- Comparison rates: an endangered species?
- Builder’s Tie In Deeds explained
- Corporate finance specialist's return trip to Sydney
Through the ID maze: identifying mortgagors under the Land Titles Act (Qld)
Mortgagees in Queensland must now take "reasonable steps" to identify the person(s) signing the mortgage as mortgagor, or risk losing indefeasibility of title.
Earlier this week, Gadens Lawyers published an update on the commencement of the identification requirements effected by amendments to the Land Titles Act (Qld). Click here to read the previous update click here...
This update looks at the ways in which mortgagees may demonstrate that they have taken "reasonable steps" to identify mortgagors.
- All mortgagees and their agents can use the 100-point check.
- Queensland titling has approved a process developed by Gadens under which any lender can appoint a third party its limited agent to conduct the 100-point check.
- Only cash dealers and their agents can use the s21 acceptable referee method, and then only when the mortgagee has an obligation under the Financial Transaction Reports Act (FTRA) to identify the mortgagor as a signatory in relation to an account. Accordingly, cash dealers cannot use the s21 method where there is no such obligation (eg, identifying guarantors or attorneys).
- Authorised Deposit-Taking Institutions (ADIs) who are accustomed to conducting identity checks will need to change their procedures to conduct 100-point checks only (s21 is not acceptable) for mortgagors who are not a signatory to an account.
- It is preferable for the identification to occur as part of the origination / approval process, rather than risk delays by requiring the customer identification through solicitors when the mortgage is being signed.
Cash Dealers under the Financial Transactions Reports Act
If the mortgagee is a "cash dealer" under the FTRA, the mortgagee may also have an obligation to identify the mortgagor as a "signatory" to an "account". If so, the mortgagee will satisfy the requirement to take "reasonable steps" to identify the mortgagor by complying with their obligations under the FTRA.
A mortgagee in this position may therefore use any one of the methods for identification of account signatories contained in the FTRA, including:
- the s21, acceptable referee method; or
- the 100-point check method.
However, the mere fact that a mortgagee is a "cash dealer" will not entitle them to use the s21, acceptable referee method of identification unless they also have an obligation to identify the mortgagor as a "signatory" to an "account" under the FTRA.
A facility or arrangement with the "cash dealer" will be an "account" within the definition of the FTRA if it:
- accepts deposits of notes and coin;
- allows withdrawal of notes and coin;
- enables the negotiation of cheques and payment orders.
Big Bank is a "cash dealer" under the FTRA. Harry approaches Big Bank to apply for a home loan. Harry also asks Big Bank to establish a savings account for him. Big Bank has an obligation under the FTRA to identify Harry as a signatory to the savings account. Therefore, if Big Bank is the mortgagee (ie, the lender of record) for the home loan, Big Bank may use the s21, acceptable referee method to verify Harry’s identification.
Big Bank asks Harry to provide a guarantor for his home loan. Harry’s mother, Sally, agrees to guarantee Harry’s home loan. Sally is not a signatory to an account held with Big Bank. Big Bank does not have an obligation under the FTRA to identify Sally and therefore Big Bank cannot rely on the s21, acceptable referee method to identify Sally.
Perpetual Limited is a "cash dealer" under the FTRA. Perpetual Limited is the lender of record for Big Manager home loans. In this case, the s21, acceptable referee method of identification cannot be used to identify the mortgagor (Harry) because Perpetual Limited (the mortgagee) does not have an obligation under the FTRA to identify Harry as a signatory to an account within the definition of the FTRA.
Non-Cash Dealers under the Financial Transactions Reports Act
If a mortgagee does not have an obligation under the FTRA to identify the mortgagor as a "signatory" to an "account", the mortgagee may not rely on the s21, acceptable referee method of identification.
If the mortgagor is a natural person
As a general rule, if the mortgagor is a natural person, the 100-point method must be used to identify the mortgagor. It is preferable to obtain at least one item of identification that includes both a photograph and signature of the mortgagor in the 100 points.
However, it is not necessary that the mortgagee personally conduct the 100-point check. A mortgagee may appoint an agent for the purposes of conducting the 100-point check. The mortgagee’s agent may be a broker, other mortgage intermediary or even the borrower’s solicitor. The MIAA is investigating arrangements to enable Australia Post to carry out the 100-point check for a modest fee which can be paid by the mortgagor or the lender.
Big Lender appoints Mortgage Broker to originate home loan applications. Big Lender appoints Mortgage Broker as its limited agent for the purposes of identifying mortgagors. Mortgage Broker arranges a home loan with Big Lender for Bill. Mortgage Broker identifies Bill using the 100-point check method and forwards copies of all documents used to identify Bill to Big Lender.
Big Lender approves a home loan application for Donna. Big Lender appoints Donna’s lawyer, or other proposed witness, to conduct the 100-point check. A specially designed form could be used for this purpose.
