IN THE

Commonwealth Court of Pennsylvania No. 523 C.D. 2016

__________________________________________ Delaware County, Pennsylvania, Recorder of Deeds, By and Through

Thomas J. Judge, Sr., in his official capacity as the Recorder of Deeds of Delaware County, Pennsylvania; Frederick C. Sheeler, in his official

capacity as Recorder of Deeds in and for the County of Berks, Pennsylvania; The Office of the Recorder of Deeds in and for the County of

Berks, Pennsylvania; The County of Berks, Pennsylvania; Joseph J. Szafran, in his official capacity as Recorder of Deeds in and for the County of Bucks, Pennsylvania; The Office of the Recorder of Deeds in and for the

County of Bucks, Pennsylvania; The County of Bucks, Pennsylvania; Richard T. Loughery, in his official capacity as Recorder of Deeds in and

for the County of Chester, Pennsylvania; The Office of the Recorder of Deeds in and for the County of Chester, Pennsylvania; and the County of

Chester, Pennsylvania, Appellees.

vs. MERSCORP, Inc., n/k/a MERSCORP Holdings, Inc.; Mortgage Electronic

Registration Systems, Inc.; Bank of America, N.A.; CitiMortgage, Inc.; Citibank, N.A.; Credit Suisse Financial Corporation; Everhome Mortgage

Company; JP Morgan Chase Bank, N.A.; State Farm Bank F.S.B.; Wells Fargo Bank, N.A.; Sovereign Bank; HSBC Bank USA, N.A.; HSBC Finance Corporation; Gateway Funding Diversified Mortgage Services, L.P. n/k/a Finance of America Mortgage LLC; Customers Bancorp, Inc.; Customers

Bank; The Bank of New York Mellon; The Bank of New York Mellon Trust Company, N.A.; Deutsche Bank National Trust Company; Deutsche Bank

Trust Company Americas; Santander Bank, N.A. f/k/a Sovereign Bank, N.A.; and Trident Mortgage Company, L.P.,

Appellants,

__________________________________________ BRIEF FOR AMICUS CURIAE

PENNSYLVANIA BANKERS ASSOCIATION __________________________________________

Raymond P. Pepe David R. Fine

K&L GATES LLP Market Square Plaza

17 North Second St., 18th Fl. Harrisburg, PA 17101

(717) 231-4500 Counsel for the Pennsylvania Bankers Association

Received 7/6/2016 12:44:35 PM Commonwealth Court of Pennsylvania

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TABLE OF CONTENTS

I. Interest of Amicus ............................................................................ 1

II. Introduction ...................................................................................... 2

III. Argument .......................................................................................... 3

A. The MERS System arose in response to a process that was error prone, insufficiently efficient to accommodate modern banking practices and unduly expensive. .......................... 3 B. The MERS System has resolved many of the problems that existed before its creation, and it has reduced the expense of lending and borrowing. .................................................. 9 C. The Recorders’ theory rests on a misunderstanding of MERS, and the Court should require them to surmount three rather than two hurdles to proceed with their case. ........... 11 D. Acceptance of the Recorders’ theory would undermine many of the benefits the MERS System has brought about for borrowers, lenders and investors, and it would create new problems for all of those parties and others. ......................... 12 1. Mortgate loans and other transactions would be more expensive. ..................................................................... 15 2. Pennsylvania borrowers might well have fewer opportunities to obtain affordable home financing. ............. 17 3. Public records would be more difficult to search. ........ 18 4. Requiring recording of note indorsements would benefit no one. ....................................................................... 19

IV. Conclusion ...................................................................................... 21

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TABLE OF AUTHORITIES

Page(s)

Federal Cases

Higgins v. BAC Home Loans Servicing, LP, 793 F.3d 688 (6th Cir. 2015) ............................................................... 12

Montgomery County, Pa. v. MERSCORP, Inc., 795 F.3d 372 (3d Cir. 2015) .......................................................... 13, 14

State Cases

Alfred M. Lutheran Distributors, Inc. v. A.P. Weilersvacher, Inc., 650 A.2d 83 (Pa. Super. 1994) .................................................... 14

Musser v. Fehr, 156 A. 740 (Pa. Super. 1931) ..................................... 4, 16

Overton v. Tyler, 3 Pa. 346 (1846) ....................................................... 4, 16

Estate of Withoeft v. Kiskaddon, 733 A.2d 623 (Pa. 1999) ..................... 14

Federal Statutes

12 U.S.C. §§ 2601, et seq., Real Estate Settlement Procedures Act ....................................................................................................... 19

12 U.S.C. § 2605(b)(3) ........................................................................ 19, 20

12 U.S.C. § 2605(c) .................................................................................. 20

15 U.S.C. §§ 1601, et seq., Truth in Lending Act .................................... 20

15 U.S.C. § 1641(f)(2) .............................................................................. 21

15 U.S.C. § 1641(g) .................................................................................. 21

State Statutes

21 P.S. § 351 .................................................................................... Passim

13 Pa.C.S. §§ 3101, et seq. ............................................................... 3, 4, 15

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13 Pa.C.S. § 3204 ..................................................................................... 16

