The provisions of the Real Property and Conveyancing Legislation Amendment Act 2009 (NSW) relating to the introduction of additional identification requirements in respect of the registration of mortgages under the Real Property Act 1900 (NSW) (RPA) have now been proclaimed to commence on 1 November 2011. In essence, these provisions place the onus on a mortgagee (the financial institution to whom the mortgage is to be given) to take "reasonable steps" to ensure that the mortgagor (the person giving the mortgage) actually did sign the mortgage document. The changes also expand on the obligations of persons witnessing a mortgagor's execution of that document.
The "reasonable steps" a mortgagee now needs to take basically involve:
- the collection of certain prescribed information and documents direct from the mortgagor (but not necessarily in a face-to-face meeting);
- the verification of that information by prescribed measures; and
- the introduction of new requirements in relation to execution on behalf of mortgagors under powers of attorney.
The overriding motivation for these legislative changes is a desire to stem the rising tide of fraud in mortgage transactions, specifically where the mortgagor's signature has been forged.
What does the new regime require of mortgagees?
The focal point of the amendments is the insertion of section 56C into the RPA.
Section 56C (1) provides that, before presenting a mortgage for lodgment for registration, the mortgagee must take reasonable steps to ensure that the person who signed the mortgage (or on whose behalf it was signed) as mortgagor is the same person who is (or is to become) the registered proprietor of the relevant land. This provision applies both to mortgagors who are natural persons and those that are bodies corporate.
The mortgagee is considered to have taken the requisite "reasonable steps" if the mortgagee takes the steps prescribed by the Real Property Amendment Regulation 2011 (2011 Regulation), which has only recently been published. The following steps are reasonable steps for that purpose:
- taking the prescribed steps regarding the collection and verification of prescribed information and documents incorporated in the new Part 3A of the Amendment of Real Property Regulation 2008 (inserted by the 2011 Regulation); or
- complying with the Anti-Money Laundering and Counter-Terrorism Financing Rules made under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML Law) in relation to the mortgage.
The prescribed reasonable steps set out in Part 3A are quite similar to the "Know Your Client" information requirements set out in the AML Law but there are some differences. However, compliance with the requirements of the AML Law in relation to the mortgage will, without more, itself amount to the taking of reasonable steps.
What are the new requirements where the mortgage is signed under power of attorney?
In this situation, in addition to taking the reasonable steps in relation to the identification of the mortgagor which it would otherwise need to take, a mortgagee must also take the same reasonable steps in relation to the identification of the person appointed attorney under the power of attorney.
A further new statutory requirement has also been introduced in relation to mortgages signed under powers of attorney. A mortgagee is now required under the RPA to verify from the power of attorney that the signing of the mortgage was authorised by the power of attorney.
Changes to the certificate of correctness requirements
Section 117(1) of the RPA currently provides that the Registrar-General may reject or refuse to accept for registration any dealing unless it contains:
- a certificate by each party to the dealing to the effect that the dealing is correct for the purposes of the RPA; and
- a certificate by each witness to the effect that the witness is personally acquainted with or is otherwise satisfied as to the identity of, the person whose signature the witness is attesting and the signing by that party was done in the presence of the witness.
Paragraph (b) of section 117 (1) is being replaced with a new provision which substantially provides that the relevant certificate signed by each witness must be to the effect that the witness is an "eligible witness" and the dealing was executed by the relevant party in the presence of that eligible witness. The eligible witness concept is new and is dealt with below in more detail.
A certification for correctness signed by a mortgagee or eligible witness would be defective if the mortgagee or eligible witness had failed to take the requisite reasonable steps to identify the mortgagor.
Further, section 117 (2) provides that a person falsely or negligently certifying the correctness of a mortgage is liable to a fine not exceeding 10 penalty units and section 117 (3) reserves the rights of any person suffering damage or loss as a consequence of an error in the certification as to correctness.
Who qualifies as an "eligible witness" and what is required of this person?
An eligible witness is a person who:
- is at least 18 years of age; and
- is not a party to the dealing; and
- has known the party whose signature the eligible witness is attesting for more than 12 months or has taken reasonable steps to identify that person.
The eligible witness must also take specified reasonable steps to identify the mortgagor whose signature he/she witnesses. These steps are significantly less onerous than those applying to mortgagees. For example, the eligible witness only needs to sight certain classes of identification documents.
Are other obligations imposed on mortgagees by the new law?
The new law introduces certain other obligations which a mortgagee must comply with. Section 56 (3) of the RPA requires a mortgagee to keep for a period of 7 years from the date of registration of the mortgage a written record of the steps taken by the mortgagee to comply with the new identification requirements, together with copies of all documents obtained by the mortgagee for that purpose.
The mortgagee must also answer any questions in relation to the relevant steps taken by the mortgagee and produce for inspection any of the records kept on relevant request being made by the Registrar-General "at any time". Should a mortgagee fail to comply with these requirements by the Registrar-General, the Registrar-General may, under section 56C (5):
- if the mortgage is registered, make a recording in the register to that effect; and
- if the mortgage has not been registered, refuse to register it, among other things.
Does the Registrar-General have any other new powers?
Section 56C creates further new powers for the Registrar-General.
Under section 56C (6), the Registrar-General may cancel any recording in the register with respect to a mortgage if the Registrar-General is of the opinion that:
- the signing of the mortgage involved fraud against the registered proprietor; and
- the mortgagee has either:
- failed to take the reasonable steps to ensure the identity of the mortgagor; or
- has actual or constructive notice that the mortgagor was not the same person who was or was about to become the registered proprietor of the mortgaged land.
The Registrar-General's right to cancel the mortgage is, however, subject to a requirement that he/she must first give notice of the proposed cancellation to the mortgagee and to any other person the Registrar-General considers should be notified of the cancellation.
During the notice period, an aggrieved mortgagee may apply to the Supreme Court of New South Wales for an order restraining the Registrar-General from proceeding with the cancellation, should it have grounds for doing so. What those grounds would be likely to include appears to be a matter for conjecture, at this stage, as no guidance is given by the new legislation or regulations.
Similar provisions apply in Queensland
Similar, though not identical, provisions have been in place in Queensland for some time. Section 11A of the Land Title Act 1994 (QLD) and section 288A of the Land Act 1994 (QLD) place an onus on mortgagees to adopt mortgagor-identification practices, akin to those now being introduced in New South Wales, prior to lodging any mortgage of Queensland-located property for registration.
Next steps for NSW mortgagees
In particular, the breadth of the Registrar-General's new powers under subsections 56C (5) and (6) and the potentially dramatic consequences flowing to mortgagees if either subsection applied in any given case, each put in stark focus the need for mortgagees who take (or propose to take) mortgages over New South Wales real estate to ensure that their internal processes and procedures are updated to take into account the new law commencing 1 November 2011.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.