Editor: David Reiss
Brooklyn Law School

March 13, 2013

U.S. 9th Circuit Court of Appeals Holds that Lenders Still Entitled to Repayment of Loans Even If MERS is Not a Beneficiary

By Gloria Liu

In Cervantes v. Countrywide Home Loans, Inc.,  No. 09–17364 (U.S. 9th Cir. 2011), there was a putative class action challenging origination and foreclosure procedures for home loans maintained within the Mortgage Electronic Registration System (MERS). In their complaint, the plaintiffs allege conspiracies by their lenders and others to use MERS to commit fraud. They also contend that all transfers of the interests in the home loans within the MERS system are invalid because the designation of MERS as a beneficiary is a sham and the system splits the deed from the note, and, thus, no party is in a position to foreclose. The court reasoned found that MERS did not initiate foreclosure: the trustees initiated foreclosure in the name of the lenders. Even if MERS were a sham beneficiary, the lenders would still be entitled to repayment of the loans and would be the proper parties to initiate foreclosure after the plaintiffs defaulted on their loans. The plaintiffs’ allegations do not call into question whether the trustees were agents of the lenders. Although it is unclear from the pleadings who the current lender is on plaintiff Cervantes’s loan, the allegations do not raise any inference that the trustee Recontrust Company lacks the authority to act on behalf of the lender. Further, the notes and deeds are not irreparably split: the split only renders the mortgage unenforceable if MERS or the trustee, as nominal holders of the deeds, are not agents of the lenders.

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