Other Authorities

12 C.F.R. § 106.41 (a) .............................................................................. 19

12 C.F.R. § 106.41(d)(6) ........................................................................... 19

Pennsylvania Rule of Appellate Procedure 531........................................ 1

Steve Cocheo, “Moving from Paper to Blips (the Proposed Mortgage Electronic Registration System)”, 88 Amer. Bankers Ass’n Banks J. 48 (Jan. 1996) ........................................ 7, 8, 9

Thomas P. Lemke, et al., “Mortgage-Backed Securities: Developments and Trends in the Secondary Mortgage Market” (2014-14 ed.) ................................................................... 4, 5, 6

Grant S. Nelson, et al., “Real Estate Finance Law” § 5.34 (5th ed. supp. 2007) .............................................................................. 7

P. Sargent and M. Harris, “The Myths and Merits of MERS,” http://www.uniformlaws.org/shared/docs/Residential%20Real%20Estate%20Mortgage%20Foreclosure%20Process%20and%20Protections/Ex.%202%20-%202012sep26_RREMFPP_A&K_Article.pdf ................................ 7, 10

R.K. Arnold, “Yes, There is Life on MERS” ................................. 5, 7 8, 14

Testimony of Douglas E. Hill, Executive Director of the County Commissioners Ass’n of Pa., to the Senate Majority Policy Committee (Nov. 18, 2008) ................................. 18, 19

Uniform Commercial Code, § 3-204 ........................................................ 16

I. Interest of Amicus

The Pennsylvania Bankers Association (the “Bankers

Association”) is a voluntary, nonprofit membership association made up

of more than 148 federally chartered and state chartered banks, savings

associations and their affiliates that do business in Pennsylvania, most

of which originate and service mortgage loans provided to residential

customers. The Bankers Association supports the diverse needs of its

membership through volunteer participation, industry advocacy,

education and membership services. The Bankers Association also

serves as an advocate in matters of federal, state and local public policy

on behalf of its membership.1

Many Bankers Association members are also members of the

MERS System that is owned and operated by MERSCORP Holdings,

Inc., the parent of Mortgage Electronic Registration System, Inc., and

they accordingly have a significant interest in legal proceedings that

implicate and affect the functions of the MERS System. The appellees’

characterization of the law, if adopted, would impose substantial

burdens and expenses on MERS, the members of the MERS System and

1 In accordance with Pennsylvania Rule of Appellate Procedure 531, the Bankers Association certifies that no party’s counsel authored this brief in whole or in part. The Bankers Association discloses that the appellants contributed financially to the preparation and submission of this brief.

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consumers who seek mortgages in Pennsylvania, and, so, the Bankers

Association offers this amicus curiae brief in support of reversal.

II. Introduction

In legal analysis, as elsewhere, context is important. Discrete

legal issues rarely exist in a vacuum divorced from their real-world

effects. It is helpful for the Court to understand the broader context in

which this case arises, the actual purpose and functions of Mortgage

Electronic Registration Systems, Inc. (“MERS”), and the MERS System

and the harms likely to arise should the Court affirm the trial judge’s

order—harms that will affect not only the lending industry but also

consumers and the recorders of deeds themselves.

The appellees, various Southeastern Pennsylvania county

recorders of deeds (the “Recorders”), sought in the trial court to portray

the MERS System as a means for the lending industry to evade the

county recording system and the fees associated with it. They were

wrong. Its creators developed the MERS System to bring efficiency and

accuracy to an increasingly complex mortgage-banking system. They

succeeded, and the MERS System now facilitates lending decisions and

greater availability of funds for mortgage loans and increased accuracy

and “searchability” of records regarding who owns rights in mortgages

and their accompanying notes and who services the mortgages and

interacts with borrowers. The MERS System benefits lenders and,

because it reduces costs and facilitates the exchange of mortgage-

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backed notes on the secondary market, the MERS System also helps

consumers.

An appellate decision agreeing with the Recorders’ positions on

the legal issues presented in this appeal would threaten some of the

important benefits the MERS System brings to the mortgage

marketplace—all while providing no meaningful benefit to anyone.

Moreover, the Recorders’ theory rests on a misunderstanding of the

MERS System such that their burden is even higher than they to

acknowledge.

The Court should vacate the trial judge’s February 12, 2016, order

and remand the case with instructions for the trial judge to sustain the

defendants’ preliminary objections and dismiss the case.

III. Argument A. The MERS System arose in response to a process that was error prone, insufficiently efficient to accommodate modern banking practices and unduly expensive.

The typical process by which consumers borrow money to

purchase real estate has two components, a note and a mortgage. Each

has a separate purpose and distinct legal attributes.

