• Jonathan C. Cross and Stacey Trimmer, Chadbourne & Parke LLP

New York government officials are continuing their assault against foreclosure actions where Mortgage Electronic Registration Systems, Inc. (“MERS”) was the assignee of the mortgage, and challenges to foreclosures involving MERS are increasingly gaining traction in New York courts. Recently, the New York State Attorney General filed a complaint against MERS and several banks alleging fraud and deception in foreclosure proceedings. People v. JPMorgan Chase Bank N.A., No. 2012/2768 (N.Y. Sup. Ct. Feb. 3, 2012). In addition, three New York trial courts have decided motions involving standing and other issues in such actions. CIT Group/Consumer Fin., Inc. v. Platt, 33 Misc. 3d 1231(A) (N.Y. Sup. Ct. 2011); U.S. Bank N.A. v. Bressler, 33 Misc. 3d 1231(A) (N.Y. Sup. Ct. 2011); Bank of New York Mellon v. Martinez, 33 Misc. 3d 1215(A) (N.Y. Sup. Ct. 2011). Two courts ruled against the foreclosing banks, finding they did not have standing to foreclose where MERS assigned a mortgage without express authority to do so or sufficient documentation evidencing that the note was also transferred. Although the third court dismissed a lack of standing defense, it did so solely for procedural reasons.

The MERS System

MERS was created in the 1990s by the mortgage industry as a private computerized database where lenders could record and track mortgage loans. MERS is typically noted in county land records as the “mortgagee of record” and/or a “nominee” of the owner of the mortgage note, which assists lenders in streamlining the mortgage assignment process. This system allowed lenders to assign and transfer loans rapidly and facilitated mass securitization of mortgage loans. Currently, over 70 million mortgage loans have been registered on the MERS system.

New York Attorney General’s Action

On February 3, 2012, the New York State Attorney General brought an action against JPMorgan Chase, Bank of America, MERS and others alleging fraud, illegal acts, and deceptive acts and practices in violation of the New York Executive Law and General Business Law. The complaint explains that New York has a public recording system where a lender traditionally recorded mortgage interests in the local county clerk’s office. With the onset of bundling mortgages into mortgage-backed securities in the 1990s, however, the mortgage industry created MERS to decrease the cost and time of using the traditional public recording system. The complaint alleges that MERS has few or no employees and it delegates its authority to “certifying officers,” who in actuality are employees of MERS members, including defendants. These certifying officers then executed mortgage assignments and foreclosure paperwork in MERS’ name. In many New York foreclosure proceedings certifying officers have signed sworn statements on behalf of MERS, but also executed documents on behalf of their employers, leading to widespread confusion.

As a result of those practices, the Attorney General complaint alleges that the defendant banks have fraudulently brought foreclosure actions in MERS’ name and that “MERS assignments have numerous defects.” In fact, “MERS often lacked standing to foreclose” because it often did not hold the promissory note and misrepresented to courts and homeowners that it owned the note. In addition, many foreclosure actions were initiated before an assignment was executed and thus plaintiffs in such actions plainly misrepresented their right to foreclose. Accordingly, the complaint seeks to enjoin the defendants from filing foreclosure proceedings in MERS’ name, executing deceptive mortgage assignments or mortgage-related documents without personal knowledge, failing to disclose to homeowners MERS’ role and failing to maintain an accurate MERS database. The complaint also requests that defendants disgorge all profits obtained by, and pay all damages caused by, these fraudulent and deceptive practices.

CIT Group/Consumer Fin., Inc. v. Platt

On December 7, 2011, a New York trial court denied a lender’s motion for summary judgment and motions to strike the borrower’s affirmative defenses of lack of standing and failure to comply with Section 1303 of the New York Real Property Actions and Proceedings Law (“RPAPL”) 1303, but granted the lender’s motions to strike the affirmative defenses of failure to comply with Section 1304 thereof and of fraud. CIT Group/Consumer Fin., Inc. v. Platt, 33 Misc. 3d 1231(A) (N.Y. Sup. Ct. 2011). In this foreclosure action, the subject mortgage listed MERS as the nominee of Wilmington Finance, Inc. (“Wilmington”) and provided that “‘MERS holds only legal title to the rights granted by [defendant Platt] . . ., but, if necessary to comply with law or custom,’ MERS has the right to foreclose and ‘to take any action required of [Wilmington].’”

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