Has MERS Captured the Government?

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A persistent theme of NetNet is that faith in regulations to improve the financial sector is misplaced. Regulations are typically written under the direction of the most powerful financial institutions, and regulators operate as if they were agents of the companies they are allegedly regulating.

Economists use the phrase “regulatory capture” to describe this dynamic. But that’s a misnomer. It implies that at some point regulations and regulators were free and had to be captured. In fact, they are typically born captives, remain captive, and die captive deaths.

Daniel Pennell, a systems expert who has testified before the Virginia House of Representatives on MERS, recently had a conversation with the general counsel of MERS, the electronic mortgage database company that has recently come under fire from courts around the country.

Pennell asked whether MERS was worried about an investigation by the Office of the Comptroller of the Currency. The general counsel’s reply was a stunning admission—basically MERS isn’t worried because it is convinced that the government regards it as too important to be sanctioned for misconduct.

I then asked Mr. Anderson about the OCC investigation. I pointed out that the reports I had read, including those in the Wall Street Journal, said that the OCC was nearly complete with its investigation of the servicers and that although MERS was originally part of that investigation, it appeared that the investigation into MERS was being parsed out and put on a separate and ongoing track.

Mr. Anderson said that he could not comment on the OCC investigation or actions but then went on to say that no administration would allow, nor would it allow a judge’s ruling, to threaten the legal standing of a MERS member to take a home. He pointed out that MERS has some relationship with 60 percent of the mortgages in the country worth in the trillions of dollars. In other words, in his opinion, regardless of the law or the findings of the OCC, MERS is too important because of the dollars associated with its operation to be allowed to be found to be acting illegally.

In short, this man, who from his position as legal counsel for the party under investigation has inside knowledge of the OCC investigation, is confident that the government will do all it can in its power, regardless of the evidence, to assure that MERS and its members are allowed to proceed as they wish because of the potential financial costs.

It’s not just Too Big To Fail that’s a problem. It is too big to regulate that cripples our attempts to rein in the financial sector.

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