The first component is a promissory note that sets forth the terms

by which the borrower promises to repay the debt. The note is a

negotiable instrument under Article 3 of the Uniform Commercial Code

(the “UCC”), and the person holding the note may negotiate it through

nothing more than indorsement and transfer of possession. See 13

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Pa.C.S. §§ 3101, et seq. (codifying UCC Article 3). Indeed, the ease of a

note’s “transferability” is an indispensable element of its value. See

Overton v. Tyler, 3 Pa. 346, 347 (1846) (“[A] negotiable bill or note is a

courier without luggage[;] it must be free from contingencies or

conditions that would embarrass it in its course”); Musser v. Fehr, 156

A. 740, 741 (Pa. Super. 1931) (courts should “resolve doubts in favor of

negotiability” of promissory notes). Because the note is personal

property and is payable to the bearer when indorsed in blank, there has

never been—nor is there now—any requirement or need to publicly

record a note’s priority vis-à-vis other debts.

The second component of a real-estate-purchase transaction is a

mortgage. Through the mortgage, the lender obtains a lien on the

purchased real estate until the debt memorialized by the note is

repaid.2 The mortgage conveys an interest in land, which interest may

compete with those that others may have in the same land. Thus, the

lender (or its nominee) typically records the mortgage in the public-

recording office to give notice of the lien to the rest of the world and

establish the lien’s priority position with respect to any other liens on

the property.

2 See Thomas P. Lemke, et al., “Mortgage-Backed Securities: Developments and Trends in the Secondary Mortgage Market” at § 3.1 (2014-14 ed.) (“Lemke”).

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A mortgage loan is generally a long-term obligation, and the

lender receives its benefit over time. For a typical loan originator, say a

local bank, that can mean immediately sending perhaps several

hundred thousand dollars out the door and then waiting years or

decades to realize the full benefit of the transaction. Moreover, a single

lender must generally bear the risk that a single borrower will default.

Because of that risk, and because many loan originators do not have

sufficient capital to fully satisfy the demands of their customers for

loans, this paradigm has inherent limits that work to the detriment of

both lenders and potential borrowers.3

But the development of a secondary mortgage market in the last

several decades has overcome those limits to a significant degree.

Because a mortgage-related note is readily transferrable, loan

originators typically sell or otherwise transfer mortgage-related notes to

investors that include the Federal National Mortgage Association

(“Fannie Mae”), the Federal Home Loan Mortgage Corporation

(“Freddie Mac”), pension funds, insurance companies, mutual funds,

hedge funds and others.4 The secondary market benefits investors,

lenders and borrowers: Because of the long-term nature of mortgages, the secondary market is an essential factor in maintaining lender liquidity.

3 See generally, R.K. Arnold, “Yes, There is Life on MERS,” 11 Prob. & Prop. 33 (1997) (“Arnold”). 4 See Lemke, supra, at § 1.1.

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The infusion of capital from investors provides mortgage lenders such as banks, thrifts, mortgage bankers, and other loan originators with a market for their loans. Lenders obtain a market for their loans and increased capital from which to make future loans, while borrowers receive the benefits of lower costs of borrowing occasioned by the ability of lenders to sell their mortgage loans on the secondary market … The advent of the [mortgage backed security] has decentralized the availability of mortgage credit, enabling investors to obtain securities representing geographically diverse interests in order to minimize risk.5

In the secondary market, the loan originator typically transfers

the mortgage-related note. Investors who buy notes most often use

separate entities—loan servicers—to collect and process payments on

behalf of the investors. It thus has been and is quite common for the

loan servicer to be assigned the mortgage and be designated as the

mortgagee of record, while the investor holds the note and thereby

maintains the beneficial interest in and control over the mortgage

securing the note.6

While the development of the secondary-mortgage market has

been largely positive, there were growing pains. The mortgage would be

recorded at its inception and, as it was sold into the secondary market,

each assignment would be recorded.7 Recording iterative mortgage

assignments was not only costly, it was slow and the resulting records

were too often cumbersome, confusing and prone to error.

5 Id. 6 Id. 7 Those assignments often arose because of changes in the identity of the loan servicer.

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During the past several decades it has become increasingly common for a mortgage loan to be transferred on the secondary mortgage market, not just once, but perhaps several times during its lifetime … [T]he increased number of transfers has produced an administrative and record-keeping burden of large proportions. Recordings are often completed slowly and are prone to error. They are also, in the aggregate, fairly costly.8 Those problems were not academic. Delays and errors in recording

