Update on Implementation of VOI Requirements for Paper-Based Mortgages


Update on Implementation of VOI Requirements for Paper-Based Mortgages

In the lead up to implementation of electronic conveyancing, various states are introducing new verification of identity (VOI) requirements for paper based mortgage and property transactions to achieve alignment with the VOI requirements for electronic transactions.

What is clear is that even after electronic conveyancing is rolled out, there will be a lengthy transition period during which paper based transactions will co-exist with electronic transactions.

VOI rollout

Western Australia introduced verification of identity (VOI) requirements for paper-based mortgages some years ago. South Australia introduced similar (but not identical) requirements more recently.

Importantly, Victoria has just introduced VOI requirements for all mortgage transactions (including paper-based) – with virtually no prior notice of the implementation date. New South Wales will change its existing VOI requirements for mortgages from 1 January 2015. Queensland will no doubt follow suit.

In the lead up to the implementation of electronic conveyancing, other states and territories will progressively introduce VOI requirements for paper-based transactions, generally consistent with the Participation Rules under the new Electronic Conveyancing National Laws.

In November 2013, a consultation paper was issued by the Registrar of Titles in Victoria, titled “Aligning Paper and Electronic Conveyancing Requirements”, suggesting how Victoria wished to align its position to that of New South Wales and Queensland with regard to identification of mortgagors in property transactions.

The current position in Victoria, New South Wales and Queensland is set out below:

1. Victoria

New requirements for mortgagees/lenders to take positive steps to verify the identity of mortgagors/borrowers and their authority to deal with the land being mortgaged were introduced in Victoria on 24 September 2014 by the Transfer of Land Amendment Act 2014 (Vic). These amendments apply to all mortgages under the current paper-based system and also those registered electronically.

This amending Act requires a mortgagee to properly verify the authority to deal and the identity of a mortgagor by taking “reasonable steps” at the time of execution of a mortgage, variation of a mortgage or transfer of a mortgage.

To assist mortgagees/lenders, the amending Act contains a safe harbour mechanism – in other words, mortgagees/lenders will be deemed to have taken reasonable steps to identify a mortgagor if they follow certain procedures detailed in the amending Act.

A mortgagee is able to claim the benefit of safe harbour and is deemed to satisfy the onus imposed on it to take “reasonable steps” in one of two ways, by:

  • following the procedure set out in any determination made by the Registrar of Titles in Victoria under section 106A of the Act as to what constitutes reasonable steps (no determinations yet made), or
  • following the procedures for identification set out in the Participation Rules made under the Electronic Conveyancing National Law.

These are referred to as the “safe harbour procedures”.

Reasonable steps and safe harbour

The safe harbour procedures in Victoria under the Participation Rules are essentially the same as those adopted in South Australia.

A mortgagee/lender can of course establish its own procedures which it considers amounts to taking “reasonable steps”, but if a fraud occurs, the mortgagee/lender then has to prove that its own steps were reasonable steps and would not be able to take advantage of the presumption which operates in its favour had it identified and verified the mortgagor in accordance with safe harbour procedures.

If a fraud occurs and loss is suffered and the lender/mortgagee is found not to have taken reasonable steps to verify the identity and authority to deal of a mortgagor/borrower then the Registrar of Titles may:

  • refuse to register the mortgage, if it has not already been registered;
  • if the mortgage has already been registered, remove the mortgage from the register book.

Where the Registrar of Titles removes the mortgage from the register book then:

  • the mortgagee/lender no longer has an indefeasible interest in the land; and
  • the mortgage is void.

As mentioned above, similar requirements also apply in the case of a transfer of mortgage. The incoming mortgagee must take reasonable steps to confirm that the original mortgagee verified the identity of the mortgagor/borrower, or take reasonable steps themselves to verify the identity and authority of the mortgagor.

The Registrar of Titles has not yet issued any determination under section 106A of the Transfer of Land Act as to what constitutes taking “reasonable steps”, even though we understand that various industry associations are pushing for a determination to allow a period of grace to comply. In the absence of any such determination, the Participation Rules for Electronic Conveyancing must be followed if the mortgagee/lender seeks the benefit of safe harbour.

Land Victoria, in its customer information bulletin issued in August 2014, implied that these new requirements would not come into effect until July 2015, which is likely to be true for transfers of land, but has been brought forward to 24 September 2014 for mortgages. See below.

“The Registrar will be introducing requirements for formal identity verification for all paper instruments lodged on or after 1 July 2015 … Land Victoria will consult with industry representatives over the next 6 months about the implementation of verification of identity requirements, as well as other implementation issues raised in the consultation feedback … the Registrar will also set out a verification of identity standard that, if followed, will be deemed to constitute reasonable steps. Timely advice about the Registrar’s requirements will be provided to Land Victoria’s customers prior to implementation … “.

What should a mortgagee/lender do in the present circumstances?

Lenders/Mortgagees are well advised to follow the verification of identity requirements contained in the Participation Rules (version 2 – issued April 2014) when documenting a paper-based mortgage transaction, so as to be able to claim the benefit of safe harbour. Of course, a mortgagee/lender can always establish its own procedures and claim them to be taking “reasonable steps”, but there would have to be good reason to do so given the absence of the benefit of safe harbour in those circumstances.

2. New South Wales

On 1 September 2014, the Real Property Regulation 2014 commenced operation.

There are many changes implemented by the new regulation as outlined by Land and Property Information (NSW) in its circular issued in May 2014 (circular 2014/06).

Land and Property Information (New South Wales) has announced that all the changes previously announced will go ahead, except for the changes to the standard verification of identity which will not commence operation on 1 September 2014, but instead will take effect from 1 January 2015.

New South Wales is adopting the national verification of identity standard that applies in electronic conveyancing situations where a mortgagee/lender seeks to claim the benefit of safe harbour when identifying and establishing the authority of a mortgagor. In other words, the standard set out in the Participation Rules.

That standard is set out in Schedule 8 of the New South Wales Participation Rules. As readers would be aware the standard requires a mortgagee or its agent to conduct a “face to face” interview with the person being identified, who must produce original documentation to establish their identity.

It is proposed the standard set out in the Participation Rules will be national and therefore there will be convergence with Victoria and South Australia – with other states and territories likely to follow suit shortly.

In New South Wales, between now and January 2015, mortgagees/lenders will need to assess the impact of the change in NSW and implement internal procedures to meet the new standard.

Until that time in New South Wales, most mainstream mortgagees/lenders will be able to continue with current identification practices in order to be able to claim the benefit of safe harbour, which are of course based on the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Commonwealth). This will continue to apply until 31 December 2014. For non-mainstream lenders, refer to:

  • Regulation13 – Confirming identities of mortgagors who are natural persons (until 1 January 2015)
  • Regulation14 – Confirming identities of mortgagors that are bodies corporate (until 1 January 2015)
  • Regulation15 – Mortgages executed under power of attorney (until 1 January 2015).

3. Queensland

Queensland has had verification of identity requirements for many years. These are contained in section 11A of the Land Title Act 1994 and section 288A of the Land Act 1994. This places an onus on all mortgagees to adopt appropriate due diligence practices prior to lodging any mortgages for registration. Traditionally mortgagees/lenders have been able to comply by adopting the same procedures as set out in the Commonwealth legislation, Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Commonwealth).

Queensland will proceed to adopt the National Electronic Conveyancing Participation Rules in due course, at which time amendments to the Queensland legislation and the Land Titles Practice Manual (Queensland) no doubt will be made.

Currently, no changes need to be made by lenders/mortgagees in relation to their dealings with Queensland paper-based mortgages.