By Lara Holmes

New York State Attorney General Eric Schneiderman on Friday sued three major U.S. banks, accusing them of fraud for using an electronic mortgage database that resulted in deceptive and illegal practices.

Schneiderman filed the lawsuit against Bank of America Corp (BAC.N), Wells Fargo & Co (WFC.N) and JPMorgan Chase & Co (JPM.N) in New York state court in Brooklyn.

 

The lawsuit is over the banks' use of MERS, the Mortgage Electronic Registration System the industry created in the mid-1990s to track the ownership and servicing of residential mortgage loans.

 

Schneiderman claims the system is plagued by inaccuracies. The lawsuit also names MERS and its parent as defendants.

The mortgage industry created MERS to allow financial institutions to evade county recording fees, avoid the need to publicly record mortgage transfers and facilitate the rapid sale and securitization of mortgages en masse, Schneiderman said.

Schneiderman's lawsuit claims that banks saved $2 billion in recording fees by using MERS.

The suit also said the use of MERS resulted in the filing of improper NY foreclosures and created confusion and uncertainty over property ownership interests.

Over 70 million mortgage loans, including millions of subprime loans, have been registered in the MERS system, rather than in local county clerks' offices, according to the lawsuit.

Schneiderman is seeking to stop the banks from filing New York foreclosure actions in MERS name, and executing false or defective mortgage assignments in state foreclosure proceedings. He is also seeking to obtain the profits the banks obtained through MERS, along with other damages.

JPMorgan spokesman Patrick Linehan declined to comment on the lawsuit. Wells Fargo spokesman Ancel Martinez said the company was reviewing the lawsuit. Bank of America spokesman Rick Simon declined comment.

Merscorp and its subsidiary MERS comply with the law and mortgage regulations, spokeswoman Janis Smith, a spokeswoman said in a statement.

In exchange for up to $25 billion, the banks are expected to resolve state and federal lawsuits about servicing misconduct and faulty foreclosures. The states have until Monday to decide whether to sign on.