caused significant problems for title searchers because assignments

were not timely recorded, and they were often recorded in the wrong

place or in the wrong order. Delays and errors led to confusion and

difficulties for closing agents seeking prompt and accurate information

and for borrowers trying to obtain lien releases.9 It sometimes

happened that the mortgage had been assigned two or more times

before the first assignment showed up in the recorder’s records.10

Recording additional documents and correcting too-frequent errors by

8 Grant S. Nelson, et al., “Real Estate Finance Law” § 5.34 (5th ed. supp. 2007). 9 See Steve Cocheo, “Moving from Paper to Blips (the Proposed Mortgage Electronic Registration System)”, 88 Amer. Bankers Ass’n Banks J. 48 (Jan. 1996). One commentator has suggested that, nationally, as many as a third of pre-MERS mortgage-assignment recordations included errors. See Arnold, supra. 10 See P. Sargent and M. Harris, “The Myths and Merits of MERS,” Nat’l L. Rev. 7 (2012) (available at http://www.uniformlaws.org/shared/docs/Residential%20Real%20Estate%20Mortgage%20Foreclosure%20Process%20and%20Protections/Ex.%202%20-%202012sep26_RREMFPP_A&K_Article.pdf (“Sargent”) (last visited June 21, 2016).

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recording offices added expense to the lending process, expense that had

to be passed along to consumers.11

Recognizing these issues, Fannie Mae, Freddie Mac, the

Government National Mortgage Association (“Ginnie Mae), the Federal

Housing Administration, the U.S. Department of Veterans Affairs and

others created the MERS System in the mid-1990s.12

The MERS System works simply. From the borrower’s

perspective, nothing is different from the pre-MERS scenario. The

borrower signs both a note and a mortgage. The mortgage names

Mortgage Electronic Registrations Systems, Inc., as the mortgagee; a

“mortgage identification number” is assigned and the mortgage, as

before, is recorded in the public land records with the local recorder’s

office. Mortgage Electronic Registrations Systems, Inc., remains the

mortgagee of record for the life of the mortgage, except when it is

directed by the note holder, or a servicer acting for the note holder, to

assign the mortgage to another person. (This may occur, for example, in

advance of a foreclosure sale.) MERS is not a party to the note that is

secured by the mortgage. Upon any transfer of a note, the change in the

beneficial ownership of the note is reported to the MERS System. The

11 Id. 12 It is worth noting that the National Association of County Recorders and Clerks and the International Association of County Recorders, Election Officials and Treasurers were part of the MERS advisory council from the start. See Arnold, supra, at 36.

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information regarding changes to the beneficial rights to the loan, along

with any changes to the servicing rights, are housed in the MERS

System database.13 B. The MERS System has resolved many of the problems that existed before its creation, and it has reduced the expense of lending and borrowing.

The MERS System has met its goals.

First, the MERS System’s streamlined process facilitates efficient

and expeditious transfers of loans in the secondary-mortgage market.

As a result, investors are more willing to buy mortgage-backed

securities. Loan originators have greater incentive to write loans

because they know they will be able to sell them promptly on the

secondary market and therefore realize immediately the benefit of

originating the loans (rather than waiting years or even decades for

that benefit). Loan originators have greater ability to make loans

because sales to the secondary market provide additional capital for the

loan originator.14

While lenders certainly benefit from a robust secondary-mortgage

market, consumers seeking to purchase homes do so as well. Because it

makes the secondary market more efficient and less costly, the MERS

13 Id. 14 See Arnold, supra, at 35.

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System allows loan originators to provide affordable financing options

such as more favorable interest rates to more people.15

Second, there is considerably less expense associated with the loan

process. Because of the MERS System there is generally only one

recordable event, namely, the recording of the mortgage with Mortgage

Electronic Registration Systems, Inc., named as mortgagee, and thus

the expense associated with recording fees is reduced. The borrower

shares in that savings.

Third, because there is no longer a flood of mortgage assignments

to be recorded, there are fewer delays and errors. That allows the

recorder to keep records more up to date, making them more accurate.

There are also fewer errors to correct, which reduces the costs of the

mortgage-lending transaction.

Because it is most commonly the loan servicer that works with a

homeowner to provide loan-payoff information, to agree on loan

modifications or to work to avoid foreclosure, that information is helpful

to consumers. (Also, MERS has a toll-free telephone number and an

Internet web site that allow borrowers to gain access to the identity of

the current loan servicer and, in most cases, the current investor or

owner of the beneficial interest in the note.)

15 See Sargent, supra.

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C. The Recorders’ theory rests on a misunderstanding of MERS, and the Court should require them to surmount three rather than two hurdles to proceed with their case.

While the Bankers Association will address the issues as the

Court has framed them, there is a threshold issue that warrants

attention.

The Recorders’ claim is that Section 351 requires lenders to create

and record mortgages and mortgage assignments and that, if they fail

to do so, the statute allows the Recorders to bring a civil action for

damages and other relief. See Amended Complaint at ¶¶ 1-2, 40, 53, 91-

98.

But, as noted above, the MERS system does, in fact, include such

recordation. When the mortgage is first created, MERS serves as the

mortgagee of record, and the mortgage is recorded as such. MERS

retains legal title to the mortgage. If, at some later time, there is a need

for MERS to transfer that legal interest, for example to a MERS

member that must bring a foreclosure action, MERS typically assigns

the mortgage and the assignment is recorded. Thus, even if the

Recorders were correct that Section 351 requires recording of mortgages

and mortgage assignments—which it does not—the Recorders would

nonetheless be wrong to suggest that MERS fails to meet that

requirement.

