Australia: Banking And Finance Update – May 2007

Last Updated: 25 May 2007
  • Time to comply with the WA Finance Broker Code of Conduct
  • Do real estate mortgages need an acknowledgement of debt?
Time To Comply With The WA Finance Broker Code Of Conduct

Last month, the WA Minister for Consumer Protection announced that a revised brokers Code of Conduct was anticipated to commence on 29 June 2007.

Only weeks away, now is your last chance to comply with the Code and avoid serious penalty.

What do you Need to do?

If you arrange finance which is in any way connected to WA, you must:

Adopt a finance broking contract (FBC)

The MFAA and Gadens are developing an FBC specifically for use in WA and also (hopefully) a national FBC which will comply with the NSW, ACT, and Victorian legislation as well. The FBC for specific use in WA can be accessed by clicking here

Many large originators and aggregators have special requirements and will need assistance to develop their own specific FBC tailored to meet the disclosure requirements which apply to their specific businesses. Contact us now to get drafting of your FBCs underway.

We recommend that FBCs are used in all jurisdictions, and not just NSW, Vic, WA where required by law, and SA where advisable to satisfy intermediaries' obligations under the Crimes Act (secret commission legislation).

Obtain a Finance Broking Licence

DOCEP (Department of Consumer and Employment Protection WA) indicates that finance broking licences must be obtained immediately. A licence is required for both UCCC regulated and unregulated loans where the borrower is a resident of WA or where the transaction has a sufficient nexus with WA.

Licences must be held not only by intermediaries who deal directly with the borrower, but also up the line entities such as aggregators, mortgage managers, and master servicers.

Businesses which have not yet obtained a licence face the very real risk of being ordered by DOCEP to cease trading. To avoid being prosecuted for trading without a licence, you need to actively seek a licence now.

Contact Kate Williams for assistance in determining whether your business requires to be licenced and also for assistance to obtain a licence.

To view a summary of the Code of Conduct that Gadens has prepared for the MFAA, click here
Article by Kate Williams

Do Real Estate Mortgages Need An Acknowledgement Of Debt?

Although most lenders use "all money" mortgages, two recent cases have suggested there may be a benefit in having an "old style" mortgage with an acknowledgement of debt.

Under an old style mortgage, the mortgagor acknowledges it is indebted to the mortgagee for a specific dollar amount. For example, the mortgage might say "The Mortgagor must pay to the Mortgagee $300,000". On the other hand, all money mortgages contain a promise that the mortgagor must pay the mortgagee any money which the mortgagor owes at any time.

The cases suggest that old style mortgages will confer indefeasibility on the mortgagee, but all money mortgages won't. This means that it might be wise for lenders to shift to "old style" mortgages to gain indefeasibility and thereby improve their chance of being able to access the Torrens Title assurance fund to compensate them when they have been subject to identity fraud.

The Torrens systems are similar but not identical in all jurisdictions. Accordingly, there are subtle differences between the circumstances when a claim against the fund will be successful. This report ignores those differences.

There are three recent cases all in NSW which considered indefeasibility.

Perpetual Trustees Victoria Limited v Tsai [2004] NSWSC 745 (5 August 2004)
This case held that the indefeasibility provisions do not apply where the obligation to make payment does not arise under the mortgage but rather arises under a separate loan agreement. This meant the mortgagee could not enforce a forged "all money" mortgage, but might have been able to enforce a mortgage if it had contained an acknowledgement of debt.

Although this case was decided in 2004, most lenders did not change to old style mortgages as a result. One of the reasons for not changing was that many commentators considered that even if there was an acknowledgment of debt in the mortgage, the fact would remain that there is no debt owing by the "real" mortgagor. So, while the mortgage might be indefeasible (in the sense that it becomes a valid mortgage although forged), the real mortgagor would be able to obtain a discharge.

Printy v Provident Capital Limited [2007] NSWSC287 (30 March 2007)
In this case there were two forged mortgages, one all money and one old style. In this case the mortgagee had already exercised power of sale and the real owner was seeking compensation for loss of his property. The court held that the real owner was entitled to compensation:

(a) in respect of the all money mortgage from the mortgagee because the mortgagee exercised power of sale to recover "all money owing by the mortgagor" and as there was no money owing by the real mortgagor, the mortgagee must refund to the real mortgagor the money it obtained from exercising power of sale

(b) in respect of the mortgage with the acknowledgment of debt, from the assurance fund.

The issue is far from settled and the Registrar-General has submitted that "there may be a registered mortgage, but it may be a registered mortgage which secures nothing". Also "if there is no loan to the [real mortgagor], the [real mortgagor] could not be in default of not repaying the loan, and therefore, the mortgagee cannot be entitled to possession".

Permanent Custodians v Yazgi [2007] NSWSC279 (30 March 2007)
The Yazgi decision was handed down on the same day as the Printy decision. The Yazgi decision is strange because it does not consider most of the cases sighted in the Printy decision.

Mr and Mrs Yazgi were the mortgagors in an all money mortgage. Mr Yazgi forged Mrs Yazgi's signature. However the Yazgi family got the money. The court held that the mortgage was enforceable, even though there was no acknowledgement of debt.

This case coincides with our "house view", namely that mortgages may be enforceable despite forgery if the "family" of the mortgagor received the money, but unlikely to enforceable is a third party fraudster ran off with the loan proceeds.

We consider that there remains a very real risk of even an old form mortgage not being indefeasible where a fraudster has absconded with the loan. However, as the first two cases held that if there is an acknowledgment of debt indefeasibility will apply, there is at least a better chance that a mortgagee who uses an old form mortgage may have access to the assurance fund.

Whether you use an old form mortgage or new form mortgage will only be relevant when dealing with fraud. Relying on indefeasibility is a last resort, and lenders are best advised to use rigorous procedures to minimise fraud as part of the documentation process. Gadens corporate commercial and residential documentation teams have extensive procedures and have recently identified and prevented many frauds. How does your documentation team compare? Remember, frauds will often go undetected for lengthy period.

gadens lawyers can help you change your precedents and procedures to adopt an old form mortgage if you decide you require this. More importantly, we can advise on fraud identification and minimisation strategies.
Article by Jon Denovan


Jon Denovan

t (02) 9931 4927


Kate Williams

t (02) 9931 4778



Joe Claudio

t (08) 9223 9248


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.

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