MERS—the mighty, unseen mortgagee of record for millions of home loans—recently defeated an effort by Kentucky counties to recover the huge amounts of recording fees that they lose annually due to the company’s electronic-transfer system. According to the federal court ruling, Kentucky law does not clearly empower counties to enforce alleged violations of state recording-fee statutes. Instead, the counties must look to state sources—like local courts or the Kentucky legislature—to obtain that authority.
In 2012, forty-one of Kentucky’s 120 counties banded together and sued MERS and dozens of its members in Kentucky federal court. The counties argued that MERS’s transfer system violated state law and gave rise to, among other things, fraud and a civil conspiracy. Without reaching the merits of the counties’ arguments, the trial court dismissed the lawsuit on the grounds that the counties lacked authority to enforce the recording fee statutes at issue. On June 5, 2015, the United States Court of Appeals for the Sixth Circuit affirmed that result.
MERS, formally known as Mortgage Electronic Registration, Systems, Inc., is a two-decade old experiment the mortgage industry created to avoid fees associated with transferring ownership of promissory notes. The company allows its members (which comprise nearly all the nation’s big lenders) to designate MERS as their nominee on mortgage instruments. That way, when a member’s loan is sold or transferred to another member, MERS remains the mortgagee of record even though the note has changed hands. That avoids the necessity of paying recording fees for the assigning and transferring of property interests.
Since its inception in the mid-1990s, MERS has grown exponentially; now, over half of new home loans in the United States are entered into MERS’s database. The company’s detractors say that the system deprives localities of much needed revenue that is necessary to maintain their local land records. MERS supporters counter that electronic transfers make lending less expensive and allow promissory notes to be freely traded like other forms of investment.
Whatever the rationale, MERS has now prevailed twice at the Sixth Circuit on these same grounds. In 2013, that court rebuffed an attempt by county clerks to enforce the recording-fee law at issue, citing the clerks’ similar lack of authority.