To many in the industry, federal regulators just gave Mortgage Electronic Registration Systems (MERS) a big stamp of approval.
In an April 13 consent order, regulators never questioned the underlying business model of Merscorp, whose private loan registry has become a lightning rod for foreclosure litigation.
The Office of the Comptroller of the Currency did not even attempt to address the controversy being litigated in hundreds of courts across the country: Does MERS have the legal right to foreclose on a borrower?
That omission is now being construed as a "win" for the largest banks.
"For MERS there is a potential silver lining in this cloud," said David Dunn, a partner at the law firm Hogan Lovells in New York who represents banks. "The [consent] order has, in effect, validated their procedures and processes. Given the attacks MERS has come under in all sorts of state courts, that's good news. It could have been a lot worse."
Several mortgage servicers, particularly Bank of America Corp., had alerted shareholders last month of the possibility of fines, penalties and even hits to earnings if MERS' business model had been upended. For now, that model remains intact, lawyers say.
Regulators also did not question the validity of allowing hundreds of bank employees to be designated as "certifying officers" of MERS — an issue plaintiff's lawyers maintained amounts to its own robo-signing scandal. Such certifying officers will have to be identified and tracked, but they can still sign legal documents such as mortgage assignments and lien releases in MERS' name, regulators said.
"The premise of MERS remains as valuable today as the day it was conceived," said Allen Jones, a managing director at RiskSpan, a Stamford, Conn., analytics and advisory firm, and a former executive of default management at BofA.
MERS did not come out of the regulators' examination completely unscathed. Given that 31 million residential mortgage loans are recorded on the MERS system, ensuring the accuracy and reliability of data reported by the servicers will be a significant challenge. Banks are particularly spooked by regulators' requirements that MERS "maintain adequate reserves for contingency risks and liabilities."
"For a little and thinly staffed enterprise like MERS, it will be a harder process," said Ellen Marshall, a partner at Manatt, Phelps & Phillips.
Marshall said the 14 largest bank servicers face "substantial costs" complying with their own consent orders and getting MERS in compliance.
The Reston, Va., company must hire significantly more staff, get its finances in order and comply with third-party audits and added scrutiny (where none existed before) from its 25 shareholders, including BofA, Wells Fargo, JPMorgan Chase, Fannie Mae and Freddie Mac.
"The staffing, reviews and audits will be costly," Marshall said. MERS "will pay for it presumably by assessing its members." (MERS’' revenue comes solely from its 2,184 active members, which pay annual fees determined by their size and transaction fees for loan registration.)
Moreover, MERS still faces hundreds of lawsuits from borrowers claiming it lacks standing to initiate a foreclosure or to assign a mortgage to the actual noteholder.
To reduce its litigation costs, MERS told its members in February to stop foreclosing in its name. MERS now will assign the mortgage back to the noteholder, essentially resolving many of the legal questions surrounding which entity has the right to foreclose.