POA agent: third party individual named to help manage principal’s affairs
Principal: the individual who authorizes the agent to act on their behalf
A power of attorney (POA) enables a court approved third party individual to stand in on behalf of a principal who is unable to take responsibility for their legal and/or business affairs. When used for a reverse mortgage, lenders are very skeptical of POAs because they increase the likelihood of fraud. For this reason, lenders require extensive documentation for the POA to ensure there are no red flags which indicate that the agent will use any proceeds for their own personal benefit. When examining the POA documentation, lenders are looking to verify the purpose and type of POA and further ensure that it meets all requirements.
A POA can be used for one of two principal purposes; convenience or mental/physical health implications.
When used for the sake of convenience, the borrower is still considered legally competent. For this reason, the reverse mortgage borrower is still responsible for completing HECM counseling themselves and signing the counseling certificate and loan application. Thereafter, the agent is permitted to sign the remaining document on the borrowers behalf.
When used for the sake of mental/physical health implications, the borrower is considered to be incapable of carrying out legal decisions. Under these circumstances, the POA agent is authorized to undergo counseling, sign the loan application, and execute any other documents on the reverse mortgage borrower’s behalf. The agent is also required to comply with any state laws concerning signatures, notarization, recordation, and witnesses.
A limited POA allows the agent to act on behalf of the borrower for limited purposes; such as the principal’s child signing a document while the principal is out of town. These POAs are only valid for a short period of time and become invalid once the action has been complete.
A general POA permits the agent to perform all rights and responsibilities of the principal; such as signing documents, paying bills, and managing finances. A general POA may be used in the case where the principal needs assistance but is not incapacitated. This kind of POA is then terminated upon incapacitation, death or revocation.
A durable POA remains in effect if/when the principal becomes incapacitated. If no durable POA was issued period to incapacitation, only court approved conservators or guardians may represent the principal. A durable POA can be either limited or general in capacity and remains in effect until death or revocation.
Unlike a durable POA, a springing POA does not become effective until the principal becomes incapacitated or another specified event occurs. However, like durable POAs, springing POAs can be either limited or general and remain in effect until death.
When dealing with reverse mortgages, general POAs are typically used. On the grounds that a general POA agent will be fully responsible for the principal’s finances, the lender requires the agent to provide substantial documentation proving their legitimacy and intent to act in the borrower’s best interest.
The POA documents are used to verify the type of POA, and certify its durability. The POA should remain valid through the duration of the borrower’s state of mental or physical incapacity. Additionally, the POA documents must acknowledge the agent’s authority to encumber, pledge, mortgage or sell the property.
The lender also required additional proof that the borrower was sound of mind when they signed the POA. However, even if the borrower demonstrated that they fully understood what they were signing at the time, federal guidelines prohibit the lender from accepting the POA without a valid doctor’s note. This is tricky because doctors do not issue any kind of uniform documentation stating their patients are competent at the POA signing. While it would benefit lenders, issuing such documentation is a tedious process and could also put the doctor at legal risk. Consequently, obtaining this proof can be very difficult for a reverse mortgage lender and in some cases is cause for application denial.
For these reasons, it is recommended that seniors consider creating a POA sooner rather than later, while they are still fully competent and sound of mind. Further, it may be beneficial to consider their reverse mortgage options when creating the POA and plan accordingly to avoid complications down the road.