Recent changes to legislation governing mortgages mean
that mortgagees who fail to adequately verify the identity of
mortgagors risk losing indefeasibility of their mortgages and being
placed in the position of an unsecured creditor.
Identity fraud in mortgage transactions is a mischief that poses
a potential problem to all landowners and mortgagees alike.
Identity fraud can occur in a number of ways, such as through the
fraudulent use of valid security documents (eg. Certificates of
Title), as well as through the production of counterfeit documents
which can be fraudulently used to obtain a mortgage.
Mortgagees should be aware of the potential financial
repercussions if identity fraud in mortgage transactions
Recent legislative changes
In response to the increasing frequency of identity fraud in
mortgage transactions as a result of the "low-doc"
lending that occurred before the GFC, Queensland was the first
state to introduce legislation which targeted identity fraud in
Amendments to the Land Title Act 1994 (Qld) were introduced in
2006. The amendments required mortgagees to take "reasonable
steps" to ensure that the person who executes a mortgage
document is in fact the person who is, or who is about to become,
the registered proprietor. The legislation also applies to a
transfer of mortgage. If a mortgagee, or transferee, fails to take
these reasonable steps and fraud occurs, then the mortgage does not
obtain the benefit of indefeasibility. This has the effect of
making the mortgagee an unsecured creditor and making it
increasingly difficult for them to enforce their security.
The reasonable steps required by the Queensland legislation are
the equivalent of the best practices currently employed by
reputable mortgagees, such as the satisfaction of a 100 point
identification verification. This is often a prerequisite in
financial transactions in any event.
A number of cases have been litigated under the new legislation,
the most striking of which is Commonwealth Bank of Australia v
Perrin  QSC 274 where the mortgagee conceded that it had
failed to adhere to the requirements of the legislation and as a
result lost the benefit of an indefeasible mortgage. This case
highlights the severe consequences of failing to comply with the
statutory reasonable steps.
Similar legislation has also been introduced in New South Wales
where in order to satisfy the statutory "reasonable
steps" mortgagees must meet the identification procedures
stipulated under the Anti-Money Laundering and Counter-Terrorism
Financing Act 2006 (Cth).
More recently, in January 2013 Western Australia introduced
similar identity verification obligations on mortgagees and South
Australia is also introducing similar legislation which will take
full effect in January 2014.
It is unclear at this stage if Victoria, Tasmania or any of the
Territories have plans to introduce similar legislation. However,
the legislation already introduced will affect mortgagees that
operate on a national basis.
What this means for you
The new legislative measures contain substantial obligations on
mortgagees when verifying the identity of those they are
contracting with. While many mortgagees will undoubtedly already
have strict identification checking procedures, the failure to
comply with the requirements could prove financially disastrous if
the mortgagee loses the protection of indefeasibility.
Mortgagees that operate a mortgage business should review their
procedures to ensure that they meet the requirements in each state
they are transacting in, in order to ensure that their security is
effective and enforceable.
Clayton Utz communications are intended to provide
commentary and general information. They should not be relied upon
as legal advice. Formal legal advice should be sought in particular
transactions or on matters of interest arising from this bulletin.
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