26 Sep 2013
How identity fraud in mortgage transactions can affect mortgagees: recent legislative changes
by Nick Poole, Claire Wesson
Recent changes to legislation governing mortgages mean that mortgagees that fail to adequately verify the identity of mortgagors risk losing indefeasibility of their mortgages and being placed in the position of an unsecured creditor.
Identity fraud in mortgage transactions is a mischief that poses a potential problem to all landowners and mortgagees alike. Identity fraud can occur in a number of ways, such as through the fraudulent use of valid security documents (eg. Certificates of Title), as well as through the production of counterfeit documents which can be fraudulently used to obtain a mortgage.
Mortgagees should be aware of the potential financial repercussions if identity fraud in mortgage transactions occur.
Recent legislative changes
In response to the increasing frequency of identity fraud in mortgage transactions as a result of the "low-doc" lending that occurred before the GFC, Queensland was the first state to introduce legislation which targeted identity fraud in mortgage transactions.
Amendments to the Land Title Act 1994 (Qld) were introduced in 2006. The amendments required mortgagees to take "reasonable steps" to ensure that the person who executes a mortgage document is in fact the person who is, or who is about to become, the registered proprietor. The legislation also applies to a transfer of mortgage. If a mortgagee, or transferee, fails to take these reasonable steps and fraud occurs, then the mortgage does not obtain the benefit of indefeasibility. This has the effect of making the mortgagee an unsecured creditor and making it increasingly difficult for them to enforce their security.
The reasonable steps required by the Queensland legislation are the equivalent of the best practices currently employed by reputable mortgagees, such as the satisfaction of a 100 point identification verification. This is often a prerequisite in financial transactions in any event.
A number of cases have been litigated under the new legislation, the most striking of which is Commonwealth Bank of Australia v Perrin  QSC 274 where the mortgagee conceded that it had failed to adhere to the requirements of the legislation and as a result lost the benefit of an indefeasible mortgage. This case highlights the severe consequences of failing to comply with the statutory reasonable steps.
Similar legislation has also been introduced in New South Wales where in order to satisfy the statutory "reasonable steps" mortgagees must meet the identification procedures stipulated under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth).
More recently, in January 2013 Western Australia introduced similar identity verification obligations on mortgagees and South Australia is also introducing similar legislation which will take full effect in January 2014.
It is unclear at this stage if Victoria, Tasmania or any of the Territories have plans to introduce similar legislation. However, the legislation already introduced will affect mortgagees that operate on a national basis.
What this means for you
The new legislative measures contain substantial obligations on mortgagees when verifying the identity of those they are contracting with. While many mortgagees will undoubtedly already have strict identification checking procedures, the failure to comply with the requirements could prove financially disastrous if the mortgagee loses the protection of indefeasibility.
Mortgagees that operate a mortgage business should review their procedures to ensure that they meet the requirements in each state they are transacting in, in order to ensure that their security is effective and enforceable.
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