In a decision that has sparked a great deal of discussion, the
U.S. Court of Appeals for the First Circuit recently decided a
borrower has standing to raise certain challenges to the assignment
of his or her mortgage from Mortgage Electronic Registration
Systems, Inc. (MERS) to a lender. At the same time, the court
affirmed the legal validity of the MERS system, putting to rest any
questions about the propriety of a MERS loan under Massachusetts
law. Culhane v. Aurora Loan Servs. of Neb., No. 12-1285,
2013 U.S. App. LEXIS 3313 (1st Cir. Feb. 15, 2013).
In a matter of first impression, the court held that, under
Massachusetts law, a borrower has standing to challenge the
assignment of his or her mortgage, even though he or she was not a
party, nor a third-party beneficiary, of the assignment.
Previously, federal district courts in Massachusetts had ruled
borrowers lacked standing to challenge mortgage assignments because
a "litigant should not normally be permitted to assert the
rights and interests of a third party." Id. at *13
(collecting cases). Evaluating those decisions, the First Circuit
opined that the district court decisions denying standing painted
"with too broad a brush." Id. at *14. Although
the court agreed with the general principle that a nonparty that
does not benefit from a contract lacks standing to assert rights
under the contract, it disagreed with the conclusion reached by
other courts and found, instead, that borrowers in Massachusetts
have such standing, partly because of the "unusual"
position they are in when their mortgages contain a power of sale
provision. Id.
The court explained that, under Massachusetts law, a borrower has
the right to challenge an assignment because (i) the borrower has a
statutory right to ensure that a foreclosure on his or her home is
conducted lawfully, and (ii) the lender is permitted to foreclose
without prior judicial authorization. Under these circumstances, to
ensure that the statutory right to a lawful foreclosure has been
met, the borrower must have an opportunity to challenge the
lender's right to foreclose.
The court cautioned this is a narrow holding and a borrower only
"has standing to challenge a mortgage assignment as invalid,
ineffective, or void (if, say, the assignor had nothing to assign
or had no authority to make an assignment to a particular
assignee)." Id. at *16. A borrower may not, however,
challenge an assignment that is "effective to pass legal
title," even if the assignment is voidable by a party to the
agreement. Id.
While providing borrowers with the right to contest the standing of
a lender to foreclose, the decision also laid to rest questions
about the validity of the MERS system. As the court stated, the
"MERS framework is faithful to the age-old tenets of mortgage
law." Id. at *3. In so ruling, the court rejected the
borrower's claim that MERS did not legitimately hold the
mortgage at the time of assignment because "MERS never owned
the 'beneficial half' of the 'legal interest' in
the mortgage." Id. at *18. Upholding the MERS system,
the court held "there is no reason to doubt the legitimacy of
the common arrangement whereby MERS holds bare legal title as
mortgagee of record and the noteholder alone enjoys the beneficial
interest in the loan." Id. The court, therefore,
found MERS had legal title to the property when it made the
assignment and MERS derived authority to properly assign the
mortgage "both from MERS's status as equitable trustee and
from the terms of the mortgage contract." Id. at
22.
Notably, the court also rejected the borrower's claim that the
assignment was invalid because MERS appointed an individual
employed by the servicer to certify as to the validity of the
assignment as an officer of MERS. Affirming the MERS framework, the
court rejected the borrower's argument, finding it was
"little more than wishful thinking," Id. at *25,
because the "Massachusetts statute neither places restrictions
on who may be elected as an officer of the assignor nor imposes
special requirements (say, regular employment) on who may serve as
a vice president of an assignor corporation." Id. at
*19.
This is a narrow holding that is limited to Massachusetts
foreclosures. Nonetheless, banks and loan servicers should expect
an increase in challenges by borrowers to a lender's right to
foreclose, if only to delay the proceedings. On the positive side
for lenders, the greater impact of the holding may be to put to
rest, at least under Massachusetts law, challenges to the validity
of the MERS system.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
