A.G. Sues Banks Over Their Use of MERS Electronic 'End-Around'
February 6, 2012
Attorney General Eric T. Schneiderman
NYLJ/Rick Kopstein
NYLJ/Rick Kopstein
In his latest broadside against the banking industry, Attorney General Eric T. Schneiderman is alleging that the nation's largest banks use the Mortgage Electronic Registration System, MERS, to evade public filings, shortchange localities of $2 billion in fees and compromise the interests of homeowners.
A complaint filed Feb. 3 describes MERS Inc. of Virginia, a digital mortgage tracking service, as "a shell company" established as a stealth mortgagee for banks, particularly JPMorgan Chase, the Bank of America and Wells Fargo Bank.
There was no immediate reponse from the bank defendants.
MERS, in a press release, said its authority to bring foreclosure actions is rooted in an agreement with the borrower. In any case, the company said it has not acted as a foreclosing agent since July 2011.
Mr. Schneiderman, co-chairman of a new mortgage unit created by President Barack Obama to investigate misconduct in the marketing and sale of mortgage-backed securities, contends that through MERS, the financial industry deceived homeowners and filed fraudulent documents to make it appear that the foreclosing party had authority to initiate an action.
The lawsuit alleges that MERS filed more than 13,000 foreclosure actions against New York homeowners, and in many cases lacked legal authority to foreclose.
The attorney general said in a statement that the banks created MERS to facilitate rapid-fire securitizations and mortgage sales, and then, "once the mortgages went sour, these same banks brought foreclosure proceedings en masse based on deceptive and fraudulent court submissions, seeking to take homes away from people with little regard for basic legal requirements or the rule of law."
People v. JPMorgan Chase was filed in Brooklyn, where one of the defendants has an office and where one of the judges, Brooklyn Supreme Court Justice Arthur Schack (See Profile), has taken a particularly hard line against banks. Last year, Justice Schack dismissed a foreclosure because of MERS deficiencies (NYLJ, July 14, 2011).
David Bookstaver, spokesman for the Office of Court Administration, said the case will be randomly assigned.
According to the lawsuit, MERS was created so banks trading in mortgage-backed securities could avoid recording fees and public disclosure, and to facilitate the rapid turn-around of mortgage sales and securitizations.
MERS becomes the owner, or the owner's nominee, of the security interest and the mortgagee of tens of millions of mortgages, with the purchase and sale documents filed in a private rather than public database, the complaint alleges. That way, the suit claims, MERS remains the mortgagee no matter how many times the loan is sold or transferred.
Additionally, by filing the information in a private, member-only database borrowers cannot track the history of their mortgages.
"By creating this bizarre and complex end-around of the traditional public recording system, banks achieved their primary goal—over 70 million mortgage loans, including millions of subprime loans have been registered in the MERS System and the industry has saved more than $2 billion in recording fees," the complaint alleges.
The suit seeks to enjoin the defendants from filing foreclosure actions through MERS and to force the banks to cure any title defects resulting from "the fraudulent and deceptive acts" alleged. It also seeks an order requiring that defendants disgorge profits obtained through the alleged frauds, plus civil penalties.
Jeffrey K. Powell, deputy chief in the Bureau of Consumer Frauds and Protection, filed the complaint on behalf of Mr. Schneiderman.
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