Getting to Sure: Legal Capacity and the Elder Lawyer in the Context of Reverse Mortgage Transactions
| Getting to Sure: Legal Capacity and the Elder Lawyer in the Context of Reverse Mortgage Transactions |
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In order for a reverse mortgage or any contract to be valid, the contracting person must have the legal capacity to enter into the contract: whether it is the elderly person, the attorney-in-fact, the joint-tenant or the guardian. In general, the law presumes that all adults have “legal capacity.” One has legal capacity until it is proven otherwise. When someone has legal capacity, it means that he or she is able to enter into contractual arrangements, can choose whether or not to enter into an attorney-client relationship, and can overall make decisions by themselves. The most important thing to remember is that legal capacity is situational and that it depends on the proposed act. A client who is signing a loan application or closing documents can be lucid and have legal capacity in that moment, and then five minutes later, may not. As an example of how the required legal capacity can differ depending on the proposed act: a relatively low level of capacity is required for someone to create a valid will, whereas a higher capacity is required to give informed consent for medical treatment. The level of legal capacity needed to execute loan documents falls somewhere between the two. What’s the Standard Measure of Legal Capacity? In my line of work, as an elder law attorney, the law’s general presumption, that a client has legal capacity, is often inaccurate. Usually, when family members bring in an elderly client, it is because they have noticed some behavior that suggests that the person’s mental faculties are declining. Such non-clinical observations, while non- determinative, do raise the question of whether the prospective elderly client has the legal capacity to sign documents or enter into an attorney-client relationship with me. This situation begs the question: How then does an elder law attorney determine a prospective client’s legal capacity? Strangely, there is no standardized procedure or even a universally accepted legal definition; it is far from black and white. Each lawyer must make an independent, holistic determination on a case-by-case basis, taking care to weigh all of the facts and circumstances. Some attorneys rely on their personal observations of the older person, as well as comments from those who spend a lot of time with him or her. Other attorneys will ask the older person a series of questions, such as “What is your name?” “Where do you live?” “How many children do you have?” and then carefully gauge the responses. Attorneys have to be sure to keep their own opinions of what is “rational” at bay when making this determination; what may be wild and inexplicable behavior may simply be eccentricity, which is not the same as incapacity. It’s a delicate dance, and is often difficult to determine the dividing line. There are certain steps you can take to protect yourselves, as lawyers do, including: - Having a third party present at the time of the loan application; and - Having a medical evaluation before the closing, including the whole family. If you are still trying to figure out where the line falls, refer to The Model Rules, which govern lawyers’ ethics nationwide. Often states themselves have rules of ethics on what constitutes legal capacity in the context of representing elderly clients. In Rhode Island, for example, we have the Rhode Island Rules of Professional Conduct. Rule 1.14 lays out what a lawyer must do if he suspects that a prospective client lacks legal capacity. Although the rule doesn’t target elder law attorneys specifically, Comment 1 to the Rule states in part: “it is recognized that some persons of advanced age can be quite capable of handling routine financial matters, while needing special legal protection concerning major transactions.” What is a “major transaction”? A reverse mortgage would be a major transaction. This comment recognizes that there will be times when a lawyer will conclude that a client seeking to obtain legal representation in procuring a reverse mortgage loan lacks legal capacity, but has the legal capacity for other contractual matters. If that is the case, there are a few legal options, including Powers of Attorney, Guardianships, Joint Ownership Arrangements and Revocable Trusts, that, if in place, allow for an attorney to represent an elderly client. Powers of Attorney If you feel like a client’s legal capacity could soon decline, a Power of Attorney should be created and executed immediately. Powers of Attorney essentially enable the named attorney-in-fact to “step-into-the-shoes” of the principal, authorizing the attorney- in-fact to make financial decisions on the principal’s behalf. A family member or a trusted friend would be appropriate attorneys-in-fact, not the loan officer. A Power of Attorney needs to be executed while the elderly person has the legal capacity to understand what she is signing and the consequences of doing so. There are three types of Powers of Attorney: Durable, Non-Durable and Springing. Durable Powers of Attorney survive incapacitation, meaning that they are still “good” even after the older person looses their legal capacity. Non-Durable Powers of