The right that “travels” in the secondary market is the beneficial

interest in the mortgage memorialized in the promissory note, not the

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mortgage itself. Thus, for the Recorders to prevail, they would have to

persuade the Court that Section 351 requires lenders to create and

publicly record some sort of document every time the promissory note is

transferred in the secondary market. The plain language of Section 351

refers to conveyances of land, not of notes, and there is no reason to

read the statute to encompass transfers of promissory notes.16

Thus, there should be no confusion: the Recorders have three

rather than two legal hurdles. They must demonstrate as a matter of

law that Section 351 mandates recording and that they have a private

right of action to enforce that obligation, and they must demonstrate

that any such requirement applies not only to mortgage assignments

but to transfers of the promissory notes memorializing the equitable

interests in those mortgages. The Recorders cannot prove any of those

three legal propositions. D. Acceptance of the Recorders’ theory would undermine many of the benefits the MERS System has brought about for borrowers, lenders and investors, and it would create new problems for all of those parties and others.

The trial judge entered an order without a supporting opinion, and

so there is no record of the reasons for his decision to overrule the

16 Indeed, the Sixth Circuit made this important distinction when it considered the Kentucky recording statute in Higgins v. BAC Home Loans Servicing, LP, 793 F.3d 688, 692 (6th Cir. 2015).

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appellants’ preliminary objections. However, this Court framed the

issues in its order granting review.

The Court directed the parties to address (1) whether 21 P.S. §

351 (“Section 351”) requires (rather than permits) recording of all

mortgages and mortgage assignments and (2) whether the General

Assembly intended the Recorders to have a private right to enforce

Section 351.17

As MERS and the other appellants will demonstrate in their

opening brief, the text of Section 351 answers the first question. As the

Third Circuit determined in Montgomery County, Pa. v. MERSCORP,

Inc., 795 F.3d 372 (3d Cir. 2015), the only mandate in Section 351 is

with regard to where recording should occur if the mortgage holder

chose to record. Id. at 377. But the mortgage holder has no statutory

obligation at all to record the mortgage or assignments of the mortgage.

Id. (Section 351 “does not issue a blanket command that all conveyances

must be recorded; it states that a conveyance ‘shall be recorded’ in the

appropriate place, or else the party risks losing his interest in the

property to a bona fide purchaser.”).

Precedent answers the second question. There is nothing in the

language of Section 351 that suggests that the Recorders have an

express right of action and, so, the question is whether the Court should

17 As noted in the previous section, the Recorders should be required to prevail on three rather than only two legal issues.

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find an implied private right of action for the Recorders to enforce

Section 351. (Of course, there is in reality no need to reach the second

question because it would only be relevant if the answer to the first

question were that Section 351 mandated recording, which it does not.)

Pennsylvania does not assume that there is a private right of

action to enforce a statute. See Estate of Withoeft v. Kiskaddon, 733

A.2d 623, 627 (Pa. 1999). Pennsylvania courts follow the federal

analysis to decide whether a statute may give rise to an implied private

right of action. See Alfred M. Lutheran Distributors, Inc. v. A.P.

Weilersvacher, Inc., 650 A.2d 83, 87 (Pa. Super. 1994). The court must

consider (1) whether the plaintiff is a member of the class for whose

“especial” benefit the statute was enacted; (2) whether there is an

indication of legislative intent, explicit or implicit, either to create such

a remedy or to deny one and (3) whether it is consistent with the

underlying purposes of the legislative scheme to imply such a remedy

for the plaintiff. Id.

None of those considerations supports the Recorders’ claims. First,

the principal purpose of recording statutes is to allow mortgage holders

to give public notice that they have an interest in the subject real estate

in order to establish priority. See Montgomery County, 795 F.3d at 377.

There is nothing in the statute, the legislative history of the statute or

Pennsylvania common law to suggest that the General Assembly

15

enacted the recording statute for the benefit—“especial” or otherwise—

of the county recorders.

The Court should reverse the trial judge’s denial of the appellants’

preliminary objections based on either of those straightforward legal

reasons. Moreover, there are a number of considerations that

demonstrate that the proper legal result is also the proper result as a

matter of equity and public policy.

1. Mortgage loans and other transactions would be more expensive.

The most obvious effect of the result the Recorders urge would be

a significant increase in expense related to mortgage lending. The

Recorders apparently (and incorrectly) equate note transfers with

mortgage assignments and argue that MERS must record a document

each time the secured note is transferred.

