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Reverse Mortgage Industry Taking a Hard Line on POAs

This article from ElderLawAnswers Newsletter, July 6, 2010, and I thought it was of interest:

Reverse mortgage lenders are now routinely second-guessing the legitimacy of power of attorney (POA) documents, according to industry sources. Presented with an agent seeking to take out a reverse mortgage on behalf of an incompetent principal, banks or brokers are typically asking for a letter from the principal's doctor stating that the senior was competent at the time the POA was executed, or, failing that, a letter from the doctor indicating when the principal's condition began. Based on this information, the lender or broker decides whether or not to proceed with the reverse mortgage application.

The practice is "pretty standardized" in the reverse mortgage industry said Ed O'Connor, president of Advanced Funding Solutions Inc., a reverse mortgage broker. "It is not a HUD requirement, [but] it has become a bank requirement. And just about every bank I know of is doing the same thing. The banks are basically covering their own tail to make sure they're not issuing a reverse mortgage to somebody who doesn't know they're getting a reverse mortgage."

"It's basically becoming a lender requirement," O'Connor told ElderLawAnswers, "and the lenders are certainly allowed to impose stricter guidelines than HUD."

Virginia ElderLawAnswers member Evan Farr raised the alarm about the reverse mortgage industry practice in a recent blog post. The 'note from a doctor' requirement, Farr wrote, is "creating an unnecessary and sometimes insurmountable roadblock for elderly clients who are incapacitated and need a reverse mortgage to be able to afford the home care or home modifications necessary to remain at home and age in place."

Farr noted that the doctor who could affirm that the principal was competent when the POA was signed may have died or retired, with medical records no longer available. Or the principal may have been so healthy at the time of execution that she hadn't been to a doctor in several years.

O'Connor said that his firm has found that doctors will not necessarily answer the question of competence directly, which is why "We ask the doctors for a letter telling us what the person's condition is and approximately when it started." However, he noted that if an attorney prepared the POA, his firm might ask for a letter from the attorney affirming the principal's competence at the time of execution.

"Some banks will still ask for a medical doctor over and above that," O'Connor said, "but it all depends on the circumstances." O'Connor noted that "50 percent of the powers of attorney we see are not actually drawn up by an attorney. They're drawn up by maybe a family member or a notary."

Incompetent Until Proven Otherwise

In his blog post, Farr observed that "the leaders of the reverse mortgage industry are taking the law into their own hands and reversing the time-honored presumption of competence by essentially presuming that all reverse mortgage applicants were incompetent at the time of signing their Powers of Attorney, and forcing the families of these now-incompetent applicants to prove that these applicants were competent when they signed their Powers of Attorney, often years prior to ever applying for a reverse mortgage."

O'Connor conceded that "we have not seen this level of scrutiny on regular mortgages. . . . we've never had anybody ask for this additional documentation. We're only seeing this on reverse mortgages."

The reason from the banks' point of view, O'Connor explained, is that their exposure is heightened in the case of a reverse mortgage. "You have a circumstance where people can tap into a large sum of money all at once and it doesn't have to be repaid. . . . The lender is on the hook."

O'Connor acknowledged that the banks are losing some business because of the policy, but said "it might not be bad business to lose." And he said that in his experience problems seldom arise with a POA. While he sees 12 to 15 POAs a year on reverse mortgage applications, "I can count on one hand the times I've had a problem with a power of attorney."

ElderLawAnswers did not get a response from Wells Fargo Home Mortgage to requests for comment on the practice. Bank of America referred us to the National Reverse Mortgage Lenders Association. Peter Bell of the Association told us that "there is no standard industry practice on this, as far as I know." Bell noted that "this is outside my area of experience" but said "there is no one on my staff at the association that deals with individual lenders' underwriting policies. You'd have to go directly to the lenders." He added that "our association is generally supportive of any additional procedures a lender chooses to implement to safeguard its clients. My guess is that a lender who is requiring this might have been burned by a case where a POA was executed inappropriately."

Illegal Discrimination?

Attorney Evan Farr contends that in turning the presumption of competence on its head, the reverse mortgage industry is engaging in "illegal discrimination in lending, as the reverse mortgage industry is essentially discriminating against disabled and incapacitated adults by imposing obstacles that are not imposed on able, competent adults."

Farr suggests that those who have experienced this type of discrimination visit HUD's Housing Discrimination Complaint Web site and file a "lending discrimination complaint," either online, by phone, or via mail, and encourage clients who have experienced this type of discrimination to do so as well.

"If HUD and the reverse mortgage industry start getting enough complaints about this issue, perhaps they will reverse their position so that the reverse mortgage can once again be a useful tool for the elders that need it most," said Farr.

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