Recently, I have noticed an increase in various types of information resources offering strategies for older Americans who want to age in place. Many of these strategies suggest that seniors consider executing a durable Power of Attorney (POA) document.
A POA is a legal document whereby one individual authorizes another individual to act on his behalf. Executed at a time when the individual is still capable of communicating their needs and desires, a POA remains in effect until revoked by the individual.
When a POA specifies the individual’s preference to obtain a HECM loan, it can help families approach the transition with ease, knowing that they are doing what their loved one intended.
The key to the successful use of a POA document in a lending transaction is based upon the lender’s confidence that the document presented was executed at a time when the individual had the requisite capacity to execute it, and that requisite capacity can be verified by a medical attestation of competency at the time of execution.
Unfortunately, there are times when the execution of a POA is unable to be supported by a credible verification of competency. Although family members sometimes step in and suggest a POA when the individual is showing signs of incompetence, the timing could prove problematic. It could be argued that at that point in time, the individual has already lost the ability to make a rational decision in his best interest. Improper timing of POA execution results in additional expenses and frustration, which could interrupt or delay the family’s ability to provide for their loved one.
In a reverse mortgage transaction, the most common uses of a POA would be in situations where:
* The borrower is mentally incompetent.
* The borrower is mentally competent, but physically incapable of signing.
* The borrower
Generally, there are three kinds of POA documents:
* Durable: The attorney-in-fact is granted the full power to act, and in the case of a reverse mortgage transaction, to encumber the property. The “durability” is an unrestricted ability to act from execution through incapacity.
* General: The attorney-in-fact is granted similar wide-ranging powers, but the POA document is only effective as long as the borrower is competent.
* Specific: The attorney-in-fact is granted powers only for a specific task or action and does not have the ongoing ability to act on the borrower’s behalf. It is only effective as long as the borrower is competent.
Areas of concern when reviewing a POA document include:
* Conformity: The POA document must conform to ALL state statutes to allow the attorney-in-fact to act. Be aware that state rules vary, necessitating a complete review by several participants in the loan process. A critical review is required by the title company underwriter, who will determine if the document will legally allow the property to be encumbered in the state where it is located. Generally, a faulted document negates all parts of the transaction.
* Competency: The loan underwriter reviews the document to determine the borrower’s mental competency and if an attorney-in-fact is needed based upon conditions present. The underwriter will require the borrower’s mental capacity to be verified by a physician in order to arrive at a decision as to how the POA document can be used in the loan transaction. Clearly, the underwriter is not acting as an attorney or physician, but rather as a “safeguard” for both the borrower and lender’s interests.
* Counseling: A General or Specific POA may not be used to represent the borrower for counseling purposes, regardless of his mental capacity. The same would apply for application execution purposes. In some cases, the lender may require all parties to be counseled as an additional safeguard. Only a Durable POA would allow for an attorney-in-fact to represent the borrower, and in this case the attorney-in-fact would be required to attend counseling. Generally, many lenders also stipulate that if the borrower is competent, he should attend counseling and, at minimum, execute the Counseling Certificate, 1009 and other disclosure documents. Incompetent borrowers may not execute the Counseling Certificate or the application documents.
* Closing: Generally, all three types of POA documents may be used to execute closing documents (although this may vary by lender), provided the POA document complies with all state requirements and allows for both legal-note enforcement and the subject property to be encumbered as determined by both the title company and lender underwriters.
I am neither an attorney nor a physician. For a more detailed analysis and opinion of POA purposes and uses, you should engage one of these professionals as this information is for discussion purposes only.