Queensland introduced a procedure for identifying mortgagors on 6 February 2006. NSW proposes a similar scheme to commence on 1 March 2011 and has released a consultation draft of regulations inviting submissions by 17 December 2010.
The objective of the legislation is to address the rising incidence of identity fraud in relation to mortgages. The Torrens Title regime is intended to give indefeasibility to a registered owner or mortgagee. In relation to mortgages, this means that once registered, a mortgagee has a state guaranteed interest in the mortgaged land, including an interest for its mortgage debt.
In practice, this guarantee has proved to be of limited utility. There are many reported cases (and no doubt many unreported cases) where courts have found that mortgagees could not rely on indefeasibility when there is forgery. These decisions have been based on a number of different concepts, but at the end of the day the simple fact is that as things currently stand, a mortgagee with a forged mortgage has little chance of recovery from the property. Quite apart from the legal ramifications, a reputable lender would not want to eject an innocent owner from their home for reputational reasons.
Method of identification
The NSW legislation, like the Queensland legislation, does not specify any particular method of identification that must be used. Rather, the legislation clearly states that the method specified in the regulations (in Queensland in the Land Titles Practice Manual) is one of the ways of confirming identity, but the mortgagee can take any other steps which are considered reasonable.
The NSW draft regulations specify a 'safe harbour' method of identification. A comparison between the two regimes appears at the end of this update. In brief, NSW requires:
- the mortgagee to identify the mortgagor by sighting the original or certified copy of one photo ID, or one non-photo ID plus a tax/rate notice; and
- the witness to identify the mortgagor by sighting one original photo ID or non-photo ID.
Witnesses face a $1,100 penalty for breach of the regulations
All lenders have gone to considerable length to develop AML/CTF procedures, and presumably they consider that they are reasonable procedures for verifying identity. Accordingly, one approach is to rely on lender's AML/CTF procedures for mortgagor identification, as those procedures represent a 'reasonable step' for identification.
Generally the AML/CTF only requires a lender to identify a customer once. The identification for mortgage purposes must be effected 'before' each mortgage is signed, which presumably means within a reasonable time. However, the verification needs only to be reasonable and so a mortgagee who has reasonable procedures in place should be reasonably satisfied that they are dealing with the correct mortgagor without re-verifying.
Record keeping requirements
The record keeping requirements are the same as AML/CTF except the seven years that records must be retained runs from the date of registration of the mortgage rather than from the time the record comes into existence. This may create some systems issues, but there is no penalty for breaching the period.
Penalties for breach
The consequence for failing to identify a mortgagor in the NSW legislation is less onerous than the Queensland legislation. The only consequence is that the mortgage may be rejected or cancelled (a significant consequence but one which a mortgagee with a forged mortgage is facing already).
In Queensland, the further penalties are:
- the amount a mortgagee can recover when exercising power of sale under a forged mortgage is limited to the principal and reasonable interest and costs
- a $200 penalty for failing to keep records for seven years or failing to produce them on demand.
The identification 'gap'
There is an identification 'gap' because usually the mortgagor is identified in connection with a loan application or account opening. Later the mortgage is sent to the mortgagor for signing. There is no guarantee that the person who was identified at the time of loan application or account opening signed the mortgage. Even if an agreed address is used, one spouse could forge the signature of the other.
This is a risk that lenders have borne for many years. Each lender needs to decide whether it is an acceptable risk in the future.
Mitigants against forgery
We have found the best strategy to minimise forgery and fraud is to require any amount in excess of $10,000 to be paid into an account in the name of the registered proprietor or mortgagee noted on the title. If the borrower insists on exceptions, special enquiries are made. This policy is based on the fact that if the money reaches the real mortgagor, that mortgagor will have great difficulty in escaping a mortgage. Gadens NMS, our mortgage processing arm, has used this system for many years with great success, and has saved lenders significant money.
Key items for submission
- Confirmation that identification can be carried out by agents (e.g. brokers).
- Specify that the provisions only apply to mortgages dated on or after 1 March 2011.
- The qualification in proposed reg 16A that documents viewed by a witness do not include a document that has expired (other than an Australian passport that has been expired less than two years) does not sit well with the definition of the various types of documents.
- Given the circumstances where powers of attorney are granted, it will often be difficult to identify the donor as well as the attorney.
- Transferees of mortgages should not need to re-identify mortgagors. Although most book sales are effected by equitable assignment, there may be cases where a legal transfer is required. It is undesirable to impose any clog on the secondary market.
REGULATION COMPARISON TABLE
|Mortgage is forged – consequence apart from the ID legislation||Courts may set aside the mortgage||Courts may set aside the mortgage|
|Mortgage is forged and the identification process is not observed – consequence under ID legislation||
RG may reject or cancel registration
Proceeds from power of sale may be reduced
|RG may reject or cancel registration|
|Consequence of failing to verify mortgagor||Much the same risk under pre ID law as post ID law||Same|
|Prescribed verification method by mortgagee||100 points under the FTRA Not updated for AML||Original or certified copy of:
· 1 photo ID; or
· 1 non-photo ID plus a tax/rate notice
|Reasonable verification by mortgagee||100 points (used by many lenders for AML/CTF)
Other reasonable AML/CTF process
|Identification of attorney||Identify attorney only||Identify donor and attorney|
|Identification of company||Compare to ASIC search||Same|
|Use agents to collect information||Approved process developed by Gadens||Yes, because no prohibition
Comment: Obtain approval from RGs or statement in regs
|Time for verification||Within a 'reasonable time' of the mortgagor signing (not registration). ['Before' is in the legislation - 'reasonable time' is in the Land Title Practice Manual]||'Before'|
|Obligations on witness||Take reasonable steps to identify the mortgagor
Witness must be prescribed person (JP, lawyers)
|Witness must sight:
· 1 original photo ID; or
· 1 non-photo ID $1,100 penalty on witness for breach
(Clarification required on age of documents)
|Record keeping||7 years from registration. $2,000 penalty for breach||7 years from registration|
|Provide verification documents on request||Yes, $2,000 penalty||Yes|
|Transferee of mortgage must verify mortgagor||Yes||Yes|
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