06 December 2005
Mortgagees in Queensland are now required to take "reasonable steps" to verify the identity of the mortgagor signing the mortgage document. If a mortgagee fails to comply and fraud is committed, then the mortgagee may lose its indefeasible title. In the event of fraud, even if a mortgagee is able to prove they took "reasonable steps" to verify the identity of the mortgagor, their rights of recovery may be limited.
The changes were introduced by the Natural Resources and Other Legislation Amendment Act 2005, which was passed on Wednesday 30 November 2005.
Who will the Act affect?
Specifically, the Act will cover:
Verifying identity
Before a mortgage is registered, the mortgagee must take "reasonable steps" to ensure that the person who executed the instrument as mortgagor is identical with the person who is, or who is about to become, the registered proprietor of the lot or the interest in a lot.
The "reasonable steps" required under the Act will be defined by reference to the Land Title Practice Manual, which will now be given statutory recognition. We contemplate making a submission to the Registrar of Titles as to the contents of the Land Title Practice Manual and your comments on these issues would be welcomed.
The explanatory memorandum to the Act contemplates that "reasonable steps will be similar to the steps required to be taken under the Financial Transaction Reports Act 1988 (Cth) and the Financial Transactions Reports Regulations 1990 (Cth); that is, the familiar 100 point score for identification. A transferee of a mortgage must now also take "reasonable steps" to ensure that the person signing the original mortgage is identical with the registered owner of the lot at the time the mortgage was executed, regardless of when the mortgage was executed.
In addition, the mortgagee is required to keep a written record in the approved form of the steps taken to verify the identity of the mortgagor.
Failure to comply with these requirements will attract a penalty of 20 units (which is equivalent to $1,500).
New powers of the Registrar of Titles
The Registrar is entitled to ask a mortgagee:
Failure to comply with a Registrar's request without reasonable excuse may also attract a penalty of 20 units.
The Registrar will be able to remove a mortgage obtained by fraud where:
Except where the Supreme Court has ordered the correction, the Registrar's power will continue to be limited to corrections which do not prejudice the rights of the holder of an interest recorded in the register.
No indefeasible title for mortgagees where there has been non-compliance
If a mortgagee/mortgage transferee fails to verify the identity of a mortgagor in accordance with the new procedures, and it is found that the mortgage was obtained by fraud, the Act provides that a mortgagee may lose its indefeasible title. This means that all other interests on the lot will prevail over a mortgage obtained by fraud.
Recovery restricted even if mortgagee has complied with the Act
A mortgagee's ability to recover under its mortgage when exercising its power of sale may now be restricted if the execution of the mortgage involved fraud against the registered proprietor. This may be the case even if the mortgagee has taken "reasonable steps" to verify the identity of the mortgagor.
The amount of costs and interest recoverable by a mortgagee when exercising its power of sale will be limited.
The costs are limited to those costs incurred by the mortgagee in directly protecting the mortgagee's interest such as insurance premiums, rates and land taxes. Costs of entry into possession and the costs of exercising power of sale, however, are not recoverable.
The daily interest recoverable is limited to the lesser of the following:
No entitlement for compensation for mortgagees where there has been non-compliance
Currently under the Land Title Act, compensation may be provided by the State to individuals who have suffered loss or damage as a result of fraud committed by another person. An mortgagee/mortgage transferee will not be entitled to compensation from the State for loss of its indefeasible title if the mortgagee's deprivation, loss or damage can be fairly attributed to the mortgagee's failure to take the required steps under the Act.
Submortgages prohibited
A further unusual provision of the Act is that sub-mortgages or a mortgage of a mortgage will no longer be permitted.
Conclusion
The Act imposes substantial new obligations on mortgagees to verify the identity of a mortgagor.
While many lenders already have stringent identification procedures for the identification of borrowers , these provisions extend these obligations to mortgagors which will include third party guarantors . Thus the requirements under the Act may well go beyond many lenders' current arrangements . We note, however, that the explanatory memorandum indicates that the purpose of the amendments are to reflect current "reputable lenders' requirements" and are intended to strike at "lenders of last resort" who make little effort to identify borrowers
However, the consequences of failing to comply with the new procedures are serious. Mortgagees should therefore review their lending procedures to ensure that they comply with the amendments.
