Borrower Competency and Written Agreements
It’s a situation most loan officers who deal with older people will face at some point: while many elders may take awhile to come up with the word they want, or respond slowly to your questions, the borrower sitting before you appears to be either incompetent, or right on the edge. What do you do?
Since reverse mortgage professionals are not medical experts (generally speaking; there may be exceptions), you can’t really make a judgment call. For some, it may be a delicate balance between personal responsibility and earning a commission. So this begs the question: what is the best ethical — and legal — approach
Who holds the power?
Power of attorney (POA) is one solution. If a prospective borrower is deemed incompetent or incapacitated, their POA would be the one to sign the loan documents on their behalf. HUD has a provision for this situation, which occurs on a limited basis. The POA would sign their name followed by “POA”, and submit the supporting POA document with a letter of explanation to the underwriter.
The larger issue, of course, is what is in the best interest of the seniors you serve. Will the POA be able to help the homeowner / borrower to make a decision in the borrower’s best interest? Or should you decline to work with this prospect?
Will your concern for a senior’s well being matter more than an ill-chosen reverse mortgage? Or will the reverse mortgage make the crucial difference? This may be one of the most challenging moral and practical issues you face as a loan officer.
Putting it in writing
As you’re well aware, the lack of written agreements can cause strife among family members who go into business together — and even more so when those with blood ties decide to share housing.
In one disturbing case described by elder law firm Chronic Care Advocacy, a woman (who was mentally competent) claimed that despite investing substantial assets to build a mother-in-law suite in her daughter’s home, paying rent and utilities for more than four years, and assisting with the cost of installing a backyard pool, she was “kicked out” by her daughter and son-in-law.
Naturally, the daughter and son-in-law paint a somewhat different picture of events leading up to the lodging debacle. What’s most relevant here is: why did this situation end up in court? Family members make informal agreements among themselves all the time, and children often bring elderly parents into their homes when the parents are no longer able to manage on their own.
Family members also loan each other money. Without a written agreement, misunderstandings can later arise about repayment terms. When problems surface, so does stress, which can fracture family relationships.
Put such agreements in writing, urges Chronic Care Advocacy. Spell out:
- What each party will do. For instance, if a parent is planning to move into a child’s home, the agreement should specify whether the parent is paying rent or will only be contributing to household expenses.
- What else is included. Will the parent or other elder need transportation to doctors’ appointments, special meals, or medical equipment? If a caregiver becomes necessary, who will pay for this service?
- What nullifies the agreement. What circumstances would necessitate the parent leaving the home, e.g., a health issue that requires nursing care? What circumstances might allow a return?
Many times just writing down the terms of the agreement will spur family members to ask each other crucial “what if” questions. While it may seem overly formal to write everything out between family members, coming to consensus about how these issues will be handled at the outset is preferable to facing a crisis.
Whether a reverse mortgage client is competent or questionable, all seniors need to understand the importance of putting their choices and decisions in writing. In the end, the terms of an agreement can help keep terms of endearment intact.
8 Comments
Amara,
As to your moral and ethical dilemma, who are we to conclude that a reverse mortgage is a reasonable answer where competency is the issue? If there is a question of competency, then even with all of their financial data without the opinion of a doctor to which we would have no privy, how would we know what is a right answer to the reverse mortgage question? Unless the POA was verifiably executed when the senior was clearly competent, the POA is invalid for HUD purposes. If a POA was created but clear competency of the borrower can be established as of the date of the signing of the POA, HUD will normally require a conservatorship as in the case where competency is in question.
If a valid POA has been legally executed, then the issue is generally easier unless the attorney in fact is incompetent or deceased. Sometimes it is an attorney who is no longer in practice and does not want the responsibility.
Let us say that properly executed POAs which meet state legal and HUD approved standards are excellent instruments for use in executing documents where the borrower is either mentally incompetent or is physically unable to sign the documents.
Where there is no HUD qualifiable POA and the competency of the applicant is in question, normally HUD will demand that a court appointed conservator sign the legal documents. Since a conservatorship takes time to set up and is generally costly, normally the HECM will take months or even more than a year to get approved.
Your segment on writing it down is great. Another idea is to video the discussion and write up a summary with each party signing off. Then make some copies for all of the parties. It would not be a bad idea to store the video and a pdf of the signed summary document on the cloud. Although many would object, seeking the help of an attorney early on should be advised.
If loans are involved using legal docs are a great idea. If the doc is a mortgage, then it should be filed with the county recorder’s office along with a deed of trust in states where that doc is a normal part of originating a mortgage.
RMMyths,
Video is a great idea, assuming the LO has the technology available. Thanks for adding value to the post!
Rereading my comment I did make one mistake. The last sentence of the first paragraph says: “If a POA was created but clear competency of the borrower can be established as of the date of the signing of the POA, HUD will normally require a conservatorship as in the case where competency is in question.” BUT it should read as follows:
If a POA was created but clear competency of the borrower CANNOT be established as of the date of the signing of the POA, HUD will normally require a conservatorship as in the case where competency is in question and there is no POA.
I apologize for any confusion.
Amara,
You’ve done it again! Great little article with, absolutely, a perfect message to professionals who deal with those who are advancing in age and/or life events. Thanks, Burgess
Burgess,
I might make you captain of my cheerleading squad 🙂
Thanks!
Rmmyths comments on the legal and underwriting issues are pure gold – well stated and telling it like it is.
The decision on the part of the Reverse LO whether to pursue the loan or not based upon personal observation of the client’s competency is sometimes a moral and ethical decision we all may have faced. Not always an easy decision… but ask yourself whether it is truly in the best interest of your client.
Dick,
Thanks for always being willing to dive to the heart of difficult subjects. I really appreciate how much you care about the seniors you serve.
Dick,
Well said.