MERS’ Victory in Court May Have Positive and Negative Effects

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February 5, 2014
Michael Cortina
SmithAmundsen Financial Services Alert

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Last week, MERSCORP, Inc. successfully defended itself against a suit filed by a county recorder that claimed that the company's practice of refusing to record or pay for the recordation of promissory note assignments unjustly enriches the company to the detriment of the county recorder. The Seventh Circuit Court of Appeals summarily affirmed dismissal of the suit without the need for briefs. Macon Cty. v. MERSCORP, Inc., --- F.3d --- (7th Cir., no. 13-3251, Jan. 30, 2014).

MERSCORP, Inc., commonly referred to as Mortgage Electronic Recording Systems, or “MERS,” operates an online system for tracking assignments of mortgage loans. A bank that obtains a mortgage can register with MERS and assign the mortgage to MERSCORP, Inc., which then records it in the county in which the mortgaged property is located. This provides notice to subsequent purchasers and creditors of the property.

Even though MERSCORP is the mortgagee of record, the assignment of a mortgage to it is not substantive. MERSCORP is not the lender; and as it does not pay the assignor for the assignment of the mortgage, it does not become the lender – in fact it has zero financial interest in the mortgage.

The purpose of assigning a mortgage to MERSCORP is to enable repeated assignments of the mortgagor’s promissory note to successive lenders – usually other banks. These assignments are not recorded in the county land registries because they are not assignments of mortgages or other property interests. So the first assignee can assign the mortgagor’s promissory note to another financial institution without the assignment being recorded in a public-records office, and the second assignee to a third, and so on. The MERS process facilitates, by streamlining, successive interbank sales of mortgage notes.

In this case, Macon County, Illinois, sued MERSCORP, Inc. claiming that its process of transferring notes without recording mortgage assignments constituted unjust enrichment in violation of Illinois law. In its decision, the Seventh Circuit Court of Appeals noted that MERS is no more engaging in unjust enrichment than any other business is when it undersells the competition. The court also analogized MERS to a taxpayer that takes lawful advantage of a loophole in the Internal Revenue Code and stated that, "no one believes that the taxpayer should have to disgorge his savings just because he took advantage of a legal loophole."

Dismissal of the case constitutes a good result for MERSCORP, Inc. and the banks that use its services. However, the continuation of the MERS process means that potential problems in foreclosure cases may continue for lenders that use the MERS system.

To illustrate, a commonly used defense in foreclosure cases is to argue that the foreclosing lender lacks “standing” (a legally recognized interest in the property that gives the lender the right to file the foreclosure) because the lender that is foreclosing is not the original lender in the case. Cognizant of irregularities in some foreclosure files, courts often require lenders to trace all assignments of a note from the original lender to the foreclosing lender before the court will enter a judgment. As the MERS system does not result in the recording of assignments, it can become difficult to track down and obtain proof from the various assignee lenders that purchased and sold the note. At least one court has required a lender to obtain affidavits from every holder in the “chain of title” of a promissory note to prove that the lender acting as the plaintiff had standing to sue (even when the original, and endorsed, promissory note was shown to the court).

Foreclosures are sometimes delayed for months while proof of standing is obtained. If MERS recorded assignments, then proving the chain of title of an obligation would simply be a matter of providing the court with certified copies of the recorded assignments. The Macon County case, however, will ensure that the MERS method of recording only a mortgage and not assignments of notes will continue into the foreseeable future.