The Mortgage Electronic Registration System Inc. (MERS) is “a private electronic registration system for tracking ownership of mortgage-related debt.” It’s often listed as the beneficiary of the deeds of trust securing its customers’ interests in homes subject to mortgages. Traditionally, the beneficiary is the lender; the deed of trust protects the lender’s interest by giving the lender the power to nominate a trustee, and giving that trustee the power to sell the home upon default. Lenders can sell secured debt, typically by selling the promissory note. Washington’s deed of trust act allows a subsequent holder of the debt to be a “beneficiary,” defining that term as “the holder of the instrument or document evidencing the obligations secured by the deed of trust.”
A federal district court asked the Washington Supreme Court to answer three certified questions involving MERS. In two foreclosure cases, loan servicers notified MERS that homeowners were delinquent. MERS appointed trustees, who initiated foreclosures. The key question was whether MERS was actually a beneficiary, with the power to appoint a trustee, if it didn’t hold the promissory notes secured by the deeds of trust. The court answered that it wasn’t, though the legal effect of MERS not being a lawful beneficiary was not clear on the record. It was, as a result, possible for the homeowner to bring a Consumer Protection Act (CPA) claim against MERS based on its representation that it was a beneficiary, depending on the facts of the case.
This blog isn’t perhaps the best place to go into MERS and its effect on record title. Christopher Peterson’s work is a good place to start. Anyway, Kevin Selkowitz and Kristin Bain bought homes in King County. Their deeds of trust named MERS as the beneficiary. The original lenders filed for bankruptcy and went into receivership respectively, and both homeowners fell behind on their payments. MERS named foreclosure trustees who began foreclosure proceedings. The assignments of the promissory notes weren’t recorded. Bain alleged underlying problems with the mortgage: the real estate agent, mortgage broker, and originator took advantage of her known cognitive disabilities; they falsified information on her mortgage application; and they failed to make legally required disclosures. In addition, Bain allged that IndyMac started foreclosure before it was assigned the loan and that some of the documents in the chain of title were fraudulent; while IndyMac was the original lender, the record suggested that ownership of the debt changed hands several times.
The court held that MERS couldn’t be a “beneficiary” within the terms of the deed of trust act if it never held the promissory note secured by the deed of trust, which it did not. The court declined to decide the full legal effect of this holding on the present record, but homeowners might have a CPA claim against MERS for acting as an unlawful beneficiary depending on the facts.
The power to sell under a deed of trust is significant because it allows the trustee to foreclose and sell the property without judicial supervision; this required construing the deed of trust act in favor of borrowers. The trustee is required to have proof that the beneficiary is the owner of the note secured by the deed of trust before foreclosing on owner-occupied homes. This is connected to the traditional rule that mortgage and note can’t be split, which MERS challenges by only purporting to transfer mortgages, with lenders left to deal with the notes themselves.
MERS facilitated the bundling and securitization of loans, which makes it “difficult, if not impossible, to identify the current holder of any particular loan, or to negotiate with that holder.” This circumstance “has caused great concern about possible errors in foreclosures, misrepresentation, and fraud. Under the MERS system, questions of authority and accountability arise, and determining who has authority to negotiate loan modifications and who is accountable for misrepresentation and fraud becomes extraordinarily difficult.” Thus, MERS seemed inconsistent with the statutory goal of providing an adequate opportunity for interested parties to prevent wrongful foreclosure. MERS argued that knowing the loan servicers’ identity was enough; there was “considerable reason” to believe that servicers couldn’t negotiate loan modifications or respond to related requests. Lack of transparency could even lead to a failure of the chain of title.
The court framed the question as whether MERS could both replace the existing recording system established by state law and still take advantage of legal procedures set forth in the same state law. Put that way, the answer is clear: no.
MERS argued that it could be a beneficiary if the parties wanted it to be; the legislature wanted to make things easier for lenders faced with defaulting borrowers, not to make foreclosure harder. Thus, since the parties agreed that MERS was the “beneficiary,” that was all that was required. To the contrary, parties to a contract can’t alter statutory provisions by contract. We can privately agree that I’m a licensed doctor; that doesn’t make me one.
MERS argued that it was “the holder of the instrument or document evidencing the obligations secured by the deed of trust” even if it didn’t hold the promissory note, because “instrument” and “document” could refer to all the loan documents making up the loan transaction, and that “obligation” must be read to include any financial obligation under any document signed in relation to the loan, including attorneys’ fees and costs incurred in the event of default. Thus, since MERS was the “holder” of the deed of trust, it was a beneficiary.