Donna returns the completed form to Big Lender with the other mortgage documents.
If the mortgagor is a company
If the mortgagor is a company, the mortgagee must adopt the lending practices of a prudent mortgagee in identifying the mortgagor.
Mortgagees should ensure they:
- conduct a company search; and
- confirm that execution is in accordance with section 127 of the Corporations Act, ie
- two directors of the company; or
- a director and secretary; or
- sole director / secretary.
Signing under power of attorney
Where an individual signs a mortgage by power of attorney, the s21, acceptable referee method of identification should never be used – even where the mortgagee is a "cash dealer". Instead the 100-point check should be used. The attorney must be identified, not the donor of the power.
If a company signs by power of attorney, the mortgagee should verify that the power of attorney was executed in accordance with s127 of the Corporations Act.
Timing of identification in the loan application process
Mortgage documents should be executed within a "reasonable time" of the mortgagor executing the mortgage.
Mortgage Broker identifies Bill as agent for Big Bank during the loan application process. There is no need for Bill to be re-identified at the time of signing the mortgage.
Anna opened a savings account with Big Bank four years ago. Anna was identified at the time of opening the account. Anna now takes out a home loan with Big Bank. Big Bank should re-verify Anna’s identity during the loan application or mortgage execution stage.
By Vicki Grey.
Comparison rates: an endangered species?
If it cannot be demonstrated that the community enjoys a net benefit from the continuation of the mandatory comparison rate (MCR) regime, then there will be a strong case for the regime to end, a preliminary report on the review of the legislation has concluded.
The preliminary Regulatory Impact Statement (RIS), released by Hawkless Consulting Pty Limited, is available - click here...
The Swinburne University of Technology has also published two papers as part of the review of the UCCC comparison rate regime.
The preliminary RIS notes that there is insufficient data to allow an assessment of whether the benefits of the disclosure requirements, or of any of the feasible alternatives considered, outweigh the costs. Accordingly the preliminary RIS is seeking further information from the public on the impacts of the MCR regime.
The existing legislation has a three-year term expiring on 30 June 2006. It is unlikely that the governments will be able to consider the report of the review and make a decision by 30 June 2006. In the absence of the review being completed, it is likely the existing mandatory comparison rate (MCR) regime will be extended for six to twelve months so that the review can be considered.
The report acknowledges that the true cost of credit can only be fully ascertained once the loan has been repaid and all actual costs are incurred and realised. Importantly, this recognises that the MCR ignores contingent costs, particularly early repayment costs.
The home loan sector is said to demonstrate the highest level of compliance and the motor vehicle sector is reported as demonstrating the lowest level of compliance.
The RIS also notes significant difficulties arising from the regime including increased costs of advertising interest rates because of the cost of providing the additional information. This has resulted in a reduction in the advertising of interest rates and therefore a reduction of information available to consumers.
Some commentators argue that when a consumer is presented with a comparison rate schedule they think the rate is not negotiable when the opposite is often true. It is also claimed that the introduction of the MCR regime has seen a gradual increase in deferred establishment fees, early repayment fees, and discharge fees which do not need to be reflected in the comparison rate, to enable credit providers to keep their MCR competitive with other credit providers.
In any event, the warning devalues any confidence consumers may place in the comparison rate.
The report notes that if the MCR is abandoned, there may be a growth of independent information providers and brokers who will provide a true comparison for consumers of the real cost of credit, having regard to the consumer’s specific circumstances.
The report also states that:
"financial deregulation and significant innovation within financial markets have seen a rapid increase in the type and number of consumer credit products available. What is not known is how consumers, and particularly low income and vulnerable consumers, have adjusted to this changed environment. From little choice in products and supplies 20 years ago, consumers now have an enormous range of choices available to them. From relatively straightforward calculations based on a loan repayment schedule, consumers now also have to contend with a variety of different charges on top of the loan repayments. For many, credit is a lot easier to secure than it once was. One obvious symptom of this increased complexity is the increasing importance of mortgage brokers as an intermediary between consumers and providers."
MCR regime overview
Supporters of the scheme claimed at the time of introduction that the comparison rate will reflect the total costs of credit arising from interest charges and other fees and charges. This was a long overdue reform. Displaying two interest rates will force the banks to compete on an equal footing with new mortgage lenders. They will no longer be able to drop their headline interest rate to match new competitors while raising application fees and monthly fees. In addition, new borrowers will be less likely to be seduced into loans which they cannot afford by "honeymoon rates".
Even by the time the MCR regime commenced, it seemed unlikely that these objectives would be achieved by the MCR.
Focus groups and interviews have been conducted to examine people’s experience of shopping for credit. From these groups it was clear that the comparison rate had played no part in any of the participants’ decision-making. Even when the MCR was explained, participants did not recall receiving a comparison rate schedule.
Many consumers are so overwhelmed by the choices and information available to them that a schedule of rates for amounts that they are not actually borrowing seems to be beside the point - the MCR requires the annual percentage rate (APR) to be stated for specified amounts.
