Power of Attorney in Mortgage Transactions
I’ve been noticing a trend lately and it’s a trend that really concerns me to be quite honest. I’m noticing that more and more mortgages are closing with borrowers utilizing power of attorney rights and am also seeing more and more reasons I don’t consider as acceptable for it. The bottom line is that allowing borrowers to close using Powers of Attorney increases risk to all interested parties for a number of reasons.
What is a power of attorney?
A Power of Attorney is a grant from one legally competent person, called the "principal" to another individual, called the "attorney-in-fact" to act on behalf of the principal. There are numerous types of power of attorney, each allowing varying powers and assigning rights.
1. Limited/Specific Power of Attorney: Through a limited Power of Attorney. Which in some areas can also be referred to as a specific power of attorney, the principal authorizes another person to do specific things on his or her behalf for a limited period of time, or only for a limited or specific circumstance(s). The limited Power of Attorney is null and void if the principal becomes incapacitated or dies. It also ceases according to the expiration date included within the legal document. This is the most commonly required and utilized POA document in mortgage lending.
2. General Power of Attorney: A general Power of Attorney gives another person the authority to act on complete behalf of the principal for any variety of situations. The document is null and void if the principal becomes incapacitated or dies.
3. Durable Power of Attorney: This type of POA assigns rights to another person to act on behalf of an incapacitated principal and ceases if the principal dies. Most often this type of POA is used so that an incapacitated individual can have another person handle financial tasks such as bill payments, property management and other money-related matters.
4. Springing Power of Attorney: This newest type of POA is written and goes into effect in the case where the principal becomes incapacitated. It’s basically prepared ahead of time and held to be used if a situation arises that renders it useful.
In most mortgage-related situations, the lender will require that a limited or specific power of attorney be utilized by the borrower in question. The POA document typically must assign rights from the principal to the agent to specifically sign on the principal’s behalf for settlement of the mortgage transaction relating to the subject property and must also identify the specific property involved.
But in addition, and this is the area I see being overlooked quite often in today’s market, most lenders specify that a power of attorney will be accepted for a borrower who is considered to be incapacitated or for a borrower who is serving active military duty and is not able to attend closing. This is where it gets a little hairy.
“Incapacitated” has a number of meanings which include but may not be limited to helpless; lacking in or deprived of strength or power, unable to act, powerless, legally incapable or ineligible, deprived of capacity or natural power, and/or disabled. Incapacitated does not apply to a person who is simply too lazy to take time out of his or her day to handle his or her own financial responsibilities. What we all need to remember is that in most cases, our reps and warrants with the lenders hold us a lot more liable and responsible for meeting their exact guidelines and requirements than you may realize.
Every time we do a loan we subject ourselves to follow their rules and if their rule states they only allow POA to be used by borrowers in state of incapacitation, we’d better darn well not be allowing our borrowers to use POA just because they feel like taking a nap during that 30 minutes they would otherwise be attending their own closing and signing their own settlement papers.
Power of Attorney usage opens up a lot of risk and quite frankly, if it continues to be taken advantage of, I think it will only be a matter of time before we see some tightening on the rules by the agencies. Honestly, how hard is it to forge a POA document? Anyone who has a friend or colleague that’s a notary can forge and create a POA and in doing so, it’s committing fraud!
In my opinion, the only bona fide reasons that a POA should be allowed are in situations where the principal is out of the state or country for a valid reason, bedridden with serious illness or serving active military duty. The excuse of I have a meeting that day, I will be out of town that day, don’t hold water. What happened to the days when people were actually held responsible for their financial decisions? I find it utterly ridiculous we even allow it and personally I think we should require some sort of proof of the “incapacitation!”