Consider the literal effect of such a requirement. The additional

expense would not be limited simply to recording fees (although, given

that secured notes are often transferred many times during the life of a

loan, those fees would be significant). Lenders do not now—and never

did—record promissory notes or the transfer of them, and they have no

systems in place to do so. Moreover, mortgage-related notes are

negotiable instruments that, under UCC Article 3, may be negotiated

simply by transferring possession of the note. There is rarely a

separate document prepared to memorialize that transfer, and

16

Pennsylvania courts have expressly rejected the need for such a

separate document.18 E.g. Musser, 156 A. at 741 (evidence of blank

indorsement and transfer of possession sufficient to establish holder’s

right to enforce note against maker).

But the Recorders would create a requirement that every

transferor of a note generate some document memorializing the

movement of the note and then record that new document in the public

land records. That would require any entity wishing to convey an

interest in a note that happens to be secured by real property to incur

not only additional recording costs but also the considerable expense of

developing and maintaining the infrastructure necessary to create and

record new documents each time a note is transferred. Adding

expensive and superfluous requirements to the transfer of notes would

destroy a fundamental, commercial benefit of negotiable instruments,

namely, their ready transferability, see Overton, 3 Pa. at 347 (“[A]

negotiable bill … must be free from contingencies or conditions that

would embarrass it in its course”); Musser, 156 A. at 741, and would set

18 To be sure, a promissory note can be negotiated with an allonge, which is a separate piece of paper bearing the relevant indorsement. See 1990 Comment to Uniform Commercial Code, § 3-204; see also 13 Pa.C.S. § 3204. To be effective, however, an allonge must physically accompany the note, such that it becomes part of the original instrument. Unlike an “assignment” (a term that is completely foreign to negotiable instruments, see Musser, supra,) an allonge could never be recorded in a county recorder’s office, lest it become ineffective when unaccompanied by the original note.

17

Pennsylvania law governing commercial paper apart from every other

jurisdiction in the country. The impact on commerce would be

significant.

Recall as well that, before the MERS System was in place,

recorders’ offices were often slow and their records inaccurate. Consider

what would happen now if those offices were flooded with documents

memorializing every transfer of every secured note as it progresses from

the lending table through the secondary market. There is every reason

to believe that the errors that bedeviled those offices 20 years ago would

return and impose on lenders the significant expense of correcting those

land records. The documents would be different—note transfers rather

than mortgage assignments—but the flood would be no less

troublesome.

Of course, were MERS to incur additional expenses to create and

record documents every time a note was transferred, those fees would

certainly be passed to MERS System members (including thousands of

lenders, financial institutions and loan servicers) and by them passed

on to consumers.

2. Pennsylvania borrowers might well have fewer opportunities to obtain affordable home financing.

The Recorders’ sought-after remedy would affect transfers of

secured notes in Pennsylvania.

18

But that limited geographic scope would be cold comfort to

potential Pennsylvania homebuyers. If MERS and the MERS System

members were required to meet the Recorders’ new and onerous

obligations, they would not only pass along the additional costs to

Pennsylvania borrowers but those lenders that conduct business

nationally might well have an incentive to focus their lending efforts

outside of Pennsylvania where the process would remain more efficient,

less burdensome and less costly. Were that to occur, mortgage loans

would not only be more expensive, they might well be less available.

3. Public records would be more difficult to search.

Before the MERS System, the increased recording of mortgages

and mortgage assignments related to the growth of the secondary-

mortgage market, coupled with delays and errors in recording, made

public land records confusing at best and inaccurate at worst. The

district judge’s mandate, if left in place, would threaten a return to that

troubling scenario, and indeed would make it worse.19

19 There is another cause for concern. In the last decade, recorders of deeds in some parts of Pennsylvania have been inundated with recordable documents arising from oil-and-gas transactions related to the Marcellus shale. See Testimony of Douglas E. Hill, Executive Director of the County Commissioners Ass’n of Pa., to the Senate Majority Policy Committee (Nov. 18, 2008) (“Most of the Marcellus activity is in our smaller, more rural counties, all of which have limited staff and office capacity, and so most [recorder of deeds’ offices] have been compelled to add staff and extend hours due to the volume.”). A significant number of recorders in Northeastern and Southwestern Pennsylvania have seen the inundation Mr. Hill spoke of seven years ago. There is all the more reason, then, to be concerned about the effect

19

4. Requiring recording of note indorsements would benefit no one.

Some have argued that requiring all assignments of mortgage and

indorsements of notes to be recorded would make it easier for borrowers

to know who owns or is servicing their mortgages. This is incorrect.

Federal law already requires information regarding the identity of

servicers and assignees of mortgages to be disclosed to borrowers on a

regular basis and provides remedies for the failure to do so.

The Consumer Financial Protection Bureau requires all servicers

of residential mortgage loans to “provide the consumer, for each billing

cycle, a periodic statement,” setting forth (among other things) “[a] toll-

free telephone number and, if applicable, an electronic mailing address

that may be used by the consumer to obtain information about the

consumer’s account.” 12 C.F.R. §§ 106.41(a) and (d)(6).

And, when the servicing of a mortgage loan is transferred from

one servicer to another, the consumer receives not one—but two—

notices under the Real Estate Settlement Procedures Act, 12 U.S.C.