Attorney are the exact opposite: they terminate the moment the principal becomes incapacitated. On the other hand, Springing Powers of Attorney, only become effective upon the happening of a specific event that is specified in the document (such as becoming incapacitated). In the context of reverse mortgage lending, a durable power of attorney will always be helpful if capacity is questionable, preferably with a provision specific to the transaction, or in the least, to mortgaging property. Guardianships A more formal option to appoint an alternate decision maker is to file for Guardianship. Obtaining a Guardianship involves going through the probate courts. There are generally three types of guardianships: guardianships of the estate, guardianships of the person and plenary guardianships. Guardianships of the estate, which are sometimes called conservatorships, limit the appointed guardian’s authority to dealing with the incapacitated person’s assets. Guardianships of the person, give the guardian control over the ward’s person, meaning the authority to decide things like where the ward should live and whether or not to consent to medical treatment. Plenary guardianships, grant the guardian the power to make decisions over both the ward’s person and estate. Most states also permit temporary or limited guardianships. Mortgage originators need to keep in mind that the appointed guardian will need to obtain a “license to mortgage” from the Probate, Family or Surrogate’s Court, in order to obtain a reverse mortgage. Joint Ownership Arrangements and Revocable Trusts Powers of Attorney and guardianships are not the only options that are available. Joint ownership arrangements can also be used. These include: joint tenancies, and for married couples, tenancies-by-the entirety. Both of these have an important common factor: when one of the joint tenants dies, the other tenant automatically assumes full ownership and control of whatever property was owned. Creating a joint tenancy can be as simple as adding a name to a bank account or deed. However, when one creates a joint tenancy, complex financial, tax, and legal consequences result, which is why it is essential to consult a lawyer or financial professional for advice before creating one. In the context of reverse mortgages, both joint tenants must be competent or have a valid Power of Attorney in order to move forward, and both must qualify for a reverse mortgage. One joint-tenant may not mortgage without the other. A revocable trust is another option that is readily available to protect an elderly client’s assets. A close friend, relative, or even a bank’s trust department may act as trustee. In the event that a client would like to be her own trustee, trusts are routinely drafted to provide for a successor trustee in the event that the client becomes incapacitated. By definition a revocable trust can be modified as long as the settlor, or the person who created the trust, has the legal capacity to make and appreciate the consequences of such modification. In the case of reverse mortgages, trusts must include a specific power to mortgage and in virtually all cases, the assent of the lifetime beneficiaries. These requirements bring us right back to a need for capacity in the ultimate borrower. Reverse Mortgages and Legal Capacity Under the federal home mortgage program, HUD, legal representatives (guardians and attorneys-in-fact), may execute the legal documents needed for a reverse mortgage transaction, provided that the authority to do so was granted to them by the court or the Power of Attorney. The law requires that seniors receive counseling before they obtain a loan. Legal representatives must request counseling. Whether counseling sessions are between counselors and legal representatives, or counselors and the seniors directly, the reverse mortgage counseling code of ethics requires that all counseling sessions be by HUD-approved HECM counseling agencies. Counselors are trained to identify potential competency issues. Lawyers and medical professionals can help reverse mortgage originators assist seniors and their families to decide what options are best for them when facing incapacity. Conclusion Two words can sum up why legal capacity is of the utmost importance to the reverse mortgage industry: void and voidable. Should an elderly person enter into a contract for a reverse mortgage and be incapacitated at the time, then that contract becomes voidable, which means that he or she may disaffirm the terms of the contract. Another way to say it is: the contract becomes invalid. Whereas, if an elderly person is under Guardianship when he or she signs a contract, then that contract is void from the outset. A void contract means that it is unenforceable by either of the contracting parties. Failure to recognize that someone lacks legal capacity can result in a variety of consequences for mortgage originators, ranging from loss of the loan; loss of any advanced funds; and a negative impact on the reputation of all reverse mortgage originators. For those very reasons, it is imperative that mortgage originators keep the golden rule in mind: In order for a reverse mortgage or any contract to be valid, the contracting person must have the legal capacity to enter into the contract: whether it is the elderly person, the attorney-in-fact, the joint-tenant or the guardian. |
