Consumer Law & Policy Blog

MERS cannot foreclose unless it is the holder of the underlying note.

In an opinion with possible far reaching consequences, a New York appellate court has held that a party does not have standing to commence a foreclosure action when that party's assignor, in this case, Mortgage Electronic Registration Systems, Inc. (hereinafter MERS), was listed in the underlying mortgage instruments as a nominee and mortgagee for the purpose of recording, but was never the actual holder or assignee of the underlying notes.

In Bank of New York v. Silverberg, the court discusses the MERS system, extensively citing an article by Chris Peterson, and concludes that efficiency does not trump the law. The court stated:

"In 1993, the MERS system was created by several large participants in the real estate mortgage industry to track  ownership interests in residential mortgages" (Matter of MERSCORP, Inc. v. Romaine, 8 N.Y.3d 90, 96). MERS was  intended to "streamline the mortgage process by using electronic commerce to eliminate paper." MERS's implementation followed the delays occasioned by local recording offices, which were at times slow in recording instruments because of complex local regulations and database systems that had  become voluminous and increasingly difficult to search (see Peterson, Foreclosure, Subprime Mortgage Lending, and the Mortgage Electronic Registration System,78 U. Cin. L. Rev. 1359, 1366 (2010).

 "Mortgage lenders and other entities, known as MERS  members, subscribe to the MERS system  and pay annual fees for the electronic processing and tracking of ownership and transfers of  mortgages. Members contractually agree to appoint MERS to act as their common agent on all  mortgages they register in the MERS system" (Romaine, at 96)

The MERS system facilitated the transfer of loans into pools of other loans which were then  sold to investors as securities (see Peterson, at 1361-1362). MERS delivers  savings to the participants in the real estate mortgage industry by allowing those entities to avoid the  payment of fees which local governments require to record mortgage assignments (see Peterson at 1368-1369).

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Lenders identify MERS as nominee and mortgagee for its members' successors and assignees. MERS remains the  mortgagee of record in local county recording offices regardless of how  many times the mortgage is transferred, thus freeing MERS's members from paying the  recording fees that would otherwise be furnished to the relevant localities (id.; see Romaine, at 100). This leaves borrowers and the local county or municipal recording offices unaware  of the identity of thetrue owner of the note, and extinguishes a source of revenue to the  localities. According to MERS, any loan registered in its system is "inoculated against future assignments because MERS remains the mortgagee no matter how many times servicing is traded." Moreover, MERS does not lend money, does not receive payments on promissory  notes, and does not service loans by collecting loan payments

 Therefore, assuming that the consolidation agreement transformed MERS into a mortgagee for the purpose of recording—even though it never loaned any money, never had a right to  receive payment of the loan, and never had a right to foreclose on the property upon a default in payment—the consolidation agreement did not give MERS title to the note, nor does the record show that the note was physically delivered to MERS. Indeed, the consolidation agreement defines "Note Holder," rather than the mortgagee, as the "Lender or anyone who succeeds to Lender's right under the Agreement and who is entitled to receive the payments under the Agreement." Hence, the plaintiff, which merely stepped into the shoes of MERS, its  assignor, and gained only that to which its assignor was entitled (see Matter of International Ribbon Mills, 36 N.Y.2d 121, 126;  see also U.C.C. §3-201 ["(t)ransfer of an instrument vests in the transferee such rights as the transferor has therein"]), did not acquire the power to  foreclose by way of the corrected assignment.

 In sum, because MERS was never the lawful holder or assignee of the notes described and  identified in the consolidation agreement, the corrected assignment of mortgage is a nullity, and MERS was without authority to assign the power to foreclose to the plaintiff. Consequently, the plaintiff failed to show that it had standing to foreclose.

