Fraudulent mortgage - a win for lenders but lessons to be learned...

In a recent decision of the Victorian Supreme Court in Solak v Bank of Western Australia Ltd & Ors [2009] VSC 82, the Court rejected a mortgagor's application that a fraudulent mortgage be discharged from the title of the mortgagor's property.  

It has long been accepted that upon registration of a mortgage, a mortgagee will, subject to certain exceptions, receive the benefit of 'indefeasibility' or conclusiveness of a mortgagee's interest in the title. However, the question which often arises in the context of forged mortgages and forged loan agreements is even if the mortgage is 'indefeasible', does it secure anything where the obligation to pay is set out in a separate forged loan agreement. A number of previous authorities held that while the mortgage was indefeasible, the money secured by the mortgage did not extend to the fraudulent loan.

It was no surprise then, that the mortgagor claimed no moneys were secured under the mortgage as the obligation to pay was contained in a separate loan agreement which he did not sign. In other words, he claimed that any obligation to pay moneys under the forged home loan contract were those of the fraudster and not him and on that basis, were not secured by the mortgage.

The court held that the obligation to pay under the forged home loan agreement was sufficiently incorporated into the mortgage so as to be protected by the indefeasibility of the mortgage and thereby secured the loan moneys under the mortgage. 

In this decision, Pagone J also considered the apportionment of loss to be attributed between the lender, the mortgage broker and mortgage originator. Leaving aside the liability of the fraudster, his Honour apportioned the loss 70% to the mortgage broker (not having fulfilled contractual obligations to identify the mortgagor), 30% to the lender (having accepted defective identity forms and not having sufficient internal systems to prevent the fraud) and 0% to mortgagor originator. 

Although the case was a win for the lender, it is yet to be seen whether the decision will be upheld if appealed or followed by other Australian courts.

The decision highlights, and serves as a reminder to lenders, brokers and originators, that:

  • 'all monies' provisions in mortgages should be wide enough to incorporate and secure any obligations to pay which may be set out in a separate loan document;

  • systems and procedures designed to ensure proper identification of a mortgagor should be stringently followed;

  • any irregularities on the face of identity check forms should be thoroughly investigated; and

  • lenders and anyone involved in the identification of a mortgagor should take all reasonable and necessary steps to ensure that the party executing the mortgage (and associated loan documents) is the correct and proper party. 

Identification of parties signing mortgages is a continuing issue faced by lenders today particularly given the rise in identity fraud. As a result, identification of mortgagors and written records as to how identity was determined, should be retained by the lender and anyone else bearing the responsibility of ascertaining or confirming the identity of a mortgagor. Such obligations are, for example in relation to mortgages over land in New South Wales, proposed to become a statutory requirement. 


For further information please contact Geoff Stevens on 9288 6926 or geoff.stevens@lavanlegal.com.au.