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
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"
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:
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
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.
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
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
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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