Kentucky Attorney General Jack Conway announced that his office filed a lawsuit in Franklin Circuit Court against MERSCORP Holdings, Inc., and its wholly-owned subsidiary Mortgage Electronic Registration Systems Inc. (MERS) for violations of Kentucky law. The lawsuit is a result of General Conway's investigation of mortgage foreclosure issues in Kentucky. The suit alleges that MERS violated Kentucky law by not recording mortgage assignments with County Clerks when mortgages were sold or transferred from one bank to another. By law, mortgage assignments must be recorded in the appropriate County Clerk's office and a $12 fee is collected by the clerks on behalf of the Commonwealth of Kentucky.
"Kentucky's statute is clear. It requires assignments be recorded with County Clerks, and MERS directly violated that law by creating this system that provides no public record of sales or transactions and deliberately circumvents paying recording fees to states," Conway said. "The process makes it difficult for consumers to access data to find out who owns their loans, and the Commonwealth is ripped off when it comes to recording fees."
MERS was created in 1995 to enable the mortgage industry to avoid state recording fees, allow for the rapid sale and securitization of mortgages, and shorten the time it takes to pursue foreclosure actions. Its corporate shareholders include, among others, Bank of America, Wells Fargo, Fannie Mae, Freddie Mac, and the Mortgage Bankers Association.
Currently more than 6,500 MERS members pay for access to the private system. More than 70 million mortgages have been registered on the system. The lawsuit alleges that since MERS' creation in 1995, members have avoided paying more than $2 billion in recording fees nationwide.
Hundreds of thousands of Kentucky loans are registered in the MERS system. As a result of not publicly recording the mortgage assignments and paying the required fees, the lawsuit alleges that MERS violated Kentucky's Consumer Protection Act by committing unfair, false, misleading or deceptive conduct. Under Kentucky law, MERS could be fined up to $2,000 for every violation.
"This process undermines the integrity of Kentucky's public land records," Conway said. "Before the bottom fell out of the housing market, banks were bundling and selling loans on the securities market as fast as the ink could dry on the paperwork. When homeowners had trouble paying their mortgages during the economic downturn, they struggled to find out who owned their loans. It made it difficult to find out who to call to request a loan modification or to defend the foreclosure. There is and was no public record of the transfers."
In addition, the lawsuit makes civil claims that MERS created this system to unjustly enrich and pad its bottom line at the expense of consumers and the Commonwealth of Kentucky.
"I commend Attorney General Conway for taking action against MERS," New York Attorney General Eric T. Schneiderman said. "The banks created this system as an end-run around the public property system and state recording fees. In Kentucky, New York, and across the country, these actions have left financially troubled homeowners in the dark about who owns their mortgages, making the difficult process of negotiating a modification or fighting a foreclosure action even harder. Attorney General Conway's lawsuit is an important step towards accountability for these abusive practices."
Attorney General Schneiderman and Housing and Urban Development Secretary Shaun Donovan chair the President's mortgage fraud task force, which President Obama convened a year ago to build on the work of the mortgage foreclosure settlement.