Yesterday, the Ninth Circuit Court of Appeals affirmed dismissal (opinion here) of a fraud lawsuit against the large mortgage lenders that banded together to form the Mortgage Electronic Registration System. Mortgage loan giants Fannie Mae and Freddie Mac and several of the largest U.S. banks established MERS in 1995 to circumvent the costly and cumbersome process of transferring ownership of mortgages and recording the changes with county clerks.
Among other claims, the plaintiff class alleged that the mortgage lenders conspired to commit fraud in forming MERS. The alleged that "MERS members conspired to commit fraud by using MERS as a sham beneficiary, promoting and facilitating predatory lending practices through the use of MERS, and making it impossible for borrowers or regulators to track the changes in lenders."
The court concluded that the claims were not plausible, and so affirmed the district court's dismissal of them. Aside from finding the allegations inadequate, the court also relied on the language included in the standard mortgage/deed issued as part of a MERS transaction:
"While the plaintiffs’ allegations alone fail to raise a plausible fraud claim, we also note that their claim is undercut by the terms in Cervantes’s standard deed of trust, which describe MERS’s role in the home loan.2 For example, the plaintiffs allege they were defrauded because MERS is a “sham” beneficiary without a financial interest in the loan, yet the disclosures in the deed indicate that MERS is acting “solely as a nominee for Lender and Lender’s successors and assigns” and holds “only legal title to the interest granted by Borrower in this Security Instrument.” Further, while the plaintiffs indicate that MERS was used to hide who owned the loan, the deed states that the loan or a partial interest in it “can be sold one or more times without prior notice to Borrower,” but that “[i]f there is a change in Loan Servicer, Borrower will be given written notice of the change” as required by consumer protection laws. Finally, the deed indicates that MERS has “the right to foreclose and sell the property.” By signing the deeds of trust, the plaintiffs agreed to the terms and were on notice of the contents. See Kenly v. Miracle Props., 412 F. Supp. 1072, 1075 (D. Ariz. 1976) (explaining that a deed of trust is “an essentially private contractual arrangement”). In light of the explicit terms of the standard deed signed by Cervantes, it does not appear that the plaintiffs were misinformed about MERS’s role in their home loans."
In relying on the language of the deed of trust, the Ninth Circuit's decision may have far-ranging implications for other cases where the MERS system is being challenged by borrowers individually and in putative class actions.