Business / Technology

New York Attorney General Eric Schneiderman sued a handful of the nation's largest banks Friday, claiming they deceived homeowners and courts by filing flawed and fraudulent foreclosure documents through an electronic mortgage registry.

Schneiderman's suit, filed in a New York State Supreme Court in Brooklyn, names Bank of America, J.P. Morgan Chase and Wells Fargo as defendants. It also names Mortgage Electronic Registration Systems, known as MERS, and its parent company, MERSCORP.

MERS, a privately run electronic database that was created by the mortgage industry in the 1990s, has saved financial firms millions of dollars over the years by allowing them to reassign loans without the time and expense of filing mortgage documents and paying local recording fees each time a loan changes hands.

During the housing boom, practically every major lending institution in the country used MERS to track and transfer the ownership of mortgages and more easily package them into securities that were traded across the globe. After the housing bust, financial firms increasingly used the system to hasten the foreclosure process, often allowing MERS to act as a proxy in court.

But some state and local officials, as well as consumer-advocacy groups, maintain that MERS is little more than a shell company created to bypass long-established property-recording laws — an argument embraced in Schneiderman's suit.

His lawsuit asserts that the MERS database is riddled with inaccuracies, misrepresentations and numerous "robosigned" documents, which together have "confused, misled, and deceived homeowners and the courts and made it difficult to ascertain whether a party actually has the right to foreclosure."

Schneiderman is seeking damages for homeowners that have suffered, as well as a court order forcing MERS and the banks to correct any flawed documents that led to muddled titles or improper liens.

The banks named in the lawsuit declined to comment on Friday. On its website, MERS posted rebuttals to the allegations in the lawsuit and again argued that its practices "are in compliance with state and federal laws."

The new lawsuit comes as Obama administration officials and a coalition of state attorneys general are on the brink of a settlement with the nation's biggest banks over foreclosure-related abuses that sparked outrage in the fall of 2010.

That deal, expected to be finalized in coming days, could net as much as $25 billion in penalties that would go toward ongoing foreclosure-prevention efforts and in restitution to troubled borrowers who lost their homes in the wake of the financial crisis.

It also would force banks to overhaul the way they service loans.

California Attorney General Kamala Harris publicly balked at the settlement, saying she won't sign a deal that blocks investigations into mortgage loans.

Until recently, Schneiderman had been critical of the deal, arguing that officials should hold off until conducting deeper investigations into the housing crisis.

In his State of the Union address last month, President Obama announced a new task force of state and federal officials to further investigate mortgage misdeeds, and tapped Schneiderman to help lead it.

Material from Bloomberg News is used in this report.