The court, however, agreed with Washington’s AG that the “instrument” had to be the note, because otherwise the statute would say that “beneficiary means the holder of the [deed of trust] secured by the deed of trust,” and a deed of trust isn’t secured by itself. Other provisions of the statute were to the same effect, including a provision that, if read the way MERS wanted, would allow a non-holding party to credit to its bid at the foreclosure sale amounts owed to the note-holder. The court also noted that a recent foreclosure prevention law aimed to encourage homeowners and “beneficiaries” to communicate and negotiate to avoid foreclosure, and MERS doesn’t have any power to do those things. The law wouldn’t make sense unless beneficiary means noteholder.
MERS argued that it was the agent of a beneficiary, and the court accepted that the law of agency could apply. But “[w]hile we have no reason to doubt that the lenders and their assigns control MERS, agency requires a specific principal that is accountable for the acts of its agent. If MERS is an agent, its principals in the two cases before us remain unidentified.” MERS said that the deed of trust language said MERS was “acting solely as a nominee for Lender and Lender's successors and assigns.” But the lender’s nomination of MERS doesn’t rise to an agency relationship with successor noteholders; MERS failed to identify the lawful principals that controlled its actions, even when asked at oral argument. The record suggested that MERS acted as an agent of the servicer, but said nothing about the noteholder.
So, what now? Well, we need to figure out who the beneficiary is. “Because it is the repository of the information relating to the chain of transactions, MERS would be in the best position to prove the identity of the holder of the note and beneficiary.” (Heh. I’m sure its 20,000 vice presidents can easily retrieve those records.) If the deed of trust has been split from the obligation, the deed of trust would be unenforceable, but the record didn’t clearly show that this had happened. If MERS was in fact an agent for the noteholder, there would have been no split. If MERS wasn’t, an equitable mortgage in favor of the noteholder might be an appropriate remedy. Or, if the noteholder properly transferred the note to MERS, MERS might be able to proceed with foreclosure.
This conclusion led to the CPA ruling. The CPA requires (1) an unfair or deceptive act or practice; (2) occurring in trade or commerce; (3) public interest impact; (4) injury to plaintiff in his or her business or property; and (5) causation. MERS only disputed some elements.
Deceptiveness requires neither intent nor actual deception, but the capacity to deceive a substantial portion of the public. MERS argued that it fully described its role to Bain on the contract she signed. But nothing in the deed of trust would alert a careful reader to the fact that MERS wouldn’t hold the note. The AG argued that MERS knew or should have known that it needed to hold the note to claim to be the beneficiary, and that MERS’s assignment of the deed of trust “purports to transfer its beneficial interest on behalf of its own successors and assigns, not on behalf of any principal.” This undermined MERS’s contention that it was only acting as an agent, and served to conceal the true holder of the loan. “Many other courts have found it deceptive to claim authority when no authority existed and to conceal the true party in a transaction.” Though the court didn’t find that this conduct was per se deceptive, it had the capacity to deceive, satisfying the first element.
There was also a public interest impact, since MERS is involved with an enormous number of mortgages. “If in fact the language is unfair or deceptive, it would have a broad impact. This element is also presumptively met.”
MERS argued that there could be no injury because the borrower knows who the servicer is, and that’s enough. “But there are many different scenarios, such as when homeowners need to deal with the holder of the note to resolve disputes or to take advantage of legal protections, where the homeowner does need to know more and can be injured by ignorance. Further, if there have been misrepresentations, fraud, or irregularities in the proceedings, and if the homeowner borrower cannot locate the party accountable and with authority to correct the irregularity, there certainly could be injury under the CPA.” The court also noted that, while this wasn’t at issue here, “MERS's officers often issue assignments without verifying the underlying information, which has resulted in incorrect or fraudulent transfers. Actions like those could well be the basis of a meritorious CPA claim.”
Given the procedural posture, the court declined to rule categorically on injury, which would depend on the facts of the case and MERS’s causal role. As the AG pointed out, MERS’ concealment of loan transfers also could also deprive homeowners of other rights, such as the ability to take advantage of the protections of the Truth in Lending Act and other actions that require the homeowner to sue or negotiate with the actual holder of the promissory note. My colleague Adam Levitin will love this one: “Further, while many defenses would not run against a holder in due course, they could against a holder who was not in due course.”
In conclusion: “[t]he fact that MERS claims to be a beneficiary, when under a plain reading of the statute it was not, presumptively meets the deception element of a CPA action.” The rest would have to follow later.