A few weeks ago, I ran into a situation that made me stop and think about something many families probably never consider.
An elderly gentleman had signed a Durable Power of Attorney in 2024. His attorney had recommended that he do it as a precaution, while he was still capable of making his own decisions so that someone he trusts could help manage her affairs if her health declined in the future.
It seemed like exactly the right thing to do.
Fast-forward to today.
The gentleman has since been diagnosed with dementia, and his family is now trying to obtain a reverse mortgage. Because of his current condition, the Power of Attorney has become very important.
And this is where things get complicated.
The lender needs to be satisfied that the Power of Attorney was valid when it was signed. The question is not simply whether the man is competent today. The question is whether he had the mental capacity to understand what he was signing back in 2024.
In this case, the attorney who prepared the POA and the man’s daughter both say that, at the time he signed it, he gave every indication that he was completely cognitive and understood what he was doing.
The attorney has even provided a letter explaining that he prepared the POA and believed the borrower was competent when he signed it.
But the lender is still asking for additional medical documentation regarding his competency at the time the POA was executed.
This isn’t the first time I have encountered this problem.
Several years ago, I had another reverse mortgage where an elderly borrower had a Power of Attorney prepared by her attorney. In that case, the attorney provided a detailed, two-page letter explaining that she had prepared the POA and that the borrower was competent when she signed it.
At the time, the lender told me several times that everything appeared to be in order and that the closing papers were only a few days away.
Then, unexpectedly, the loan was declined.
The borrower needed the money, and I felt terrible that after all the work the family had put into the transaction, we couldn’t get the loan completed. My company ultimately loaned the daughter $25,000, interest-free, to help the family until the home could eventually be sold.
The borrower passed away about two years later, and the daughter repaid our company. That experience stayed with me.
Now, I am seeing a very similar issue again. It raises an important question:
When an elderly person signs a Power of Attorney as a precaution against future incapacity, should there also be medical documentation showing that the person was mentally competent at the time?
I don’t think there is a simple answer.
A Power of Attorney is designed to be a planning tool. You create it while you are capable of making your own decisions so that someone you trust can step in if you later become unable to manage your affairs.
But nobody may be thinking about a future reverse mortgage, bank transaction, or other financial matter that could require proof of capacity years later.
And a doctor who examines someone today cannot simply go back in time and personally determine exactly what that person’s mental condition was on the day the document was signed.
That is what makes this situation so difficult.
It is also important to understand that being elderly or even having a medical condition does not automatically mean someone lacks the capacity to sign a legal document. The issue is whether the person understood the nature and consequences of what they were signing.
HUD’s current HECM guidelines do recognize the use of qualifying durable Powers of Attorney in reverse mortgage transactions, including circumstances involving a borrower who lacks legal competency. The POA must meet specific requirements. (HUD Global)
But lenders may still need sufficient documentation to satisfy their underwriting and legal requirements. So what would I do differently?
If I were signing a Power of Attorney today, I would want my doctor to document that I was mentally competent to understand and execute the document at the time I signed it.
I would also want the attorney preparing the POA to document that he or she met with me and believed I understood what I was signing. I’m not saying that everyone legally needs to do this. I’m saying that after seeing what can happen years later, I would want that documentation for myself.
Because it is one thing to say: “Everyone knew Dad was fine at the time.”
It is another thing to be able to produce documentation years later showing that he was. There is an important lesson here for families with aging parents:
Don’t just plan for the possibility of incapacity. Think about how you will document your capacity while you still have it.
A little extra documentation when everything is going well may save a great deal of frustration later.
This article is for general educational purposes only and is not legal or medical advice. Questions about Power of Attorney documents, mental capacity, and documentation should be discussed with an attorney and, when appropriate, a medical professional.
