Tag Archives: qui tam

Borden & Reiss on REMIC Failure, in a Big Way

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Brad and I posted REMIC Tax Enforcement as Financial-Market Regulator to SSRN (as well as to BePress). The article is forthcoming in the University of Pennsylvania Journal of Law and Business and it provides our extended analysis of how the organizers of purported Real Estate Mortgage Investment Conduits (REMICs) failed to abide by the requirements necessary to obtain the favorable REMIC tax status. We had addressed this topic in shorter articles here, here, and here, but this is our most comprehensive take on the subject. We look forward to hearing reactions to it.

The abstract reads:

Lawmakers, prosecutors, homeowners, policymakers, investors, news media, scholars and other commentators have examined, litigated, and reported on numerous aspects of the 2008 Financial Crisis and the role that residential mortgage-backed securities (RMBS) played in that crisis. Big banks create RMBS by pooling mortgage notes into trusts and selling interests in those trusts as RMBS. Absent from prior work related to RMBS securitization is the tax treatment of RMBS mortgage-note pools and the critical role tax enforcement should play in ensuring the integrity of mortgage-note securitization.

This Article is the first to examine federal tax aspects of RMBS mortgage-note pools formed in the years leading up to the Financial Crisis. Tax law provides favorable tax treatment to real estate mortgage investment conduits (REMICs), a type of RMBS pool. To qualify for the favorable REMIC tax treatment, an RMBS pool must meet several requirements relating to the ownership and quality of mortgage notes. The practices of loan originators and RMBS organizers in the years leading up to the Financial Crisis jeopardize the tax classification of a significant portion of the RMBS pools. Nonetheless, the IRS appears to believe that there is no legal or policy basis for challenging REMIC classification of even the worst RMBS pools. This Article takes issue with the IRS’s inaction and presents both the legal and policy grounds for enforcing tax law by challenging the REMIC classification of at least the worst types of RMBS pools. The Article urges the IRS to take action, recognizing that its failure to police these arrangements prior to the Financial Crisis is partly to blame for the economic meltdown in 2008. The IRS’s continued failure to police RMBS arrangements provides latitude to industry participants, which facilitates future economic catastrophes. Even without the IRS taking action, private parties can rely upon the blueprint set forth in the Article to bring qui tam or whistleblower claims to accomplish the purposes of the REMIC rules and obtain the beneficial results that would occur if the IRS enforced the REMIC rules.

MERS-Y! MERS-Y!

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Dustin Zacks has posted Revenge of the Clerks: MERS Confronts County Clerk and Qui Tam Lawsuits, a short article that reviews litigation brought by “county clerks and private qui tam actions assert that MERS has cheated county recorders out of millions of dollars in recording fees.” (17)  Zacks writes that “the most imminent legal threat to MERS is the spate of lawsuits filed by county clerks” and that “[c]ommon to most clerk lawsuits is their assertion that all changes in beneficial ownership of home loans are required to be recorded in the public records.” (18) He reviews the arguments raised in those suits:

  • State Laws Required All Assignments to be Recorded
  • MERS Uses Deceptive Language to Avoid Recording
  • Unjust Enrichment, MERS is Evil, and Other Such Arguments (18-19)

Zacks notes that nearly all of those cases have failed to survive a motion to dismiss, with one exception.  (20)  A Pennsylvania court held that Pennsylvania’s statute “was unambiguously clear in requiring assignments to be recorded”.  (20); see Memorandum and Order, Montgomery County, PA Recorder of Deeds v. MERSCORP, Inc. , No. 11-cv-6968 (E.D. Pa. Oct. 19, 2012) at 12-15.

While Zacks is skeptical of this type of anti-MERS suit, he notes that

banks and their advocates must remain wary of these seemingly unending matters. Just as the tobacco lawsuits were initially met with skepticism and ridicule, one large win was all it took to turn regular routs into an industry-changing victory. Here, one verdict in favor of a clerk in a class-action suit could result in a ruling that MERS must go back and, for example, record innumerable assignments or pay millions of dollars in avoided recording fees. This, in turn, could result in a new appraisal of the viability of MERS’ manner of business. (21)

This seems to be the right assessment of where things stand.