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.

DO YOU KNOW WHETHER YOU NEED ESTATE PLANNING OR MEDICAID PLANNING?

Most people don't. I meet with clients all the time who come in thinking that they need to protect assets from the nursing home and find out they really need new Wills, Trusts and Powers of Attorney. Or, the other way around!

Estate planning is the process of providing for yourself and your family in the event of your retirement, disability or death. Through a properly-crafted estate plan, you put your legal and financial affairs in order so that the assets you have accumulated during your lifetime will be preserved and transferred to your heirs with the least amount of financial and emotional cost. The most common estate planning tools available include a Will, a Trust, a Durable Power of Attorney, a Health Care Power of Attorney and a Living Will Declaration.

This encompasses sitting down with your family to plan out some of the most important issues you face. For example, who will handle your affairs when you are incompetent or dead, how do you want to pass your assets to the next generation and what kinds of medical treatment you want OR DON'T WANT at end of life.

You also have to plan to avoid probate, minimize federal and Ohio estate taxes and not leave a mess for your family. Your plan will vary depending upon your family situation, assets and goals and plans for the future. The more your net worth, the more complicated and more important the planning becomes.

Medicaid planning includes many of the same things as you need for Estate planning. However, the main focus is on how to protect and preserve your assets in the event that you need long-term medical care. It can dove-tail with Estate Planning or it can be mutually exclusive.

Often Medicaid planning means trying to qualify for Medicaid benefits, the only government program that will pay for long-term care at home, in assisted living and especially in the nursing home. However, it is a welfare program. You cannot have much in the way of assets or income to qualify.

With nursing home costs running up to $100,000 per year, people need to plan early to legally preserve as many assets as possible. This may include spending your money on certain protected assets or even giving them away. The planning is not easy, and must follow the letter of the law in order to not run afoul of the many regulations that exist. The longer you wait, the fewer options that exist.

You also need to plan to avoid the state's rights to recover any remaining assets from your or your spouse's estate if you die after having received Medicaid benefits. Again, there is not an easy or clear-cut solution.

So, how do you know which kind of planning you need? And, how do you know what specific planning tools you need among the hundreds of tools available? You must to investigate all the possibilities. Please be sure to see a qualified Elder Law Attorney for assistance. He or she will assist you in focusing your Estate or Medicaid plan on your own personal needs and wants. One size definitely does not fit all with these issues!