As the HECM program becomes more popular, public reports of financial crimes against seniors who have access to greater funds as a result of the loan are now more prevalent. The FBI, HUD and state attorneys general are keenly aware that dishonest actors are exploiting HECMs to defraud senior citizens. A common scheme recognized by law enforcement is the financial abuse of a senior by a family member holding a power of attorney (POA). This article suggests ways that reverse mortgage professionals can help prevent such egregious abuse.
Quality reverse professionals always have their senior clients’ best interests in mind when helping them decide if a reverse mortgage is the right choice. However, the substantial cash proceeds that can result from the loan can leave room for fraudulent activities. When senior citizens are exploited, it is not dishonest loan officers or mortgage companies that are the greatest threat. Rather, children, siblings, grandchildren or other family members are most likely to take advantage of senior borrowers. According to the National Center on Elder Abuse, as many as 5 million senior citizens are taken advantage of each year. Sadly, 60.4 percent of all perpetrators of financial elder abuse are adult children.
The benefits of a power of attorney are well known, but the risks associated with this legal transaction are often overlooked. Power of attorney abuse is the misuse by the agent of the authority granted by the principal. This means that the agent is making a decision or taking an action that is not in the principal’s best interest. Often, power of attorney fraud occurs when an agent spends the principal’s money to benefit the agent rather than the principal.
Similar to the relationship between a professional athlete and a sports agent, every agent with power of attorney has a legal duty to act as a fiduciary for the principal. Courts have explained the fiduciary relationship to mean that the agent must act in the utmost good faith and with undivided loyalty toward the principal, and must act in accordance with the highest principles of morality, fidelity and fair dealing. In matters connected to the agent, the agent must serve only the principal; the agent cannot act for his or herself or in the interests of others. Consistent with this legal duty, an agent must not make a gift to himself or to a third party of any money or property that is the subject of the agency relationship, unless specifically authorized to do so under the power of attorney. An agent who violates this duty may have committed one or more crimes, including exploitation, embezzlement, fraud, larceny and theft, and
When POAs Are Part of a Reverse Transaction
Although the common law automatically imposes a fiduciary duty on every agent, most power of attorney documents do not explicitly specify this duty in the document. Agents can sometimes be unaware that they may not use the principal’s money or property for their own benefit. In a reverse mortgage transaction, this means that the agent is not permitted to use loan proceeds to benefit his or herself. Reverse mortgage professionals can reduce the risk that an agent will abuse a power of attorney by explaining and educating the agent about his or her responsibilities and limitations as power of attorney. An agent who knows the rules is more apt to play by them.
When it becomes clear that a power of attorney will be used in a reverse mortgage transaction, there should be a discussion with the agent about the duty owed to the principal, a review of the power of attorney document, and written instructions provided to the agent explaining his or her responsibilities, powers and limitations. This discussion should be confirmed in a letter to the agent summarizing the conversation. If the power of attorney identifies an alternate or successor agent, a copy of the letter can also be sent to this individual to give notice that the power of attorney will be used for a reverse mortgage transaction on behalf of the principal.
The loan file should contain notes documenting the purpose of the reverse mortgage transaction and detailing exactly what the loan proceeds will be used for. The file should clearly indicate that the purpose of the loan is to benefit the borrower and that the loan proceeds will only be used for this purpose. Often, the agent will be a family member who lives with or cares for the senior borrower; take caution to explicitly state that the loan proceeds cannot be used for the agent’s benefit despite this arrangement.
Steps such as these help reverse mortgage professionals create both documentary and testimonial evidence that can be used if there is a criminal or civil proceeding to demonstrate that the agent knew his or her conduct was unauthorized. If the agent commits abuse, the testimony about the power of attorney discussion and a copy of the confirming letter and related documents will be compelling evidence against the agent in any civil or criminal case. Moreover, this type of evidence will help protect the reverse mortgage professional from allegations that he or she had notice that the agent would misappropriate the funds or that the agent would breach the fiduciary duty and defraud the senior borrower.
Reverse mortgage professionals provide senior clients with the ability to tap into their home equity through a HECM. In some situations, it is necessary to complete the transaction through a power of attorney because of the client’s failing health. By understanding the risks involved in using a power of attorney and by taking appropriate action, reverse mortgage professionals can help prevent the financial abuse of their elderly clients, assist in the civil or criminal prosecutions of the abusers, and help insulate themselves and their companies from potential liability.