Tag Archives: Third Circuit

What To Do With MERS?

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Albert_V_Bryan_Federal_District_Courthouse_-_Alexandria_Va

Bloomberg BNA quoted me in More Policy Queries As MERS Racks Up Court Wins (behind a paywall). The article further discusses the case I had blogged about earlier this week.  It reads, in part,

Mortgage Electronic Registration Systems, Inc. (MERS), the keeper of a major piece of the U.S. housing market’s infrastructure, has beaten back the latest court challenge to its national tracking system, even as criticism of the company keeps coming (Montgomery County v. MERSCORP, Inc., 2015 BL 247363, 3d Cir., No. 14-cv-04315, 8/3/15). In an Aug. 3 decision, the U.S. Court of Appeals for the Third Circuit reversed a lower court ruling in favor of Nancy J. Becker, the recorder of deeds for Montgomery County, Pa., whose lawsuit claimed MERS illegally sidestepped millions of dollars in recording fees.

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MERS has faced an array of critics, including those who say its tracking system is cloaked in secrecy. MERS disagrees, and provides a web portal for homeowners seeking information.

A host of friend-of-the-court briefs filed in the Third Circuit blasted the company, including one filed in March by law school professors who said the MERS system “has introduced unprecedented opacity and incompleteness to the record of interests in real estate.”

One of those, Brooklyn Law School Professor David Reiss, Aug. 6 raised the question whether MERS, though not a servicer, might be the subject of increased oversight.

“The problems consumers faced during the foreclosure crisis were compounded by MERS,” Reiss told Bloomberg BNA. “Those issues have not been resolved by the MERS litigation, and it would be interesting to see if the Consumer Financial Protection Bureau will seek to regulate MERS as an important player in the servicing industry. It would also be interesting to see whether state regulators will pick the ball in this area by further regulating MERS to increase transparency and procedural fairness for homeowners,” he said.

MERS Victorious

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Montgomery County, PA Courthouse

The U.S. Court of Appeals for the Third Circuit ruled in favor of MERS in Montgomery County v. MERSCORP, (August 3, 2015, No. 15-1219) (Barry, J.). MERS, for the uninitiated,

is a national electronic loan registry system that permits its members to freely transfer, among themselves, the promissory notes associated with mortgages, while MERS remains the mortgagee of record in public land records as “nominee” for the note holder and its successors and assigns. MERS facilitates the secondary market for mortgages by permitting its members to transfer the beneficial interest associated with a mortgage—that is, the right to repayment pursuant to the terms of the promissory note—to one another, recording such transfers in the MERS database to notify one another and establish priority, instead of recording such transfers as mortgage assignments in local land recording offices. It was created, in part, to reduce costs associated with the transfer of notes secured by mortgages by permitting note holders to avoid recording fees. (4, footnote omitted)

I, along with others, had filed an amicus brief in this case. The court states that

We acknowledge the arguments of the Recorder and her amici contending that MERS has a harmful impact on homeowners, title professionals, local land records, and various public programs supported in part by the fees collected by Pennsylvania’s recorders of deeds. In this appeal, however, we are not called upon to evaluate how MERS impacts various constituencies or to adjudicate whether MERS is good or bad. Just as the Seventh Circuit observed in Union County, while the Recorder is critical of MERS in several respects, “[her] appeal claims only that MERSCORP is violating [state law] by failing to record its transfer of mortgage debts, thus depriving the county governments of recording fees. That claim—the only one before us—has no merit.” 735 F.3d at 734-35. (13)

MERS has had a lot of success in cases like this, but the fact remains that it was implemented in a flawed fashion with little to no input from a broad range of constituencies. Regulators and legislators should pay renewed attention to MERS to ensure that the ownership and servicing of residential mortgages are tracked in a way that protects consumers from abusive behavior by sophisticated mortgage market players who rely on opaque mechanisms like MERS.

Monday’s Adjudication Roundup

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Monday’s Adjudication Roundup

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Foreclosures and the Fair Debt Collection Practices Act

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Bloomberg BNA quoted me in Third Circuit Says Foreclosure Complaint May Serve as Basis for Claims Under FDCPA (behind a paywall). The article opens,

A foreclosure complaint may form the basis of a Fair Debt Collection Practices Act (FDCPA) claim, the U.S. Court of Appeals for the Third Circuit held, saying foreclosure meets the broad definition of “debt collection” under the statute (Kaymark v. Bank of Am. N.A., 2015 BL 97853, 3d Cir., No. 14-cv-01816, 4/7/15).

