Thursday, April 07, 2005

Lien On You?

The Toronto Star reports that the Law Society of Upper Canada is investigating 72 lawyers as part of an investigation into mortgage fraud involving the Teranet land registry system:

In the report presented at the society's recent convocation, the law society says fraudsters have been able to use the province's electronic land registry system, Teranet Land Information Services Inc., to alter records — including changing ownership of properties to themselves. The fraud artists then use the documents to obtain mortgages. They may even make a few mortgage payments before running off with the rest of the cash. The fraud isn't discovered until the homeowner receives a mortgage bill or tries to sell the property and finds that there's a lien on it.

The report says mortgage fraud has ballooned to about $300 million a year and become easier with the "depersonalization" of banking due to a move away from face-to-face contact between borrowers and lenders due to the growth of Internet and telephone banking.

Before people start screaming about an army of crooked lawyers ripping off the public, a note of caution:

The report says the lawyers may be "unwitting" participants in the fraud, having been called into the transaction too late to catch a fraud that took place early in the deal.

In one scenario outlined in the report, a fraudster gains access to the Teranet system using a lost or stolen diskette meant to give lawyers and other real estate industry professionals access to land registry records, and changes title on a property to his or her name — even paying the required fees and taxes.

"Now the fraudster has title to someone else's home," the report says.

From there, the fraudster can get a mortgage — using Teranet to fraudulently discharge any outstanding mortgages to make the loan approval go more smoothly, if necessary.

An explanatory note, as I understand it:

Before Teranet was set up, there were two land registry systems in Ontario: one known as land registry, primarily in southern Ontario, the other known as land titles (or Torrens), in northern Ontario.

The former was a registry of instruments (deeds, mortgages, liens, etc.) on lots in concessions and townships dating back from the time the original townships were created as far back as the late 1790's, and forward as they were subdivided

The latter was more simply a record of title to a particular piece of real property and history of its transfers and charges thereon.

As part of any standard real estate transaction, a lawyer has to do a title search confirming, in fact, that the seller actually has title to the property. The search usually goes back 40 years, bearing in mind any curative provisions of the Planning Act that remedy earlier defects that might otherwise have prevented good title from passing.

Under Teranet, all real property in Ontario will eventually be converted to the land titles system. Under land titles, the same in-depth title searches need not be run as land titles is itself good title. Nonetheless, searches for any charges on the property must be run.

Teranet allows real estate transactions to be closed entirely on-line, without having to go a county registry office. The PINs and passwords are effectively the lawyers' electronic signatures stating that good legal title can pass, all charges have been taken care of, taxes paid, etc. If anything goes wrong, title insurance might cover it, but the lawyer is open to liability for professional negligence.

If Teranet has been compromised this way, a fair number of real estate lawyers who were otherwise innocent might lose their practices once word gets out in the profession and to the public. As for those who might have been complicit, LSUC will have to hit them as hard as if they'd dipped into the trust accounts--the one sin LSUC will not forgive in this life, or the next.

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