, a Jacksonville, Fla.-based attorney serving as outside counsel for Duval County, claims that when MERS is named on county land records, it creates an illegal disconnect between the mortgage document and the promissory note that allows the owner of the promissory note to change without being recorded in land records — keeping borrowers in the dark about who holds their debt.
"Both the note and mortgage are to be recorded. The principle issue we're trying to get at is the punitive distinction of MERS being the mortgagee while the note is shifted from one to another up through the typical securitization process," Volpe said in a phone interview. "The principle concern about the disconnect is that the public records are not complete insofar as the true beneficial owner of the mortgage is not reflected in the public records."
In previous challenges to mortgage liens filed in the name of MERS, the Reston, Va.-based company has relied on agency laws to defend its position as both the legal holder of the mortgage, and as an agent acting on behalf of the owner of the promissory note.
Smith says MERS is the true owner of the mortgage, and is not, in the Florida complaint's words, a "straw man" placeholder listed in public records.
"The 'owner of the loan' is the party who has possession of the promissory note, but the promissory note is not, and has never been, and is not required to be disclosed or filed in the public records," she writes.
Smith adds that the Truth in Lending Act requires disclosure to borrowers when the note changes hands and the Real Estate Settlement Procedures Act requires notification of changes in servicing rights. In addition, Smith says borrowers can search the MERS website to find information on their note holder and mortgage servicer.
Last month in Texas, following action by the counties that encompass Houston and San Antonio, the Dallas County District Attorney expanded a lawsuit his office filed in September to seek class action status for other counties in the state.
Following a subpoena issued against MERS earlier this year, on Oct. 27, Delaware Attorney General Joseph "Beau" Biden filed a lawsuit claiming MERS engages in deceptive trade practices. The complaint cites a review of 100 foreclosures in New Castle County during 2010 that showed discrepancies between MERS records and the entities that participated in the foreclosure.
"This review revealed that the name of the plaintiff in the foreclosure action was different from the entities listed in the copy of MERS' own database provided to the Delaware DOJ in 22% of the cases," the suit reads. "In addition, when comparing the name of the plaintiff to the entity identified on MERS' publicly accessible ServicerID system, mismatches occurred in 21% of the cases."
"The confusing path and inaccurate records associated with these mortgages are not isolated instances of bad record keeping by MERS. This type of confusion is endemic to the entire MERS System," Delaware's complaint reads.
In a press statement, Smith said the claims in the Texas case are without legal or factual merit and that MERS complies with state laws. In a separate statement about the allegations in Delaware, Smith said the MERS business model is "straightforward and transparent," adding that "[T]he lawsuit they filed was unexpected, and we disagree with the allegations made in their complaint."
Biden claims MERS holds more than 30% of the state's mortgages. Volpe, the attorney representing Duval County, could not provide specifics on how many mortgages are in the name of MERS, but believes the recordkeeping issues in Delaware are also a problem in Florida.
"I don't think MERS can demonstrate that they know who owns the notes or describe the trajectory of multiple assignments or transfers because I'm not sure they accomplished assignments from one holder of the note to another," he says. "I don't know what the facts will ultimately reflect here but there's enough indication of problems with the data and the database that causes me to suggest that's what MERS thinks they do is different from what they do."