Texas vs. MERS: What’s at Stake?


County lawyers in Texas are setting their sights on MERS, claiming Merscorp Inc. and its subsidiary, Mortgage Electronic Registration Systems Inc., avoided paying millions in property recording fees. Dallas County already filed a lawsuit and attorneys from Harris and Bexar counties, which encompass Houston and San Antonio, respectively, are seeking permission to file their own suits.

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Texas is one of about 20 states where lenders and borrowers typically enter into a deed of trust agreement rather than a mortgage. A deed of trust is a three-party transaction where the homeowner retains equitable title to the property, but grants legal title to a trustee, who holds it for a beneficiary (the lender) until the borrower satisfies the terms of the promissory note. The trustee can foreclose and convey ownership of the property, but only when instructed by the beneficiary.

When MERS is involved, the lender and borrower agree that MERS will be the beneficiary of the deed of trust. And similar to how a deed trust holds a property for the interest of the beneficiary, MERS holds the deed of trust for the benefit of the lender.

If a promissory note changes hands, so long as both parties agree, MERS remains the beneficiary of the deed of trust.

“What they’re transferring is not the beneficial interest under the deed of trust, what they’re transferring is their rights against MERS,” explained Jerry Marlatt, senior of counsel at the New York office of law firm Morrison Foerster, who practices in capital markets and investment law, but is not involved with MERS or the case in Texas.

“There wouldn’t be an assignment in the county land records because MERS is already the beneficiary,” Marlatt added.

Is this legal in Texas? Stephen Malouf doesn’t think so. Malouf is the Dallas-based attorney serving as outside counsel for Dallas County’s lawsuit, and is the lawyer the Harris County attorney wants to hire if it moves forward in suing MERS.

“When the lender transfers the note, it always transfers the mortgage with it…because in the transfers and the assignments, it says, ‘We’re assigning the security interest,’” he said. “So that assignment under Texas law, in our judgment, must be recorded and we’re asking the court to make that determination.”

Merscorp believes the claims in the Dallas County lawsuit are “without legal or factual merit,” the company said in a statement when the suit was filed.

“The MERS business model and practices are legal and comply with the recording statutes and regulations of Texas,” the statement reads. “This position has been upheld in numerous cases in Texas courts and countless cases across the country on the state and federal level.”

Property regulations are dictated by state law and when a defaulted borrower or municipality challenges MERS, courts—both state and federal, like a bankruptcy court—are weighing applicable state laws when considering plaintiffs’ claims.

The Texas Local Government Code addresses property recordings:

“To release, transfer, assign, or take another action relating to an instrument that is filed, registered, or recorded in the office of the county clerk, a person must file, register, or record another instrument relating to the action in the same manner as the original instrument was required to be filed, registered, or recorded,” the law reads in part.

When the entity that MERS is holding the deed of trust for changes, does that meet the criteria of a transfer, assignment or “another action” related to the deed of trust that must be recorded under the Texas code? That’s the question courts will have to decide.

“As a beneficiary, (MERS) has legal title to that beneficial interest under the deed of trust. It’s holding it on behalf of somebody else, but it has full power for the full benefit of beneficial interest under the deed of trust,” Marlatt said.

“The question then becomes if MERS, as the legal beneficiary, changes who it’s holding for, is that an assignment under Texas law? I think the answer is no,” he continued. “I think all of the legal right to that beneficial interest is with MERS. But that sounds like the question they’re trying to test.”

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