Could States Tax MERS Out of Existence?

November 3, 2016 at 7:56 am 3 comments

On Halloween, the Supreme Court decided that it would not hear an appeal challenging the constitutionality of a Connecticut law which takes direct aim at the MERSCORP model. If you provide mortgages, there is a good chance that you benefit from the efficiencies brought about by the MERS system

Connecticut has a typical mortgage recording framework. Lenders pay the clerk in the locality in which the real property is located for the right to record the mortgage and secure their lien. Traditionally, if that mortgage was sold, a new record would have to be made and additional fees paid.

Starting in the 1990s, MERSCORP changed that model. When a MERS member makes a mortgage loan MERS is recorded as the mortgage holder. When a MERS mortgage or its servicing rights are sold to another MERS member the transfer is electronically recorded in a MERSCORP data base but MERS remains the mortgage holder.

This clever system is perfect for facilitating quick and efficient secondary market sales. The GSEs are among its users. We now have a de facto national banking system. While this creates risks by making it possible for an investor in New York to buy bundled mortgages from Nevada that go delinquent, the secondary market is here to stay. The more efficiently it operates, the more cheaply you can provide mortgages to our members.

But on the local level recording fees remain a major source of income and by facilitating multiple mortgage transfers that don’t have to be recorded localities miss out on potential revenue. Connecticut addressed this problem by passing a law charging a company operating an electronic database almost three times as much for recording a mortgage as a traditional mortgagee. When the Connecticut Supreme Court upheld this statute (MERSCORP HOLDINGS, ET AL. V. MALLOY, DANNEL P)

MERS appealed to the Supreme Court which decided not to take the case.

One state won’t kill MERS but other states now have roadmap for taxing MERS transactions. As the Supreme Court recognized a long time ago the power to tax really is the power to destroy.

Entry filed under: Compliance, General, Mortgage Lending, Regulatory.

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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