Last Friday and Saturday I attended the Teaching Consumer Law Conference hosted by the University of Houston Law Center. There were a number of terrific presentations, but Christopher Peterson’s presentation on Mortgage Electronic Registration System, Inc. (MERS) really caught my attention.

MERS is a privately held company that “registers” mortgages. Ordinarily, the mortgagee (lender) must record its interest in the mortgage in the county land records. Any subsequent transfers of the mortgagee’s interest (for example, in the securitization process) must also be recorded. MERS short circuits this multiple recording process. Instead, the lender includes language in the Deed of Trust or Mortgage describing MERS as “a separate corporation that is acting solely as a nominee for Lender and Lender’s successors and assigns. MERS is the mortgagee under this Security Instrument.” MERS is recorded as the mortgagee in the county land records. Although MERS does not lend money, service the mortgage, or receive any of the payment stream from the mortgage, it remains as “nominee” through all future transfers. As a result, any subsequent transfers of interest in the mortgage are recorded only in MERS electronic system -- not in the county land records. According to MERS, it “now registers more than half the mortgage loans originated in the United States.”

Increasingly, foreclosure actions are being brought in MERS name. Professor Peterson questions whether MERS as “nominee” has standing to bring foreclosure actions. A few courts have agreed with him, but other courts conclude MERS has standing. (See here for a summary.) Professor Peterson believes that the MERS system may have other legal deficiencies. He questions whether subsequent transfers of the mortgagee interests are properly perfected if they are only recorded in the MERS system and not the county records. He also believes it may be appropriate to treat MERS as a debt collector under the Fair Debt Collection Act. I look forward to reading Professor Peterson’s completed article.

While I have not fully analyzed the legal implications of MERS’s business plan, it seems to me that MERS's innovation of electronically tracking mortgage interests was only a matter of time. It is cumbersome and costly to file and search in the paper land records in each county. States have already consolidated and digitized records for security interests in personal property. Of course, the personal property recording systems are still state government systems. In contrast, MERS is a nation-wide private company owned partly by some mortgage lenders. MERS will end up with a lot of bad publicity if a very large number of foreclosure actions are brought in its name, particularly if it appears that the MERS system was used to hide the ball from consumers.

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