A lawsuit filed by five South Carolina counties challenging the practices of a national electronic mortgage document registry system has survived a pair of motions to dismiss filed by the company and a group of banks and mortgage lenders named as defendants.
The counties are suing because they say the system results in county property and lien records being out of compliance with state maintenance laws and hides the true owner of mortgage loans, making county records inaccurate and making it difficult for borrowers to defend against foreclosure by preventing them from determining who owns their mortgage.
The motions argued that the counties did not have standing to sue because they weren’t directly involved in the mortgage document system.
Earlier this month, Beaufort County Circuit Judge R. Lawton McIntosh denied the motions by Mortgage Electronic Registration Systems and its owner financial institutions to dismiss the counties’ claims. MERS is an electronic registry used by its owners and member banks that tracks changes in servicing rights and beneficial ownership interests in mortgage loans.
MERS, a subsidiary of Merscorp Holdings Inc. was created in 1995 by executives of national banks and mortgage servicers in order to simplify the process of buying and selling loans by showing MERS as the nominal owner of mortgages, eliminating the companies’ need to file mortgage ownership changes with county courts.
The complaints alleges MERS and its member banks corrupted and destroyed the state’s property records system. The complaint cites South Carolina law, which requires changes of loan ownership to be recorded with the county register of deeds. However, the complaint alleges the financial institutions that own MERS avoid the cost of making title changes by stating that MERS owns the mortgage, causing the borrower and the county to not know which financial institution truly holds the note.
“Judge McIntosh’s order denying the motions to dismiss the issues raised by the counties was an early but essential hurdle we had to cross with the real battles to come in the future as we continue to press our claims against MERS and its banks,” said attorney Jim Scheider, of Vaux, Marscher & Berglind in Bluffton, in a June 1 statement after McIntosh’s ruling. Scheider is the co-lead counsel, along with Blufton attorney Antonia Theresa Lucia, representing the five counties Beaufort, Jasper, Hampton, Collation and Allendale.
The suit also names 27 banks and mortgage lenders as defendants, including national companies such as Bank of America, Deutsche Bank National Trust Co., Regions, J.P. Morgan Chase Bank and Capital One, along with South Carolina banks.
“While this MERS sounds to be odd and sounds to be something to disrupt things, it has, in fact, helped the banks have liquidity and given them the ability to write more mortgages than they would otherwise be able to,” attorney J. Edward Bell said. “If they can’t sell their mortgages then they can’t do business.”
Bell, a founding partner of the Bell Legal Group in Georgetown, is representing Capital One in this action.
“One of the questions we must ask is, can you give us any evidence to suggest title checkers, loan closers, banks or individuals can’t check a title? And (the plaintiffs) can’t give us any evidence there either,” Bell said.
The complaint states: “The MERS system has all but collapsed this (recordation) system throughout the United States, including South Carolina.” It also mentions a 2011 report done by the Financial Crisis Inquiry Commission detailing some lenders practices that contributed to the housing crisis and Great Recession. At the time of the report, about 4 million families had lost their homes to foreclosure, while another nearly 5 million had entered the foreclosure process or had fallen behind on mortgage payments. According to the commission, “there were widespread reports of egregious and predatory lending practices, dramatic increases in household mortgage debt, and exponential growth in financial firms’ trading activities.”
According to the complaint, “South Carolina public policy favors a reliable and functioning public recordation system to avoid destructive breaks in title, confusion as to the true identity of the (owner), fraudulent foreclosures, and uncertainty when real property is sold.”
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