New York sues 3 big banks over use of mortgage registry database

Opening a new front against the American banking industry, New York sued three of the nation’s biggest mortgage servicers over their use of an electronic database that, according to the Empire State, has resulted in widespread deception and fraudulent foreclosure practices.

The suit alleges that employees of the three institutions — Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co. — filed false and misleading actions in New York and federal courts using the controversial Mortgage Electronic Registry System, undermining the state’s foreclosure process and public records system.

The financial institutions first used MERS so they could quickly sell and resell mortgages, much like shares of companies, during the boom years without having to record each transaction at county offices.

But with the huge number of foreclosures since the housing market’s collapse, that system — which New York says is riddled with errors — has made it hard to track property transfers through public records.

“The banks created the MERS system as an end run around the property recording system, to facilitate the rapid securitization and sale of mortgages,” New York Atty. Gen. Eric Schneiderman said in a statement Friday. “Once the mortgages went sour, these same banks brought foreclosure proceedings en masse based on deceptive and fraudulent court submissions, seeking to take homes away from people with little regard for basic legal requirements or the rule of law.”

The banks all declined to comment Friday.

New York’s lawsuit also names Virginia-based MERSCorp Inc. and its subsidiary Mortgage Electronic Registration Systems Inc. The mortgage registry company, in a statement, said it would defend itself.

“Federal and state courts around the country have repeatedly upheld the MERS business model and the validity of MERS as legal mortgagee and nominee for lenders,” the company said. “We refute the attorney general’s claims and will defend the case vigorously in court.”

Meanwhile, states’ attorneys general continue to negotiate with the banks named in New York’s suit, plus Ally Financial Inc. andCitigroup Inc., over a proposed $25-billion settlement regarding alleged foreclosure and mortgage servicing errors that emerged in 2010.

The long-expected deal has stumbled at several points, but individual states have a deadline of Monday to either reject or accept the deal. Schneiderman has previously criticized the talks, arguing that a settlement could shut down his own investigations into mortgage misdeeds of Wall Street leading up to the financial crisis.

The political stakes of the foreclosure talks have risen in recent weeks, with President Obama announcing in last week’s State of the Union speech that he would step up efforts to find wrongdoing leading up to the mortgage meltdown. The administration, which has pushed hard for a foreclosure settlement, appointed Schneiderman co-chairman of its new working group to combine efforts by federal and state authorities.

Schneiderman has maintained he will not sign on to any deal he felt would shut down other mortgage-related investigations. A spokesman for Schneiderman declined to comment further Friday.

Geoff Greenwood, a spokesman for Iowa Atty. Gen. Tom Miller, who is leading the foreclosure talks, said the suit would not derail negotiations.

“We don’t believe the New York lawsuit against the banks and MERSCorp materially affects our proposed mortgage servicing settlement,” Greenwood said.

An additional wild card is whether California will accept the deal. Atty. Gen.Kamala D. Harrisrecently said through a spokesman that the deal was inadequate for California. If it does not sign on, the deal is unlikely to be anywhere near as large as the proposed $25 billion.

The mortgage registry system challenged by Schneiderman has emerged as a controversial part of the mortgage industry. Last year, Massachusetts sued the company, as well as the nation’s five largest mortgage servicers, alleging foreclosure abuses. Delaware Atty. Gen. Beau Biden, who has partnered with Schneiderman in his investigation of Wall Street, has also filed suit against MERS.

Banks’ use of MERS has opened them up to a number of consumer lawsuits nationwide. Many of those suits challenge financial institutions to produce evidence that they have the right to foreclose. In California, where no court order is required to foreclose on a home, courts have been less open to MERS challenges.

alejandro.lazo@latimes.com