A mortgage by deposit of title deed or an equitable mortgage of immovable property is a widely used methodology of creating security against a loan availed from banks and other financial institutions in India. But, it is easily open to fraud. This is because of the reason that it is created merely by the deposit of title deeds with the lender. There is no need for a written instrument for the creation of such mortgage. As there is no written instrument that is why no registration of such mortgage is required under the Indian Registration Act, 1908. While the non-registration of this kind of mortgage makes it easy to create, it opens up opportunities for fraud by unscrupulous borrowers too.
For instance, the National Housing Bank has identified certain cases of forging of title documents, multiple financing on the same property and sale of property under the equitable mortgage as common modus operandi of frauds in the sector of housing finance. In the last 140 years, after the inception of equitable mortgage in India, the requirements of debt financing, organizing the lending institutions and the character of land markets have undergone a deep change.
ORIGIN OF EQUITABLE MORTGAGE IN ENGLAND:
The doctrine of equitable mortgage originated in England in the 18th century when the Honorable Court of Chancery in a judgment of the case Russel v Russel recognized the act of depositing title deed with the lender as the creation of an equitable mortgage of the property. Before this judgment, the only way to create a legal mortgage in England was the transfer of the immovable property to the lender through a written deed on the condition that the property will be re-transferred to the borrower after repayment of the loan.
The Honorable Court of Chancery, in the case decided that if the documents are handed over to the lender, then a mortgage is created even if a formal deed of mortgage is not executed. At that time there was no system of registration of the property and the transactions in relation with them under a government authority in England. Later on, even when the registration was introduced in England, this form of mortgage was exempted from registration by the saving provision in Section 13 of the Law of Property Act, 1925, the United Kingdom.
EQUITABLE MORTGAGE IN INDIA:
In India, mortgage by deposit of title deeds or an equitable mortgage is provided in Section 58 (f) of the Transfer of Property Act, 1882. Although it is compulsory to have a written and registered instrument for all other types of mortgages, but mere delivery of title deeds to the lender is enough to create an equitable mortgage.
During the time when the Transfer of Property Act, 1882, was enacted, the incorporation of equitable mortgage in the law was an aberration because as a matter of policy; registration was made mandatory for almost all of the transactions that fell under the category of immovable property. There were divergent views on this issue at the time of the drafting of this law.
The Fourth Law Commission submitted its report in the year of 1879 in which it stated: “the equitable mortgage is against the policy of our registration-law. It leads to evasion of stamp-duty; and it is at variance with the principle of making the system of transfer of immovable property as far as possible a system of public transfer”. But, this provision was inserted in the law by the legislative body against the advice of the Fourth Law Commission.
Being the easiest mode of security for a loan, an equitable mortgage continues to be immensely in practice with lending institutions and borrowers in India. It saves the stamp duty and the registration fee for the borrower as well as saves the lender from visiting the office of the registrar for the purpose of registration of the mortgage deed. For instance, a large quantity of home loans in India is disbursed on the security of an equitable mortgage.
MEASURES TO PREVENT FRAUD IN RELATION WITH EQUITABLE MORTGAGE:
Stamp duty and registration fees on the memorandum of deposit of title deeds have been decreased in some states to encourage the registration of equitable mortgages. However, even with reduced charges, a less number of equitable mortgages are registered. It is because of the reason that the lenders and borrowers are not compelled to register such a transaction. Even the Honorable Supreme Court has held that it is not necessary to draw a written agreement or memorandum for the creation of an equitable mortgage in the case of State of Haryana v. Narvir Singh.
In the states of Maharashtra and Gujarat, by an amendment in the Indian Registration Act, 1908, an intimation of an equitable mortgage to the Registrar has been made mandatory. This is an effective methodology of bringing equitable mortgages on record. However, this methodology is confined to these two states only.
For the prevention of frauds in loan cases involving multiple lending from different banks on the account of same immovable property, the Government of India has established the Central Registry of Securitisation Asset Reconstruction and Security INterest of India (CERSAI) under the provisions of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Under this particular Act, it is mandatory or essential for all the banks and the financial institutions to file particulars of all equitable mortgages created in their favor on the portal of the CERSAI. Other lenders and prospective buyers can access the data of CERSAI to acquire knowledge about any equitable mortgage on a property. This is an effective step taken to bring equitable mortgages on record but it only deals with a part of the problem in relation with equitable mortgages. Provisions of this Act do not apply to the loans given by lenders other than banks and financial institutions. The Equitable mortgages which are created on agricultural land are also not required to be registered with the CERSAI. Therefore, a large proportion of equitable mortgages are still left out of any public record.
The concept of equitable mortgage was invented in England because of the reason that there was no legitimate option or methodology for creating a mortgage without conveying the property to the mortgagee with possession. At that particular period of time, in England, there was no system of registration of property transactions in the public records too. As well as it was based on the principles of equity which were applied in England along with the common law.
However, at the time of enactment of the act of Transfer of Property, the situation was entirely different in India. And such type of mortgage was not in practice traditionally in India. The factors or conditions which supported equitable mortgage in England also did not exist in India. Yet, it was made as the part of the statute against the Principle of Public Transfer of immovable property established by the Indian Registration Act, 1908 and the Transfer of Property Act, 1882.
The equitable mortgage has been abolished in the United Kingdom, the country of its origin. The time has come to abolish it in India too. For creating security of immovable property against a loan, a simple mortgage as per Section 58 (b), the Transfer of Property Act, 1882 should be used instead of an equitable mortgage. Unlike an equitable mortgage, a simple mortgage can be created only through a registered deed under the Indian Registration Act 1908 (Section 96, Transfer of Property Act 1882). Lenders and borrowers are likely to oppose this prescription because of the cost of stamp duty and registration fee and the need for the physical presence of a lender at the time of registration. However, these cons can be removed by making suitable amendments in the law. There is reasonable justification to exempt simple mortgage from stamp duty and registration fee because of the reason that no effective transfer of immovable property takes place in this transaction. The mortgager retains the property with him or her during the whole tenure of the loan. The mortgagee only has the right to cause the mortgaged property sold in case of default in repayment of the loan through the intervention of the court.
Therefore, the actual transfer of ownership takes place only when the property is sold as per the order of the court. At that particular period of time stamp duty and registration fee can be collected from the buyer. Hence, effectively, exemption of simple mortgage from stamp duty and registration fee will cause no genuine loss to the exchequer. Presently, in any case, the government is not getting any revenue from stamp duty and registration fee on equitable mortgages being used as security in majority of loan cases. Moreover, the presence of the lender at the time of registration of simple mortgage can be dispensed with by making required amendments in the Registration Act, 1908. Such a change is pending from so long and it will immensely benefit financial institutions as well as borrowers.
- The Transfer of Property Act, 1882
- The Indian Registration Act, 1908
- Law of Property Act, 1925 (England)
- Russel v Russel (1783)
- Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
- State of Haryana v. Narvir Singh (2014) 1 SCC 105
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