It used to be that every time a bank sold a mortgage, the county land recording office received a fee. It wasn’t much — $30 or so — but then real estate boomed in the 1990s and banks pooled millions of mortgages into securities that investors bought and sold.
One mortgage transaction became a dozen or more, and the tab grew ever larger. So the banks came up with a way around the fees. And now they are fighting to avoid perhaps tens of billions of dollars in penalties that have added up over the years.
In 1997, when the banks’ burgeoning business in mortgage securities was clashing with the unwieldy nature of written forms, the industry created its own alternative, an electronic system that would track the ever-changing ownership of home loans.
The banks formed a private company called Mortgage Electronic Registry Systems Inc., or MERS. It has registered more than 65 million loans, three out of every five on the market.
As in other states, lenders in Colorado have used MERS to bypass registering the sale, assignment or transfer of a note or deed of trust.
But under Colorado law, MERS can’t initiate a foreclosure. Individual lenders or their servicers must certify they are the “qualified holder” with authority to foreclose on a property. And they must make restitution if another party shows up with a claim to the debt.
Counties complained about the lost revenue after MERS was implemented, but they rarely tried to challenge the new way of doing business. Now two lawyers in Reno, Nev., have filed suit in 17 states alleging that banks cheated counties out of billions of dollars. In Virginia, a lawmaker has asked the state’s attorney general to investigate MERS over its failure to pay recording fees. And everywhere elected officials and class-action lawyers turn, the back-office procedures of MERS are being called into question.
The suits were filed in California, Nevada and Tennessee and 14 undisclosed states where the cases are still under court seal. Attorneys Robert Hager and Treava Hearne, who are filing the suits, chose the states because their laws allow what are called false-claims suits, in which citizens can take legal action against companies that may have cheated the government.
The suits allege that by privatizing public records, MERS enabled banks to circumvent American property law and bypass the counties’ fee and paperwork requirements, costing billions of dollars in lost revenue over more than a decade. MERS says its process is legal and that the fees are not required under its system.
“These are local fees for service; if no service is needed or requested, no fee is appropriate,” MERS spokeswoman Karmela Lejarde said in an e-mail.
