A lawsuit accusing several mortgage lenders of fraud over home loans maintained within the industry's private electronic database cannot proceed, according to a U.S. appeals court ruling.

The lawsuit targeted lenders, including Bank of America Corp (BAC.N), JPMorgan Chase & Co (JPM.N) and Wells Fargo (WFC.N), over their use of the Mortgage Electronic Registration System.

MERS, a unit of Merscorp Inc of Reston, Virginia, owns the computerized registry which tracks the transfer of the beneficial interest in home loans, as well as any changes in loan servicers. It was also a defendant.

Mortgage loan giants Fannie Mae and Freddie Mac and several of the largest U.S. banks established MERS in 1995 to circumvent the costly and cumbersome process of transferring ownership of mortgages and recording the changes with county clerks.

However, MERS's role in foreclosure cases has made it a lightning rod in recent months in other court decisions which have held that loan servicers' use of the registry violates basic real estate and mortgage laws.

Bill Nebeker, an attorney for the plaintiffs, said they had not yet decided whether to appeal Wednesday's ruling from the 9th U.S. Circuit Court of Appeals.

A proposed class action in an Arizona federal court alleged a conspiracy among MERS members to commit fraud and facilitate predatory lending practices.

The MERS system made it impossible for borrowers or regulators to track changes in lenders, according to a court filing.

A lower court judge dismissed the lawsuit, and on Wednesday the 9th Circuit upheld that decision.

Although the plaintiffs allege that aspects of the MERS system are fraudulent, they cannot establish that they were misinformed about the MERS system, wrote Judge Consuelo Callahan for the unanimous three judge 9th Circuit panel.

Merscorp spokeswoman Janis Smith said the company is quite pleased by the latest ruling from the 9th U.S. Circuit Court of Appeals, especially since it didn't give the plaintiffs a chance to refashion their allegations.

There's some finality to it in that sense, Smith said.

However, a separate multi-district class action against MERS is also being litigated before the same Arizona judge.

The 9th Circuit ruling will likely lead to a dismissal of that case as well, Nebeker said. But the multi-district case has a different procedural history that will fare better on appeal, Nebeker said.

Representatives for Bank of America and Wells Fargo did not immediately respond to a request for comment. A JPMorgan Chase spokesman declined to comment.

Besides Arizona, the 9th Circuit covers other states in the Western United States hard hit by the housing crisis, including California and Nevada.

The case in the 9th Circuit is Olga Cervantes, Carlos Almendarez and Arturo Maximo, individually and on behalf of a class of similarly situated individuals v. Countrywide Home Loans Inc. et al., 09-17364.

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