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 MERS purportedly holds approximately 60 million mortgage   loans (see Michael Powell & Gretchen Morgenson, MERS? It  May Have Swallowed Your Loan, New York Times, March 5, 2011), and is involved in the origination of approximately 60% of all mortgage loans in the  United States (see Peterson at 1362; Kate Berry, Foreclosures Turn Up Heat on MERS, Am. Banker, July 10, 2007, at 1). This Court is mindful of the impact that this decision may have  on the mortgage industry in New York, and perhaps the nation. Nonetheless, the law must not  yield to expediency and the convenience of lending institutions. Proper procedures must be followed to ensure the reliability of the chain of ownership, to secure the dependable transfer of property, and to assure the enforcement of the rules that govern real property.

 

Debt Collectors and Pseudonyms

by Jeff Sovern

Brian posted earlier a link to the Times article about debt collectors.  The article notes in a photo caption that debt collectors use pseudonyms, apparently because they fear retribution from consumers from whom they are attempting to collect debts.  But doesn't that violate 15 U.S.C. section 1692e, which prohibits "false, deceptive, or misleading representation[s] or means in connection with the collection of any debt"?  The use of pseudonyms need not always be innocent; a debt collector who has violated the Fair Debt Collection Practices Act can use a pseudonym to conceal his or her identity to escape liability.  Thus, in testimony before Congress in 1992, Richard Bell, a former debt collector, stated that collection agencies report that a collector about whom they receive a complaint has been fired or left the company; in fact, according to Bell, the collector simply changes his alias.

Consumer (Mis)Education and Disease Eradication

By the mid-1990's, measles was on the verge of eradication, at least in the U.S. Why? Because an effective vaccine was available, and public health officials had convinced the public that it worked. Now measles is on the rise, with outbreaks occuring in recent years. Why? Largely beause parents have been misinformed that the measles vaccine causes autism in children. Lives are at stake, and the government is waging a counter-offensive.

On the verge of regulation by the CFPB, the debt collection industry attempts to improve its terrible image

Read about it here.

Supreme Court dismisses arbitration waiver case granted for review.

As reported in  SCOTUSblog, settlement of a dispute over waiver of arbitration rights has led the Supreme Court to dismiss a case that it was scheduled to decide in its next Term starting in October — Stok & Associates v. Citibank (docket 10-514).  The Stok case was dismissed on June 2. 

The issue in the case was whether one side in a legal dispute surrenders any right it may have had to send the matter to an arbitrator, if it has participated in a court case growing out of the same dispute.  A second issue is whether that right is waived even if the other side would not be prejudiced by the failure to go to arbitration earlier.

The Court agreed to hear the case, primarily because there is a distinct split among federal Circuit Courts on the arbitration question.  In a majority of those courts, a party claiming a waiver of arbitration by the other side’s participation in a court case is required to show legal prejudice from failing to arbitrate earlier; if it does not make that showing, arbitration follows.  A minority of Circuit Courts have ruled that, once a party takes part in litigation, it is barred from demanding arbitration, whether or not prejudice is shown.

 

Will There Be A Recess Appointee To Head Up The CFPB?

Following up on Jeff's "Waiting for Godot" post noting the possibility that President Obama may nominate Raj Date (not Elizabeth Warren) to head up the Consumer Financial Protection Bureau, today's Washington Post reports that Senate Minority Leader Mitch McConnell is steadfast in his vow to block any CFPB nominee unless the agency is restructured to the Republicans' liking:

[A]n aide to ... McConnell said Thursday that the lawmaker stands by his vow to block any candidate. Late last month, McConnell led 44 senators in a letter to the White House calling for structural changes to the bureau. Rep. Barney Frank (D-Mass.) has accused GOP opponents of discriminating against Warren because she is female, but McConnell’s complaints are much broader. “It’s not sexist. It’s not Elizabeth Warren-specific,” McConnell spokesman Donald Stewart said. “It’s any nominee.” It takes only a single senator to hold up the confirmation indefinitely. President Obama could appoint someone duuring the next congressional recess, but Republicans can keep the Senate in session to block that move.