One lending officer has said that over the last two years he has seen about 400 borrowers and only one borrower has asked for an effective rate, by which the borrower meant a rate that included fees and charges.
On the other hand, consumer advocates generally agree that the MCR regime had seen a significant fall in the quoting of interest rates in fixed credit advertising, and that this was no bad thing given that some of the interest rates advertised before were misleading.
Focus groups also unanimously reveal that advertising played little or no part in their search and decision-making process. The most outstanding result is the low level of awareness and use of the comparison rate.
A majority of people consulted thought that brokers were an effective and user-friendly customer interface to a complex process.
By Jon Denovan, Sydney.
Builder’s Tie In Deeds explained
There is considerable confusion over the purpose and value to lenders of Builder’s Tie in Deeds.
Lenders who finance material construction projects often require the builder to enter a Builder’s Tie In Deed (sometimes called a Builder’s Tripartite Deed - a "BTD"). BTDs are usually required where the contract sum is $5m or more.
Lenders now routinely include BTDs in their list of required transaction documents, and major builders have become accustomed to signing BTDs. However, the credit objective of asking for a BTD is often forgotten.
The key provisions in BTDs are reasonably standard and are set out in the table at the end of this article.
Purpose of BTDs
Obviously, the underlying objective of lenders is to achieve practical completion without problems. Although the BTD may be of assistance if problems arise, BTDs do not provide a panacea for everything.
Certainly, where the default is by the borrower, the BTD is a valuable tool. The BTD will enable the lender to elect to take over the management of the project and payment of the progress payments so that the job continues on track. In these circumstances, the legal position is quite clear and the main practical problem is finding a new suitable manager for the project on behalf of the sponsor.
A BTD is of less use where the problems are on the builder’s side. If the builder fails to perform the contract, the BTD will usually provide no better right than the building contract itself to require the builder to proceed. If the builder fails to pay its subcontractors or is simply having difficulty completing the job, the BTD provides no magic solution.
The principal legal right provided by the BTD in respect of builder default is a claim for damages. Sometimes the builder’s liability for damages is limited in the building contract, and if that limitation is transferred over to the BTD, it may provide completely inadequate compensation to the lender.
For most material builder defaults, however, the solution will be termination of the original building contract and locating a new builder.
Accordingly, while a BTD is a useful tool in addressing construction risk, getting the works completed when there is default by the builder or sponsor remains a significant risk in construction financing.
Usual BTD provisions
A BTD will usually provide as follows.
By Mark Skinner
Corporate finance specialist's return trip to Sydney
Sean Rush - who began his legal career as a summer clerk at Gadens Lawyers – has returned as a partner at the firm’s Sydney office, via Papua New Guinea, Chile and the United Kingdom.
Sean has broad international experience in corporate finance, having practised in that area for more than 13 years. He joined Gadens Lawyers in January from the London office of Baker & McKenzie. Prior to that, Sean was based in Baker & McKenzie’s Santiago office.
Sean said: "Having international experience helps you think outside the box. Particularly with cross-border deals, faced with the additional challenge of co-ordinating issues across various jurisdictions, you learn valuable skills about managing a transaction efficiently and effectively."
A career highlight for Sean is acting as lead counsel for Oriflame Cosmetics of Sweden. The transaction was a leveraged recapitalisation by way of a syndicated English law credit facility in excess of €300m, funded by a syndicate of banks from Europe and the Commonwealth of Independent States (CIS). It included equity, asset and IP security involving 17 jurisdictions throughout western Europe, the CIS, Africa and Asia.
Michael Bradley, Gadens Lawyers’ Sydney managing partner, said: "Sean’s skills and experience fit with a major focus of the firm – servicing the banking and finance sector. As a friend, I’m personally delighted to have Sean back at Gadens."
Apart from gaining valuable experience, Sean’s travels gave him the opportunity to practise his Spanish. For example, in Chile, he conducted a number of negotiations on a cross-border project in Spanish. A consortium of English, North American and Chilean companies participated in the US$230m fiber optic infrastructure project.
Before heading off to Chile, Sean was a resident partner at Gadens Lawyers’ Port Moresby office, where his experience included advising on the drafting of legislation for the central bank and the US$200m privatisation of New Britain Palm Oil. He said that he is keen to get involved in PNG deals again.
Sean said that the decision to return to Gadens Lawyers was made that much easier after he saw familiar faces on the firm’s website (gadens.com.au). "It says a lot about Gadens that so many of the current partners have come up the ranks. An important part of the appeal of the firm is the culture – it’s great to be part of a firm that emphasises enjoying your time at work as well as outside of work."
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This publication is provided to clients and correspondents for their information on a complimentary basis. It represents a brief summary of the law applicable as at the date of publication and should not be relied on as a definitive or complete statement of the relevant laws.