Bank of America Corp. (BAC), Citigroup Inc. (C) and PNC Financial Services Group Inc. (PNC) may face added costs or fines after investigators questioned the use of a mortgage database instead of original documents to justify foreclosures.
Earnings at Bank of America, the largest U.S. lender, may suffer materially if using Mortgage Electronic Registration Systems or MERS is found to be invalid, according to a regulatory filing last week. Citigroup and PNC said fines or other penalties may result from investigations into MERS and allegations of faulty foreclosure practices.
“They’re recognizing the writing on the wall, that there are serious problems associated with the basic business model and legal theories of the MERS system,” Christopher L. Peterson, a law professor at the University of Utah in Salt Lake City who has written articles on Reston, Virginia-based MERS, said yesterday.
MERS is a private database run by closely held Merscorp Inc. that tracks ownership in about half of all U.S. home mortgages. It allows banks to buy and sell loans without having to record transfers with the county, and some lenders named MERS as their agent to bring foreclosures. Consumer advocates argue that MERS records aren’t a legal substitute for traditional documents, prompting some courts to throw out foreclosures.
Merscorp said on Feb. 16 it will propose a rule change to stop members from foreclosing in its name. It’s owned by Fannie Mae and Freddie Mac, the government-owned mortgage companies that have received $151 billion in government aid since 2008, and financial firms including Bank of America, Citigroup and JPMorgan Chase & Co. (JPM), according to the MERS website.
Relying on MERS
Bank of America said legal challenges against MERS have asserted that use of the system can “cloud ownership” of a loan, according to its filing. The Charlotte, North Carolina- based lender, which ranks second in U.S. home lending and first among mortgage servicers, said it uses MERS for “a substantial portion” of new home loans, including those sold to investors or transferred into securitized trusts.
The process “is based on a well-established body of law that establishes ownership of mortgage loans by the securitization trusts, and we believe that we have substantially executed this process,” Bank of America said in its filing.
The question of MERS’s “legitimacy” drew scrutiny from the U.S. Justice Department and Congress as well as regulators and state attorneys general, Citigroup said in its filing. The bank “has determined that the integrity of its current foreclosure process is sound,” the New York-based firm said.
PNC, the sixth-largest U.S. bank by deposits, expects to sign consent orders with U.S. regulators for remedial actions tied to mortgage servicing and foreclosures, according to yesterday’s filing with securities regulators. The Pittsburgh- based lender cited its use of MERS among the matters covered by the orders, which it said are likely to come from the Federal Reserve and the Office of the Comptroller of the Currency.
“We believe that PNC has systems designed to ensure that no foreclosure proceeds unless the loan is genuinely in default,” the bank’s filing said.
Fred Solomon, a spokesman for PNC, declined to comment on MERS. Regarding the consent orders, “we take this very seriously, and PNC is committed to doing the right thing for its customers.” Mark Rodgers, a spokesman for Citigroup, and Bank of America’s Dan Frahm declined to comment beyond the annual reports.
Origin of MERS
Attorneys for homeowners have challenged seizures in which MERS began foreclosures on behalf of banks who named the firm as their agent. Courts have differed on whether that’s allowed, with a California appeals court ruling in favor of MERS last month while a federal bankruptcy court in New York rejected the practice.
Karmela Lejarde, a spokeswoman for MERS, declined to comment. In January, the company said it was designed to “build upon and supplement, but not displace, the existing public land- record system.”
Merscorp was created in 1995 to improve servicing after county offices couldn’t deal with the flood of mortgage transfers, according to MERS. The system made it easier for Wall Street to quickly bundle mortgages together in securitized trusts, fueling the growth in home lending.
Foreclosure practices in addition to those related to MERS are the subject of investigations. Attorneys general of all 50 states are jointly investigating whether banks and loan servicers used false documents and signatures to justify hundreds of thousands of foreclosures. Bank of America, JPMorgan and PNC were among lenders that temporarily halted or delayed foreclosures to review practices.
Geoff Greenwood, a spokesman Iowa Attorney General Tom Miller who is coordinating the state probes, declined to comment.
“A lot of these problems could have been avoided by doing a little bit more legal due diligence and following the rules,” Peterson said.
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