Mortgage assignments in India have not been very prevalent because of the long term nature of the underlying loans, complexities in stamp duty and registration and resultant uncertainty in enforceability of the underlying loans.
The mortgage portfolios assigned predominantly consist of loans secured by mortgage by deposit of title deeds of immoveable property. Memorandum of entry recording the deposit of title deeds is executed; however quite often in practise, the memorandum is not in full compliance with the applicable stamp and registration laws and this area needs to be strengthened by many lenders. A few states such as Maharashtra, Karnataka and Tamil Nadu have brought even the memorandum within the ambit of a higher stamp duty, whereas in many states such memorandum is not encompassed by the stamp act and are either unstamped or nominal stamp duty is paid. Many states stipulate nominal stamp duty for the transfer of interest secured by a mortgage deed and advantage can be taken of this provision for mortgage assignments. In our view the benefit of this provision will be available for mortgage assignments only if requisite stamp duty has been paid on the original mortgage deed/memorandum. However, it needs to be cautioned that there are a few states which give the benefit of nominal stamp duty only to transfer of legal mortgages and not to transfer of mortgage by deposit of title deeds.
Registration, however, does pose a challenge. Though judicial precedents are consistent that a memorandum merely recording the past act of depositing the title deeds with intent to create security does not require registration, it may be possible for the registration authorities to argue that the assignment of the memorandum at the nominal stamp duty does attract registration. One possible solution could be to execute a memorandum recording the act of transfer of title deeds on an earlier date and putting forth the argument that a memorandum which merely records the past act of transfer of title deeds with intent to transfer security does not require registration. There are, however, two conflicting judgments of the Madras High Court on this subject. In Perumal Ammal v. Perumal Naicker (1920)40M.LJ25 it was held that though the rule is now that a mortgage right or debt cannot be transferred without a registered instrument under Section 54 of the Transfer of Property Act it is subject to the exception that "where the law still admits of the separate transfer of the mortgage-debt as by the indorsement of a promissory-note secured by a deposit of title-deeds or by the attachment and sale in execution of a mortgage debt, Section 8 of the Transfer of Property Act still operates to carry the security with it”. This decision by a two judge bench was dissented by another two judge bench in Elumalai Chetty and Jagannadha Chetty v. Balakrishna Mudaliar AIR1922Mad344 which held that mortgage of immoveable property is itself immoveable property under the Transfer of Property Act whatever the form of 'the mortgage may be; and the transfer of ownership of such a right falls under Section 54 and will require a registered instrument for the purpose’. Both these judgments do not directly deal with the issue of memorandum recording past act of transfer of title deeds with intent to transfer security and this issue has not really been tested in the courts in India. Though not sacrosanct, there is a fair chance that the abovementioned approach would be successful if the documents are appropriately drafted. The risk can be mitigated by retaining the assignment documents in a state with liberal stamp and registration laws. In good retail portfolios, defaults would arise only on a small proportion of loans. If need for enforcement arises then individual memorandum and/or other documents can be taken into the concerned state and necessary stamp duty and registration fees be paid on the same. Power of attorneys, indemnities and undertakings for execution of any necessary documents can be executed by the assignor in favour of the assignee to execute such individual confirmations should courts hold such transfers as invalid in the absence of registration or inadequate stamping. Of course, this approach may not work in assignment of a pool of non performing assets.
Unlike a vehicle loan or consumer loan, mortgage loans require higher degree of diligence and expertise in verifying property title and valuations. There are some organizations who have developed skills in these areas but have constraints on the extent of loans they can take on their books. If assignment of retail mortgage loans by such organizations could be smoothened, other organizations who do not have the expertise can take the retail mortgage loan on their books for the purpose of diversifying their risk, improving their returns and getting priority sector benefits, where available. The housing finance industry needs to aggressively pursue the government for rationalization of stamp duty and registration laws. Eliminating the uncertainty surrounding stamp duty and registration will give a fillip to mortgage assignment thus enabling housing finance to reach a larger section of the population.
Sandhya Iyer is a partner and Ann Jose is an Associate at law firm Vaish Associates