The California Court of Appeal has ruled that the Mortgage Electronic Registration Systems, Inc., or MERS, has the power, as nominee beneficiary, to assign its interest under a deed of trust.

In its May 17, 2012, opinion in Herrera v. Federal National Mortgage Association, the California Court of Appeal, Fourth Appellate District, confirmed the universal view of California’s courts that a borrower’s signature on the deed of trust grants MERS such authority.

The borrowers in Herrera defaulted on a home loan and Federal National Mortgage Association (Fannie Mae) purchased the property at a nonjudicial foreclosure sale. The borrowers filed suit against Fannie Mae to set aside the sale. The trial court dismissed the complaint.

On appeal, the borrowers argued that they should be permitted to amend their complaint to allege that MERS, a nominee beneficiary, lacked authority to assign the note and deed of trust since MERS did not have an agency agreement with the original lender or with the Federal Deposit Insurance Corporation (FDIC) which obtained title to the loan after the original lender was placed in receivership. As a result, the borrowers asserted that the MERS assignment of the deed of trust and note to a subsequent lender was void.

Upholding the trial court’s dismissal of the case, the appellate panel in Herrera relied on the fact that MERS, in the original deed of trust, was granted the right to exercise all interests and rights held by the lender and its successors and assigns, including the right to assign the DOT and to foreclose on borrowers’ property. The court’s rationale is consistent with two California appellate decisions handed down in 2011.

The Herrera court further noted that even if borrowers could show that the MERS assignment of the deed of trust was somehow void, the borrowers could not show any prejudice that would justify invalidating the foreclosure sale. If MERS indeed lacked authority to make the assignment, the court reasoned, the true victims were not the borrowers in default, but the original lender that would have, under such circumstances, suffered the unauthorized loss of its promissory note.

Ballard Spahr’s Consumer Financial Services Group has substantial experience in defending financial institutions against the kinds of claims advanced by borrowers in this case. The group is nationally recognized for its skill in litigation defense, its guidance in structuring and documenting new consumer financial services products, and its experience with the full range of federal and state consumer credit laws throughout the country. The group also produces the CFPB Monitor, a blog that focuses exclusively on important developments from the Consumer Financial Protection Bureau.

For more information, please contact Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com; Practice Leader Jeremy T. Rosenblum at 215.864.8505 or rosenblum@ballardspahr.com; or Alan S. Petlak in our Los Angeles office at 424.204.4320 or petlaka@ballardspahr.com.