§§ 2601, et seq. Specifically, “not less than 15 days before the effective

date of transfer of the servicing,” the transferor servicer must “notify

the borrower in writing of any assignment, sale, or transfer of the

servicing of the loan,” 12 U.S.C. § 2605(b)(3), and provide a robust

disclosure of information about the transferor and transferee servicers on delay and errors of adding to those offices’ burden documents recording every transfer of a mortgage-related note.

20

to guide the borrow through the transfer, id.20 Then, “not more than 15

days after the effective date of transfer of the servicing,” the transferee

servicer must provide a notice with the same information as was

provided by the transferor servicer. 12 U.S.C. § 2605(c).

With respect to the identity of the owner or assignee of a mortgage

loan, if any, the Truth in Lending Act, 15 U.S.C. §§ 1601, et seq., states

that “not later than 30 days after the date on which a mortgage loan is

sold or otherwise transferred or assigned to a third party, the creditor

that is the new owner or assignee of the debt shall notify the borrower

in writing of such transfer,” and provide information, including “(A) the

identity, address, telephone number of the new creditor; (B) the date of

20 The notice “shall include … (A) [t]he effective date of transfer … [;] (B) [t]he name, address, and toll-free or collect call telephone number of the transferee servicer[;] (C) [a] toll-free or collect call telephone number for (i) an individual employed by the transferor servicer, or (ii) the department of the transferor servicer, that can be contacted by the borrower to answer inquiries relating to the transfer of servicing[;] (D) The name and toll-free or collect call telephone number for (i) an individual employed by the transferee servicer, or (ii) the department of the transferee servicer, that can be contacted by the borrower to answer inquiries relating to the transfer of servicing[;] (E) [t]he date on which the transferor servicer who is servicing the mortgage loan before the assignment, sale, or transfer will cease to accept payments relating to the loan and the date on which the transferee servicer will begin to accept such payments[;] (F) [a]ny information concerning the effect the transfer may have, if any, on the terms of or the continued availability of mortgage life or disability insurance or any other type of optional insurance and what action, if any, the borrower must take to maintain coverage[; and](G) [a] statement that the assignment, sale, or transfer of the servicing of the mortgage loan does not affect any term or condition of the security instruments other than terms directly related to the servicing of such loan.” 12 U.S.C. § 2605(b)(3).

21

transfer; [and] (C) how to reach an agent or party having authority to

act on behalf of the new creditor.” 15 U.S.C. § 1641(g). And, at any other

time, “upon written request by the obligor, the servicer shall provide the

obligor, to the best knowledge of the servicer, with the name, address,

and telephone number of the owner of the obligation or the master

servicer of the obligation.” 15 U.S.C. § 1641(f)(2).

Even if the Court were to accept the implicit suggestion that

borrowers go to the county registry to learn who holds their mortgage

loan or is servicing it, expanding the recording requirements, as the

Recorders propose, would not provide borrowers with any information

that is not already required to be—and in fact is—provided to them by

law in the normal course. Imposing the drastic changes to

Pennsylvania’s recording system urged by the Recorders would harm

many and benefit no one (except, perhaps, the Recorders who seek

additional fees).

IV. Conclusion

Viewed solely from a legal perspective, the Recorders’ claim is

troubling. Viewed from a broader context, the claim is more concerning

still because of the significant harm it threatens to all those who

participate in mortgage lending and commerce in Pennsylvania.

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The Court should reverse the trial judge’s order overruling the

appellants’ preliminary objections and remand the case with an

instruction that the trial judge sustain the preliminary objections and

dismiss the complaint. Respectfully submitted, K&L GATES LLP /s/ David R. Fine Raymond P. Pepe David R. Fine Market Square Plaza 17 North Second Street, 18th Floor Harrisburg, PA 17101 (717) 231-4500 Counsel for the Pennsylvania Bankers Association July 6, 2016

CERTIFICATION OF WORD COUNT

I certify that this brief includes 5,006 words as calculated with the word-counting feature of Microsoft Word.

