Clause 50 of the April 2013 LINZ Exposure draft of the proposed Land Transfer Bill marks a significant departure from one of the central concepts of our land law system: that, as a general rule, rights arising under registered interests are "indefeasible" unless a person acts fraudulently in registration of an interest.
The proposed changes seek to combat mortgage fraud by impersonators of property owners by:
- Requiring a lender/mortgagee to verify a borrower's/mortgagor's identity and
- Empowering the courts to set aside a mortgage where a lender/mortgagee has failed to take reasonable steps to establish and verify the identity of the borrower/mortgagor.
While not only contrary to the concept of indefeasibility the proposed change is also at odds with current practice and LINZ guidelines by which conveyancing professionals (usually the borrower's solicitor) are obligated to verify the identity of their mortgagor client when signing and certifying a mortgage instrument on their behalf in the landonline edealing system, and the mortgagee and third parties are entitled to rely upon their signature and certification of the electronic mortgage instrument accordingly.
For institutional lenders/mortgagees, who already have stringent internal client due diligence requirements the introduction of an additional legal requirement to take reasonable steps to establish and verify the identity of the borrower/mortgagor, with risk of a mortgage being set aside for failure to do so, potentially creates new operational risk which may outweigh the benefit of addressing the underlying problem of mortgage fraud.