Lending to customers introduced by intermediaries has its particular risks.
One of these is that the process is susceptible to identity fraud – due in part to the lender relying on third parties to properly verify the identity of the loan applicant.
Changes to the Real Property Act have assisted in making it more difficult for an imposter to sign for the mortgagor. For instance, from November 2011 a person witnessing a mortgagor’s signature must have either known the person executing the mortgage for at least 12 months or have taken ‘reasonable steps’ to identify that person. ‘Reasonable steps’ requires the witness to sight documents that confirm the identity of the person executing the document.
This is welcome news for lenders.
Further good news was received last month when the NSW Court of Appeal handed down it decision in Perpetual Trustee Company Limited v CTC Group Pty Limited (No 2).
In this case the Court found that a loan introducer who had failed to properly verify the identity of the mortgagor was responsible for making good the lender’s entire loss. The introducer sought unsuccessfully to rely on the Civil Liability Act in order to apportion liability for the loss to the fraudster, the witness and even the mortgage manager.
The Court found that (at least so far as the law in NSW is concerned) an agreement between a lender and an introducer as to where the loss will lie (such as an indemnity in favour of the lender) will trump the apportionment of liability regime set out in the Civil Liability Act. For further detail see below.
Perpetual and CTC Group Pty Limited were party to a Loan Origination and Management Agreement.
Pursuant to this agreement, CTC was to identify, interview and introduce loan applicants to Perpetual.
One of the loan applicants introduced by CTC was David Bayeh.
The purpose of Perpetual’s advance was for refinance and an additional $290,000 for investment purposes.
Following default Perpetual commenced proceedings for debt and possession.
David Bayeh defended the proceedings on the basis that the signature purporting to be his on the mortgage was a forgery.
Perpetual joined the alleged fraudster, Youssef Bayeh - David Bayeh’s brother, and CTC to the Proceedings.
Perpetual claimed that CTC had breached the terms of their loan origination agreement by failing to properly identify the loan applicant.
Forgery established but no win against the Originator
The trial judge found that Youssef Bayeh had forged his brother’s signature on the loan documentation.
Perpetual succeeded in obtaining judgment for the full debt against the fraudster. However Perpetual:
- only obtained judgment against David Bayeh for the sum advanced for the purposes of the refinance; and
- failed to obtain any judgment at all against CTC– on the basis that Perpetual had failed to prove that CTC had failed to properly identify David Bayeh.
On appeal, Perpetual sought to overturn the finding that it had failed to prove that CTC had failed to properly identify David Bayeh.
CTC though argued in the Court of Appeal that its liability should be apportioned amongst other alleged “concurrent wrongdoers”. This included the fraudster, who CTC argued should bear most of the loss (eg around 80% - commercially not an attractive proposition).
- that CTC’s liability was not apportionable because Perpetual and CTC Group had entered into an agreement whereby CTC had agreed to indemnify Perpetual for such losses; and
- such an agreement fell within Section 3A of the Civil Liability Act - which provides that parties may in effect “contract out” of the apportionment regime.
CTC countered that the “contracting out” provisions ought not apply, since there was no express statement in the agreement which recorded an intention on behalf of Perpetual/CTC to contract out of the Civil Liability Act.
The Court of Appeal ultimately accepted Perpetual’s submissions.
What does this mean for Lenders?
In a fraud scenario, where a lender has an appropriately drafted mortgage origination agreement, the lender may seek to avoid the apportionment regime and look to the originator (who is often insured) to recover one hundred per cent of its loss.
This is all the more important following the decision by the High Court of Australia in Hunt & Hunt Lawyers v. Mitchell Morgan Nominees Pty Ltd handed down last week. In that case the Court allowed the loss to be apportioned to a fraudster making it more difficult for Lenders to recover 100% in a fraud scenario.