/s/ David R. Fine

PROOF OF SERVICE I certify that, on July 6, 2016, I served two copies of the attached document on the following by U.S. Mail, postage-prepaid, which service satisfies the requirements of Pa.R.A.P. 121: Franco A. Corrado, Esq. MORGAN LEWIS & BOCKIUS LLP 1701 Market Street Philadelphia, PA 19103 Counsel for MERSCORP Inc. n/k/a MERSCORP Holdings, Inc., Mortgage Electronic Registration Systems, Inc., and Deutsche Bank National Trust Company and Deutsche Bank Trust Company Americas in their capacities as trustees of any specific residential mortgage-backed securitization trusts at issue Robert M. Brochin, Esq. MORGAN LEWIS & BOCKIUS LLP 200 S. Biscayne Blvd., Suite 5300 Miami, FL 33131 Counsel for MERSCORP Inc. n/k/a MERSCORP Holdings, Inc., and Mortgage Electronic Registration Systems, Inc. Brian A. Herman, Esq. MORGAN, LEWIS & BOCKIUS LLP 101 Park Avenue New York, NY 10178-0060 Counsel for JPMorgan Chase Bank, N.A. Dana E. Becker, Esq. MORGAN, LEWIS & BOCKIUS LLP 1701 Market Street Philadelphia, PA 19103 Counsel for JPMorgan Chase Bank, N.A. Francine F. Griesing, Esq. Rocco P. Imperatrice, Esq. IMPERATRICE, AMARANT & BELL, P.C. 3405 West Chester Pike Newtown Square, PA 19073 Counsel for Bank of America, N.A. Patrick R. Kingsley, Esq. STRADLEY RONAN STEVENS & YOUNG 2005 Market Street, Suite 2600 Philadelphia, PA 19103 Counsel for EverBank

Henry F. Reichner, Esq. REED SMITH LLP Three Logan Square Suite 3100 1717 Arch Street Philadelphia, PA 19103 Counsel for Gateway Funding Diversified Mortgage Services, L.P. n/k/a Finance of America Mortgage LLC, Customers Bancorp, Inc., Customers Bank, Bank of America, N.A., Wells Fargo Bank, N.A., HSBC Bank USA, N.A., HSBC Finance Corporation, The Bank of New York Mellon, and The Bank of New York Mellon Trust Company, N.A. Gregory J. Marshall, Esq. SNELL & WILMER LLP 400 E. Van Buren St. One Arizona Center Phoenix, AZ 85045-2202 Counsel for HSBC Bank USA, N.A. and HSBC Finance Corporation Joseph F. Yenouskas, Esq. Thomas M. Hefferon, Esq. GOODWIN PROCTER LLP 901 New York Ave NW Washington, DC 20001 Counsel for Bank of America, N.A., Wells Fargo Bank, N.A., EverBank, The Bank of New York Mellon, and The Bank of New York Mellon Trust Company, N.A. Steven J. Adams, Esq. STEVENS & LEE 111 N. Sixth Street P.O. Box 679 Reading, PA 19603-0679 Christine M. Kovan, Esq. STEVENS & LEE 620 Freedom Business Center Suite 200 King of Prussia, PA 19406 Counsel for Trident Mortgage Company, L.P.

Peter Colonna Romano, Esq. PARKER IBRAHIM & BERG LLC Seven Penn Center, 11th Floor 1635 Market Street Philadelphia, PA 19103 Counsel for Santander Bank, N.A. f/k/a Sovereign Bank, N.A. Charles J. Kocher, Esq. SALTZ MONGELUZZI 1605 Market Street, 52nd Floor Philadelphia, PA 19103 Counsel for Thomas J. Judge, Sr. William J. Leonard, Esq. OBERMAYER REBMANN One Penn Center, 19th Floor 1617 John F. Kennedy Blvd. Philadelphia, PA 19103 Joshua D. Snyder, Esq. BONI & ZACK LLC 15 St. Asaphs Road Bala Cynwyd, PA 19004 Joseph W. Pizzo, Esq. JOSEPH PIZZO & ASSOCIATES, LLC Seven Neshaminy Interplex, Suite 200 Trevose, PA 19053 Counsel for Joseph J. Szafran and Richard T. Loughery Dorothy A. Davis, Esq. ECKERT SEAMANS CHERIN & MELLOTT, LLC U.S. Steel Tower, 44th Floor 600 Grant Street Pittsburgh, PA 15219 Anita J. Murray, Esquire, Esq. ECKERT SEAMANS CHERIN & MELLOTT, LLC Two Liberty Place 50 South 16th Street, 22nd Floor Philadelphia, PA 19102 Michael Dockterman, Esq. Lauren Jaffe, Esq. STEPTOE & JOHNSON, LLP 115 South LaSalle Street, Suite 3100 Chicago, IL 60603 Counsel for Credit Suisse Financial Corporation

Alva C. Mather, Esq. GRIESING LAW LLC 1717 Arch St., Ste. 3630 Philadelphia, PA 19103 Lucia Nale, Esq. Thomas V. Panoff, Esq. MAYER BROWN LLP 71 S. Wacker Drive Chicago, IL 60606 Counsel for CitiMortgage, Inc. and Citibank, N.A. James T. Moughan, Esq. BENNETT, BRICKLIN & SALTZBURG LLC 1601 Market Street, 16th Floor Philadelphia, PA 19103 Joseph A. Cancila, Jr., Esq. RILEY SAFER HOLMES & CANCILA LLP 70 W. Madison Street, Suite 2900 Chicago, IL 60602 David C. Blickenstaff, Esq. SCHIFF HARDIN LLP 233 S. Wacker Drive, Suite 6600 Chicago, IL 60606 Counsel for State Farm Bank, F.S.B /s/ David R. Fine