In recent years, India has witnessed a sharp increase in the number of fraudulent activities involving equitable mortgages. Equitable mortgages are a form of secured loan where the lender obtains an interest in the borrower’s property as collateral. The rise in the number of fraudulent equitable mortgage cases has highlighted the need for stronger measures to prevent such fraudulent activities.
This post will explore the concept of an equitable mortgage, how it works, and the different types of fraudulent activities associated with them. Additionally, we will discuss the impact of these fraudulent activities on the Indian banking system and measures that can be taken to prevent them.
What is Equitable Mortgage?
An equitable mortgage is a type of mortgage that is used to secure a loan where the borrower offers their property as collateral. Unlike a legal mortgage, in which the lender’s interest in the property is registered with the government, an equitable mortgage does not require registration.
In other words, the lender’s interest in the property is not publicly recorded, and the borrower retains legal ownership of the property. However, the lender does have a right to the property in the event that the borrower defaults on the loan.
Equitable mortgages let lenders hold property as collateral. However, their rights aren’t enforceable against third parties. These mortgages are popular in India due to their speed and lack of paperwork.
Equitable mortgages are commonly used in India, particularly in cases where the borrower does not have a clear title to the property or where the property is not eligible for a legal mortgage. Equitable mortgages are also used in cases where the borrower needs to obtain a loan quickly, as the process of registering a legal mortgage can be time-consuming.
Types of Equitable Mortgage Frauds
- Fictitious Property
One of the most common types of equitable mortgage fraud is the creation of fictitious property. In this scenario, the borrower provides false information about the property and creates fake documents to show ownership. The lender approves the loan and obtains an equitable mortgage on the property, only to realize later that the property does not exist.
- Overvalued Property
In cases of overvalued property, the borrower inflates the value of the property to obtain a larger loan. The lender approves the loan and obtains an equitable mortgage on the property, only to realize later that the property is worth much less than what was claimed.
- Double Mortgage
In cases of double mortgage fraud, the borrower obtains a loan from multiple lenders using the same property as collateral. The borrower may use different sets of documents to obtain loans from different lenders. In such cases, the lenders may not be aware that the property has already been mortgaged to another lender.
- Fabricated Documents
Borrowers may use fraudulent documents to show property ownership or inflate its value. Lenders approve the loan based on these documents but later discover their falsity.
Impact on the Indian Banking System
The rise in equitable mortgage fraud has had a significant impact on the Indian banking system. Banks have lost billions of rupees due to fraudulent activities, and the number of such cases continues to rise. The impact of these frauds goes beyond the financial loss to banks. It undermines the confidence of the public in the banking system and reduces the availability of credit to legitimate borrowers.
Preventive Measures
The Indian banking system has taken several steps to prevent equitable mortgage fraud. Some of these measures are:
- Verification of Property Ownership
Lenders have started to verify the ownership of the property before approving loans. The lenders check the ownership documents and conduct site visits to ensure that the borrower owns the property and it exists.
- Independent Valuation
Lenders are hiring independent valuers to assess the value of the property. This reduces the risk of overvalued property and ensures that the loan amount is commensurate with the value of the property.
- Credit Bureaus
Lenders are checking the credit history of borrowers before approving loans. This reduces the risk of lending to borrowers.
