Equitable Mortgage: Time to Abolish a Colonial Legacy
A change that is long overdue to prevent rampant financial fraud
This is a guest blog.
An equitable mortgage of immovable property is a widely used method of creating security against a loan availed from banks and other financial institutions in India. However, it is easily open to fraud.
This is because it is created merely by a deposit of title deeds with the lender. There is no need for a written instrument for creating such a mortgage. As there is no written instrument, no registration of such mortgage is required under the Registration Act, 1908. While non-registration of this kind of mortgage makes it easy to create, it also opens opportunities for fraud by unscrupulous borrowers.
For instance, the National Housing Bank has identified 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 housing finance sector.
In the last 140 years, since the inception of equitable mortgage in India, requirements of debt financing, organisation of lending institutions and the character of land markets have undergone a sea-change. To restrain the increasing trend of frauds related to equitable mortgages, critical scrutiny of this form of security has become imperative.
This blog attempts to analyse key aspects ofequitable mortgage, including legal principles, reasons for its widespread acceptance, and problems faced by the lenders and the borrowers. It also provides suggestions for reforming the law without affecting the flow of credit to borrowers.
Origin of equitable mortgage in England
The doctrine of equitable mortgage originated in England in the 18th century when the Court of Chancery in a judgment in Russel v Russel (1783) recognised the act of deposit of title deed with the lender as creating an equitable mortgage of the property. Before this judgment, the only way to create a legal mortgage in England was to transfer the immovable property to the lender through a written deed with the condition that the property will be transferred back to the borrower after repayment of the loan.
The court of Chancery, in this case, decided that if documents are handed over to the lender, a mortgage is created even if a formal deed of mortgage is not executed. At that time there was no system of registering property transactions with a government authority in England. Later, even when registration was introduced in England, this form of mortgage was exempted from registrationby a saving provision in Section 13 of the Law of Property Act 1925, the United Kingdom.
Law on equitable mortgage in India
In India, mortgage by deposit of title deeds is one of the mortgages provided in Section 58(f) of the Transfer of Property Act 1882. While it is compulsory to have a written and registered instrument for all other kinds of mortgages, mere delivery of title deeds to the lender is enough to create an equitable mortgage.
At the time of enactment of the Transfer of Property Act, 1882,the inclusion of equitable mortgage in the law was an aberration because, as a matter of policy, registration was made mandatory for most transactions that fell under immovable property. There were divergent views on this issue at the time of the drafting of this law. The Fourth Law Commission in its report submitted in 1879 observed ‘it (equitable mortgage) is opposed to 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.’ However, this provision was inserted in the law by the Select Committee in opposition to the advice of the Law Commission.
Being the easiest mode of security for a loan, equitable mortgage continues to be immensely popular with lending institutions and borrowers in India. It saves the stamp duty and the registration fee for the borrower and saves the lender from visiting the office of the registrar for the registration of the mortgage deed. For instance, a large number of home loans in India today are disbursed on the security of an equitable mortgage.
Measures to prevent fraud relating to equitable mortgage
Some measures have been taken by the central government as well as a few state governments to prevent fraud relating to equitable mortgages. Stamp duty and registration fees on the memorandum of deposit of title deeds has been reduced in some states to encourage registration of equitable mortgages. However, even with reduced charges, a very small number of equitable mortgages are registered because lenders and borrowers are not legally bound to register such a transaction. Even the Supreme Court has held that it is not necessary to draw a written agreement or memorandum for the creation of an equitable mortgage (State of Haryana v. Narvir Singh, (2014) 1 SCC 105).
In Maharashtra and Gujarat, through an amendment in the Registration Act, 1908, an intimation of an equitable mortgage to the Registrar has been made compulsory. This is an effective method of bringing equitable mortgages on record but is confined to these two states only.
To prevent frauds in loan cases involving multiple lending from different banks on the 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 Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Under this Act, it is mandatory for all banks and financial institutions to file particulars of all equitable mortgages created in their favour on the portal of the CERSAI. Other lenders and prospective buyers can access the data of CERSAI to know about any equitable mortgage on a property. This is an effective step to bring equitable mortgages on record but it deals only with a part of the problem. Provisions of this Act do not apply to loans given by lenders other than banks and financial institutions. Equitable mortgages created on agricultural land are also not required to be registered with the CERSAI. Thus, a large proportion of equitable mortgages is still left out of any public record.
Time to abolish an alien concept imported in the country
As already mentioned, the law on equitable mortgage has been controversial since its inception. The concept of equitable mortgage was invented in England because there was no legal option to create a mortgage without conveying the property to the mortgagee with possession. At that time, in England, there was no system of registration of property transactions in the public records. Also, it was based on principles of equity which were applied in England alongside common law.
However, at the time of enactment of the Transfer of Property Act, the situation was entirely different in India. Such a kind of mortgage was not used here traditionally. The factors which supported equitable mortgage in England also did not exist here. Yet, it was made part of the statute against the principle of public transfer of immovable property established through the Registration Act 1908 and the Transfer of Property Act 1882.
Interestingly, equitable mortgage has already been abolished in the United Kingdom, the country of its origin. The time has come to abolish equitable mortgage in India as well. For creating security of immovable property against a loan, a simple mortgage (as defined in Section 58(b), theTransfer 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 Registration Act 1908 (Section 96, Transfer of Property Act 1882). Anyone dealing with an immovable property will easily find a simple mortgage on that property by searching the record of the Registrar. This will reduce the chances of fraud to a minimum.
Lenders and borrowers are likely to resist this prescription initially because of the cost of stamp duty and registration fee and the need for the presence of a lender at the time of registration. However, these disadvantages can be removed by making suitable changes in the law. There is good justification to exempt simple mortgage from stamp duty and registration fee because effectively no transfer of immovable property takes place in this transaction. The mortgager retains the property with him during the entire tenure of the loan. The mortgagee only gets a right to cause the mortgaged property sold in case of default in repayment through the intervention of the court.
Thus, the actual transfer of ownership takes place only when the property is sold as per court order. At that 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 real loss to the exchequer. In any case, even at present, the government is not getting any stamp duty and registration fee on equitable mortgages being used as security in majority of loan cases. Additionally, the presence of the lender at the time of registration of simple mortgage can be dispensed with by making suitable amendment in the Registration Act, 1908.
Such a change is long overdue and will immensely benefit financial institutions as well as borrowers.
All views are personal.
About the Authors
B.K. Agarwal is an IAS officer with over 35 years of experience who is presently serving as Secretary, Lokpal of India. During his service he has handled several land related tasks, viz., adjudication of land title disputes, making of record-of-rights, cadastral survey and registration of land transaction deeds. He has acquired expertise in land administration and related issues. He has authored a book, “Land Registration: Global Practices and Lessons for India.” His articles on land related subjects have been published in various newspapers and magazines. He is frequently invited by the educational institutes and other organizations to speak on topics related to land administration and property law.