There have been new laws passed in Victoria that impose strict obligations on mortgagees to verify the authority and identity of the mortgagor when creating or varying a mortgage. If the Registrar of Titles is not satisfied that reasonable steps have been taken by the mortgagee to verify the authority or identity of the mortgagor, the mortgagee will not be able to register its mortgage or (if already registered) the Registrar can remove the mortgage.
The amendments are a result of the Transfer of Land Amendment Act 2014 (Vic) (the Amendment Act) that commenced 24 September 2014 inserting, amongst others, sections 74(1A), 74(3)-(5) and sections 87A to 87E to the Transfer of Land Act 1958 (Vic) (the TLA).
The obligation on the mortgagee is to take reasonable steps to verify the authority and identity of the mortgagor to ensure that the person executing the mortgage is the same person who is, or is to become, the registered proprietor of the land that is security for the payment of the debt owed to the mortgagee. The Amendment Act states that the mortgagee will be considered to have taken reasonable steps if it has taken steps consistent with any verification of identify and authority requirements:
- determined by the Registrar of Titles; or
- set out in the 'participation rules' within the meaning of the Electronic Conveyancing National Law (Victoria) – please see the Model Participation Rules for more specific details, in particular schedule 8.
If a mortgagee fails to take reasonable steps to verify identity and authority and if it is revealed that the registered proprietor was not the person who gave the mortgage, the Registrar has the power to either refuse to register the mortgage, or (if already registered) remove the mortgage from the Register. The result is that where a fraud is perpetrated and the mortgagee is found by the Registrar not to have taken reasonable steps as described above, the mortgage will be void, even if the mortgagee had no knowledge of the fraud.
Before the amendments, where a registered mortgage was found to have been granted fraudulently, the mortgagee retained the benefit of indefeasible title under the TLA where it had no knowledge of the fraud. In those circumstances, the mortgagor was still obliged to pay the mortgagee the full debt secured by the mortgage in order to procure a discharge. They could then apply for compensation from the Registrar. In the Explanatory Memorandum for the Amendment Act, the reason behind this change to the TLA was given, namely it was viewed by the State as "inappropriate that the State should be expected to use public funds to compensate for a fraud that occurred because of a failure … to properly verify identity." The Explanatory Memorandum goes on to say that this "will mean that the legitimate registered proprietor will no longer need to repay the fraudulent mortgage and will thus no longer need to claim compensation".
It is contemplated by the legislation that there may still be instances where a fraudulent mortgage remains registered where, for example, the fraud has been committed through the use of high quality forged identity documents that go undetected. In this scenario, the mortgagee may still have undertaken all reasonable steps to verify identity but still could not have detected the fraud. However, the Amendment Act imposes restrictions on the amount that can be recovered by the mortgagee. Under the new law, the interest rate that is claimed by the mortgagee on its principal debt must not exceed the "Banks Accepted Bills Rate" (which approximates market interest rates).
There are other changes introduced by the Amendment Act which include the introduction of a new instrument called a 'priority notice' (which is expected to assist with settlements) and the provision for the eventual phasing out of paper titles.
Lenders need to be aware of these amendments and ensure that their practices for verifying the authority and identity of mortgagors comply with the requirements of the Amendment Act.