MERS Foreclosure Fraud Class Appeal Dismissed

Three Arizona homeowners facing foreclosure lost an appeal seeking to reinstate their fraud and conspiracy class action against Countrywide Home Loans and others using the MERS, or Mortgage Electronic Registration System.

The 9th U.S. Circuit Court of Appeals upheld dismissal of the Arizona federal suit against Countrywide Home Loans, now owned by Bank of America [BAC].  The suit also named major players in the mortgage industry, HSBC Mortgage Corp., Wells Fargo Bank, AIG United Guaranty, Bank of America, GE Money Bank, National City Corp., Morgan Chase Bank, Merrill Lynch & Co. and others.

“Although the plaintiffs allege that aspects of the MERS system are fraudulent, they cannot establish that they were misinformed about the MERS system, relied on any misinformation in entering into their home loans, or were injured as a result of the misinformation,” wrote Judge Connie Callahan, for the three-judge panel.

MERS is a private electronic database that tracks who holds home loans as well as loan servicers.  After borrowers take out loans a bank may sell it to another lender, or may sell a portion.  The servicer collects payments and sends them to the various owners of the mortgage.  The companies in the mortgage industry pay fees to MERS to track loan ownership.

MERS became a nominal holder of the deed as loans were sold and resold rapidly through the 1990s and early 2000s.  Although bank ownership of mortgages may have changed, MERS only recorded this in their database, but did not record these with local county clerks.  Yet it had to interest or rights to loan payments or interest in floreclosure.

 The three Arizona plaintiffs in this case, Olga Cervantes, Carlos Almendarez and Arturo Maximo, received loans or refinancing in 2006 from Countrywide and First Franklin.

Each named MERS as a “beneficiary” and “nominee” in the deed of trust.

They later defaulted on the loans.  They later sued claiming that MERS members conspired to commit fraud by using MERS as a sham beneficiary and making it impossible for borrowers or regulators to track the changes in lenders.

The borrowers contend that all transfers of interests in the home loans within the MERS system are invalid because the designation of MERS as a beneficiary is a sham and that no party is in a position to foreclose, according to the court.

The borrowers also claimed violations of the Truth in Lending Act and the Arizona Consumer Fraud Act.  All were dismissed by the appeals court.

Case:  Cervantes v. Countrywide Home Loans, No. 09-17364  (9th Circuit)

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