14 Sep 2009
Mortgagees: New duties and obligations
Mortgagees in NSW will need to review how they verify the identification of the mortgagor and exercise their power of sale.
The Real Property and Conveyancing Legislation Amendment Act 2009 (NSW) (Amendment Act), which will amend both the Real Property Act 1900 and the Conveyancing Act 1919, came into force on 13 May 2009. The Amendment Act will enact various legislative changes which are important to note as they may require a change in practice by mortgagees. These changes relate to:
These changes relating to mortgagees will commence on a date to be proclaimed. It is likely such proclamation will not occur for up to six months.
Identification of mortgagor
While it has always been good and prudent practice to do so, under the proposed new section 56C of the Real Property Act 1900, a mortgagee must take reasonable steps to ensure that the person executing the mortgage as mortgagor is the registered proprietor of the land or is to become the registered proprietor (upon settlement) before the mortgage is presented for registration at Land and Property Information NSW.
The mortgagee must make a written record of the steps taken by the mortgagee to comply with that requirement and retain that record together with a copy of any document obtained by the mortgagee for that purpose. These records must be retained for a period of seven years from the date of registration (or other prescribed period).
The Registrar-General may require the mortgagee to answer questions about the steps the mortgagee took to verify the identity of the mortgagor. If the mortgagee fails to satisfy the Registrar-General’s inquiries, and the mortgage has already been registered, under the proposed new section 56C the Registrar-General will have the power to make a notation on the register to the effect that section 56C has not been complied with.
Alternatively, the Registrar-General can refuse the registration of a mortgage that involved fraud against the registered proprietor or where the mortgagee failed to take reasonable steps to verify the identity of the mortgagor or has notice that the mortgagor was not the registered proprietor of the land. If the mortgage has not been registered and the mortgagee cannot demonstrate compliance with section 56C, the Registrar-General may refuse to register the mortgage.
The provisions also apply to a mortgagee on a transfer of a mortgage.
Compensation from the Assurance Fund is not available to compensate a mortgagee (or transferee of a mortgage) whose loss arises from their failure to comply with the identification requirements.
In view of the potentially serious consequences, mortgagees should review their current practices to ensure that their practices will satisfy the new requirements under section 56C to verify the identity of the mortgagor. Such practices might include proper identification of the mortgagor by a witness, with certification regarding identity (or knowledge of the mortgagor) by the witness. Under proposed new sub-section 117(4), the attesting witness should either have known the mortgagor for more than 12 months or have taken reasonable steps to verify the mortgagor’s identity, such as witnessing a driver’s licence or passport as proof of identity.
Exercise of mortgagee’s power of sale
The Amendment Act has also certified the duty of a mortgagee (and any agent appointed by a mortgagee) when exercising its power of sale. Under proposed new section 111A of the Conveyancing Act 1919, the mortgagee, in exercising the power of sale, must take reasonable care to ensure that the land is sold for either:
a. not less than its market value, if the property has an ascertainable market value; or
b. the best price that may reasonably be obtained, if the property does not have an ascertainable market value.
While section 111A has not altered the position at common law concerning a mortgagee’s duty when exercising its power of sale, the duty is now enshrined in legislation. Mortgagees should ensure they obtain appropriate real estate and valuation advice regarding the property in order to comply with this legislative requirement.