Dale Kaymark filed a class suit against Bank of America and Udren Law Offices, P.C., a Cherry Hill, N.J., law firm, including in its claims an allegation that Udren violated the FDCPA by listing in a foreclosure complaint not-yet-incurred fees as due and owing.

Kaymark also said the firm violated the statute by trying to collect fees not authorized by the mortgage agreement.

A district court dismissed those and other claims by Kaymark, but the Third Circuit reversed April 7, allowing all but one of his FDCPA claims against Udren.

According to the court, a 2014 Third Circuit ruling on debt collection letters also applies to foreclosure complaints.

“We conclude that a communication cannot be uniquely exempted from the FDCPA because it is a formal pleading or, in particular, a complaint,” Judge D. Michael Fisher said. “This principle is widely accepted by our sister Circuits,” he said.

Wide Impact Seen

Udren Law Offices did not immediately respond to a request for comment on the case. In separate briefs filed in August 2014 and December 2014, lawyers for the firm predicted that application of the FDCPA to foreclosure complaints might allow any state foreclosure action to spark an FDCPA suit, with ill effects for legal practice.

A Bank of America spokeswoman April 8 declined to comment on the ruling. The FDCPA claim was directed only at the law firm, not the bank. Lawyers for Kaymark also did not immediately respond to a request for comment.

Brooklyn Law School Professor David Reiss, the Research Director of the Center for Urban Business Entrepreneurship, said the decision highlights increased judicial sensitivity in some areas of the law.

“It’s a well-reasoned ruling that clarifies application of the statute in the foreclosure context and that will affect contacts that lawyers have with alleged debtors,” said Reiss, who maintains a real estate finance blog. “In terms of practical effects, it won’t necessarily mean thousands of new lawsuits, but it does mean that lawyers will have to be very careful about how they communicate fees and estimates. It’s going to mean, to some extent, a cleaning-up of informal practices in the foreclosure bar, such as treating not-yet-accrued costs as accrued costs,” Reiss told Bloomberg BNA.

Monday’s Adjudication Roundup

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Regression Aggression: Statistics and Disparate Impact

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The Third Circuit affirmed, in Rodriguez et al. v. National City Bank et al., No. 11-8079 (Aug. 12, 2013), the denial of final approval “of the parties’ proposed settlement and certification of the settlement class” in a mortgage loan discrimination case brought by minority borrowers who claimed a disparate impact resulting from how the defendants charged borrowers. (4)

The part of the opinion that I found most interesting (but not compelling) was where it discussed the statistical work that the plaintiffs had done to support their case.  The Court states that

Even if Plaintiffs had succeeded in controlling for every  objective  credit-related variable – something no court could have reviewed because the analyses are not of record – the regression analyses  do not even purport to control for individual, subjective considerations.  A loan officer may have set an individual borrower’s interest rate and fees based on any number of non-discriminatory reasons, such as whether the mortgage loans were intended to benefit other family members who were not borrowers, whether borrowers misrepresented their income or assets, whether borrowers were seeking or had previously been given  favorable loan-to value terms not warranted by their credit status, whether the loans were part of a beneficial debt consolidation, or even concerns the loan officer  may have  had  at the time  for the financial institution irrespective of the borrower. While those possibilities do not necessarily rebut the argument that the Discretionary Pricing Policy opened the door to biases that individual loan officers could have harbored,  they  do undermine the assertion that there was a common and unlawful mode by which the officers exercised their discretion. (26-27)

I have not read the plaintiffs’ study, but the Court’s logic seems suspect to me. I can’t imagine how a statistician would “control for individual, subjective considerations,” particularly as that appears to be an infinite set of variables. Indeed, the Court gives little meaningful guidance as to what a comprehensive regression analysis would look like. What “individual, subjective considerations” would they include?  Where would that data exist to be studied?

The court does note some serious problems with the plaintiffs’ case, including the fact that they did not introduce their data or regression analyses into the record.  But those failings are not sufficient to explain the Court’s reasoning in the selection quoted above.

This case might be ripe for reconsideration or an en banc review, even if just to clarify what the Court wants from plaintiffs in future disparate impact cases.