Reverse Mortgages and Power of Attorney: Who Is Best Positioned to
Protect an Incompetent Borrower?
Elderly homeowners who need reverse mortgages but are incompetent may have the decision made for them if they exercised a Power of Attorney (POA) before they became incompetent. The POA grants a designated third party the right to act in the elder’s behalf. Reverse mortgage lenders may or may not accept a POA, however, fearful that the reverse mortgage proceeds will be used for the benefit of the party with the POA rather than the elder, and the lender will be blamed.
Recently, I exchanged views on this issue with a Certified Elder Law Attorney & Certified Estate Advisor who has not given me permission to use his name. The following is an edited version of the exchange.
Attorney: We have lately been running into a huge problem with the reverse mortgage industry -- it seems that some, if not all, reverse mortgage lenders are now routinely second-guessing the legitimacy of every Power of Attorney document presented for use in connection with obtaining a reverse mortgage...the reverse mortgage lenders are now refusing to honor the POA unless the Agent (1) obtains a letter from the applicant's doctor or former doctor stating that the applicant was mentally competent when the POA was originally signed AND (2) a letter from the applicant's doctor stating that the applicant is not now mentally competent.
Guttentag: It is not in the financial interest of reverse mortgage lenders to turn down deals because of a POA issue, since they only make money when they make loans. The industry, however, is extremely sensitive to the bad PR that arises when elders get scammed in connection with a reverse mortgage, which happens on occasion. They have adopted the POA rules to which you object because they don't want to be complicit in situations where elders are taken advantage of, even though it means turning business away. I would commend them for this.
Attorney: Forcing everyone executing a POA to get a statement of competency at the same time would be extremely impractical, inconvenient, and cost-prohibitive (as most doctors charge clients for competency evaluations and they are not covered by insurance), and would deter many, if not most people from executing a POA. Additionally, because most financial institutions won't accept a POA that's more than a few years old, most attorneys recommend re-signing POAs every few years, so this would mean getting a competency evaluation every time.
Guttentag: How would you deal with unscrupulous agents who use a POA to take out reverse mortgages for their clients where the real intent is to provide funds the agent can use to pay himself?
Attorney: That's a whole different issue, and one that can presumably be addressed by proper counseling…
Guttentag: If the borrower is incompetent, the counselor has no one to counsel except the agent. The counselor is not a monitor and does not have legal authority to stop a transaction just because he is not sure that the agent is acting in the best interest of the elder.
There aren’t many situations in which the lender is the party best positioned to protect the borrower, but this seems to be one.