 

Waiting for Godot

by Jeff Sovern

Last August 11, I posted this to the blog:

At the risk of being a nag, I'm wondering when the President will nominate the new director of the CFPB.  I have two fears.  First, if the nominee cannot be confirmed before the new Congress takes over, and, as some predict, Republicans make significant gains in the election, a filibuster will be more likely to block the nominee, which could both prevent the President's first choice from serving in this key position and lead to additional delays as a second nominee is selected.  Second, the longer it takes before the CFPB's head takes office, the longer it will be before the CFPB can get rolling.  Confirmation proceedings can take an extended period even in non-election years. The CFPB will have a lot of things to look at in its early days, including arbitration clauses and revised disclosures under the Truth in Lending Act, and the sooner it can do that, the better.   I have no idea how long vetting processes take, and it is a time when lots of people go on vacation, but I hope this is getting the attention it deserves. It's not as if there aren't good candidates.

If the President had nominated someone last fall, perhaps the threat by GOP Seantors to block any nominee unless the Bureau's powers are reduced would have been rendered ineffective.  Meanwhile, Washington Post/Bloomberg reports that the administration is thinking of nominating Raj Date to the job.  The article states: "In a statement, White House spokeswoman Amy Brundage said that no decisions have been made and that the administration is still considering a number of candidates."

Constitutionality of the Affordable Care Act's Mandate Argued in the 11th Circuit

As nearly eveyone knows, the Affordable Care Act will require in 2014 that certain people buy health insurance or pay a fine or tax if they choose not to buy health insurance. Yesterday, one of the many constitutional challenges to the mandate was argued in the U.S. Court of Appeals for the Eleventh Circuit. Read here a description of the argument, at which all three panelists apparently expressed skepticism about the mandates constitutionality. Note how Acting Solicitor General Neil Katyal defended the law:

But Mr. Katyal urged the judges to see the law not as a mandate to buy an insurance policy, but as a regulation of the means of payment for care that individuals would inevitably consume. [italics added] Americans would not be conscripted into the market, Mr. Katyal suggested, because the uniquely unpredictable demand for health care would have already placed them there. “It’s all about financing,” Mr. Katyal asserted. “It’s about regulating whether people are paying cash or credit.”

 

Have Law Schools Violated Consumer Protection Laws?

Law professors have been buzzing about the graduate of Thomas Jefferson Law who brought a class action against the school under a UDAP statute for allegedly misrepresenting its placement statistics (a compendium of articles can be found here).  In addtion, 

Joel F. Murray

, a graduate of Cal-Davis, argues in Professional Dishonesty: Do U.S. Law Schools That Report False or Misleading Employment Statistics Violate Consumer Protection Laws? that law schools that report inaccurate figures are violating the FTC Act.  He urges the FTC to investigate.  Here's the abstract:

This paper examines the potential legal application of the Federal Trade Commission Act (FTC Act) to American Bar Association (ABA) accredited law schools. In recent years, evidence has emerged indicating that many law schools are misreporting or falsifying employment statistics in marketing materials and to the U.S. News Rankings and World Report law school rankings, the preeminent rankings for United States (U.S.) law schools. The reporting of false or misleading employment statistics to prospective students may violate provisions of the FTC Act that prohibit deceptive practices and false advertising. This paper reviews evidence that U.S. law schools are misreporting employment statistics, examines how the FTC Act applies to U.S. law schools, and argues that U.S. law schools that misreport or falsify employment statistics violate multiple provisions of the FTC Act.

 

Delaware Courts to Collectors: Prove It

The Delaware courts have posted an administrative directive setting higher standards for consumer debt collectors to plead and document their collection actions.  Among other things the directive calls for debt buyers to identify the original creditor and all assignments of the debt and to attach a copy of the original contract.  The latter requirement will be challenging for credit card debts, because the written credit card account agreement is a thing of the past; most credit card contracts are now formed (according to the card issuers anyway) when a consumer clicks an "I agree" button, and the contract terms are somewhere in the cloud.  You can read and respond to comments on the directive here.