FRANKFORT — A Virginia company created by the mortgage industry violated Kentucky's Consumer Protection Act by failing to disclose when mortgages were sold or transferred from one bank to another, Attorney General Jack Conway claimed in a lawsuit filed Wednesday in Franklin Circuit Court.
The 36-page suit alleges that MERSCORP Holdings Inc. and its wholly owned subsidiary, Mortgage Electronic Registration Systems Inc., both in Reston, Va., were required to record mortgage assignments in the appropriate county clerk's office, which collects a $12 fee for each mortgage recorded.
Many banks and mortgage lenders sell outstanding loans to free up money for new loans. They use a mortgage assignment to legally grant the loan obligation to the new mortgage holder.
Conway, in a news conference in his Capitol office, said state law is clear that mortgage assignments must be recorded with county clerks.
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"MERS directly violated that law by creating this system that provides no public record of sales or transactions and deliberately circumvents paying recording fees to states," he said. "The process makes it difficult for consumers to access data to find out who owns their loans, and the Commonwealth is ripped off when it comes to recording fees."
He described MERS as "a ghost" that the industry created to claim that it holds the mortgage so it does not have to abide by state laws.
Jason Lobo, a spokesman for MERS, said the company has done nothing wrong.
"There is no merit to the allegations leveled at MERS by Kentucky Attorney General Jack Conway in today's news conference," Lobo said in a statement. "All MERS mortgages are registered in the local land records and all recording fees are properly paid."
MERS was created in 1995. Its corporate stockholders include Bank of America, Wells Fargo, Fannie Mae, Freddie Mac and the Mortgage Bankers Association.
Hundreds of thousands of Kentucky loans are registered in MERS, Conway said, and more than 70 million mortgages have been registered on the system nationwide.
Conway declined to put a number on how many alleged violations might have occurred in Kentucky with MERS, but he said the suit calls for fines of as much as $2,000 for each violation.
The lawsuit also makes civil claims that MERS was created to "unjustly enrich and pad its bottom line at the expense of consumers and the Commonwealth of Kentucky."
Conway's action follows a lawsuit filed last year on behalf of 14 Kentucky counties against MERS in U.S. District Court in Ashland. The suit, which is ongoing, alleges that MERS schemed to avoid paying Kentucky counties millions of dollars in fees.
Three other states — New York, Massachusetts and Delaware — have filed similar lawsuits against MERS.
Conway said Delaware has settled, but that state has weaker consumer-protection laws than Kentucky. Lobo said the Massachusetts lawsuit has been dismissed.
In a statement, New York Attorney General Eric T. Schneiderman commended Conway for filing the lawsuit.
"The banks created this system as an end-run around the public property system and state recording fees," Schneiderman said. "In Kentucky, New York and across the country, these actions have left financially troubled homemakers in the dark about who owns their mortgages, making the difficult process of negotiating a modification or fighting a foreclosure action even harder."
Conway said he discussed his lawsuit last week with a federal mortgage fraud task force, which President Obama set up last year to build on the work of the $25 billion mortgage foreclosure settlement.
Conway joined 48 other state attorneys general in negotiating that settlement. They alleged that the nation's five largest banks had committed fraud during many foreclosure settlements by filing "robo-signed" documents with the courts.
Kentucky's share of the settlement is about $58 million. Of that, $38 million goes to consumers who qualify for refinancing, loan write-downs, debt restructuring and cash payments of as much as $2,000.