In a recently issued opinion, the Connecticut Supreme Court upheld the constitutionality of a recording statute specifically targeted by the Connecticut legislature to impose higher recording fees on residential mortgage loans where MERS was listed as the nominee of record.

The case, MERSCorp Holdings, Inc., et al. v. Daniel P. Malloy, involved an in-depth examination of the constitutionality of Connecticut General Statute 7-34(a)(2). That statute, amended by the Connecticut legislature in 2013, imposes a substantially increased recording fee on certain residential mortgage loans where MERS was listed as the nominee and was expressly designed to “collect from a nominee of a mortgage, namely, MERS, substantially more for the filing of deeds, assignments, and other documents in the land records than from any other filer.” MERSCorp Holdings, Inc. and Mortgage Electronic Registration Systems Inc. (MERS) challenged the statute because it violated both the equal protection and dormant commerce clauses of the United States and Connecticut constitutions. The Connecticut Supreme Court disagreed, and found the statute constitutional.

As an initial matter, the Court noted that the equal protection clause was not implicated, as the statute was rationally related to a legitimate government purpose. Specifically, the Court noted two conceivable bases on which the legislature might reasonably have imposed higher fees on MERS loans: (1) MERS was a large corporation “better able to shoulder high recording fees than are smaller mortgagees” and (2) to specifically compensate for “the fees lost over the course of the life of the loan” in the MERS context.

The Court then examined plaintiffs’ argument that the statute violated the dormant commerce clause of the United States Constitution. In holding that the statute did not facially discriminate (and therefore violate the dormant commerce clause), the Court stated:

In the present case, there is no indication that the legislative choice to impose higher fees on nominees –whether in state or out of state—who operate national mortgage databases reflected an invidious discrimination against out of state interests, or an effort to favor Connecticut-based financial companies. If anything, the opposite is true, as the likely result will be that Connecticut homeowners… will typically absorb the higher upfront fees for MERS-listed loans….

The Court concluded that there was no proof that the statute had any detrimental effect on MERS, and no evidence presented that the higher recording fees outweighed the benefits of participation in a national registration database such as the one designed by MERS. As such, even though the statute was designed by the Connecticut legislature to target a specific entity and category of loans, the statute passed muster under the constitutional attack levied against it.

Based on this opinion, servicers and lenders can continue to expect to pay substantially increased recording costs in Connecticut on loans where MERS is listed as the nominee or mortgagee of record.