Australia: Reasonable Steps? A New Statutory Obligation On Mortgagees To Identify Mortgagors

Key Points:
It is currently unclear whether the new NSW requirements will impose additional burdens on mortgagees.

Most provisions of the Real Property and Conveyancing Legislation Amendment Act 2009 (NSW) (Act) came into force on 13 May 2009. However the provisions of that Act which will amend the Real Property Act 1990 (NSW) to impose a statutory obligation on mortgagees to take reasonable steps to verify the identity of potential mortgagors will not commence until a date to be proclaimed. It is likely proclamation may not occur for up to six months. This note considers the scope of this new statutory obligation.

Why Reform?

Subject to very limited exceptions, once a dealing in Torrens Title land has been registered, it is indefeasible. This may sometimes lead to outcomes that are perceived to be inequitable. To provide compensation to innocent third parties who may be adversely affected by these indefeasibility principles, the Torrens Assurance Fund has been established.

The NSW Government has determined that there is an increase on claims for compensation from the Torrens Assurance Fund in relation to mortgage fraud involving an apparent lack of due diligence by some mortgagees, particularly "low-doc" lenders who often offer high interest rate loans as a last resort to desperate borrowers in verifying the identity of mortgagors. The new provisions are intended to encourage due diligence in loan approval practices and prevent unscrupulous mortgagees from benefiting from the Torrens system of land registration (and access to the Torrens Assurance Fund) as well as providing a greater degree of certainty for innocent landowners.

A Duty To Identify - The "Reasonable Steps" Requirement

The Act contains substantially similar provisions to those in sections 11A and 11B of the Land Title Act 1994 (Qld) and mortgagees operating in that jurisdiction will be familiar with these sections. Under the NSW regime, mortgagees will need to:

  1. Take reasonable steps to confirm the identity of the mortgagor before presenting a mortgage for lodgement. Reasonable steps will include those specified by regulation. As yet, there are no regulations available that prescribe the relevant steps. It is expected that it may take up to six months to finalise these regulations.
  2. Keep a written record of the steps taken to comply with this requirement and a copy of any associated documents for a period of seven years from the date of registration of the mortgage.
  3. Answer questions asked by the Registrar-General, and provide documents to the Registrar-General, to allow the Registrar-General to determine whether or not the mortgagee has complied with the requirements noted at point 1 above.

If a mortgagee does not comply with the requirements noted at point 1 above, the Registrar-General may refuse to register the mortgage. If a mortgagee does not comply, and the execution of the mortgage involves fraud against the registered owner of the mortgaged land, the Registrar-General may cancel the registration of the mortgage. This power of cancellation will extend to circumstances where the mortgagee complied with the requirements but the mortgagee had actual or constructive notice that the mortgagor was not the same person as the registered owner of the land over which the security was taken.

The section will apply to the transferee of a mortgage in the same way that it applies to a mortgagee.

In addition, mortgagees would also be prevented from claiming from the Torrens Assurance Fund where loss to a mortgagee arises from a failure to comply with these identification requirements.

The Registrar-General may also refuse to register a real property mortgage that has not been witnessed by an "eligible witness". An eligible witness will be defined as one who has known the person signing the relevant document for more than 12 months or a witness that has taken reasonable steps to verify the identity of that person. Again, regulations will prescribe steps that will satisfy this requirement, though these are not yet available.

In Practice

In practice, the new "reasonable steps" requirement may have little impact on mortgagees who already undertake reasonable due diligence measures as part of their standard lending practices. For mortgagees who already comply with the "minimum applicable identification procedure" to collect know your customer information under the Anti-Money Laundering/Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF Act), the existing procedures they have in place may already comply with the "reasonable steps" requirement. However, it remains to be seen as to whether the standard required by the regulations and the Registrar-General Directions will exceed those in the AML/CTF Act.

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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