Elder Law Reverse Mortgages and Legal Capacity

Posted on June 27, 2008 by John Gosselin

Getting to Sure: Legal Capacity and the Elder Lawyer in the Context of Reverse Mortgage Transactions

Introduction: Legal Capacity and the Elderly

 In general, the law presumes that all adults have legal capacity unless proven otherwise. The legal standard of proof is “clear and convincing” which means, in essence, that the law sets the bar pretty high for those wanting to prove that someone is incapable of being a legal person and, therefore, unable to be a client or enter into contractual arrangements. That being said, legal capacity is situational, as is the required degree of mental capacity, both depend on the proposed act. For example, a relatively low level of capacity is required for someone to create a valid will (individuals making a will only need to show that they understand that the document they are creating is a will), while a higher level of capacity is needed for providing informed consent to medical care. The degree of legal capacity necessary to establish a lawyer-client relationship lies somewhere between the capacity of a will-maker and that needed to give informed consent to medical care. In order for prospective clients to ethically be considered legal clients, lawyers must be able to establish that the clients have sufficient legal capacity to both become the lawyer’s client, as well as having the legal capacity to take whatever legal action the client purports to do.

Medical Tests and Legal Ethics: What’s the Standard Measure of Capacity?

When dealing with elderly clients, the law’s general presumption of the client’s capacity may be inaccurate in many situations involving elderly clients. When family members (e.g. adult children), brings an aged person to an elder law attorney, in some instances they may be doing so because of some observed events or behaviors that suggest to them that the person’s mental faculties are declining. Such non-clinical observations while not determinative, they do raise the question of whether the person in question has the legal capacity. How then does an elder law attorney determine a prospective client’s legal capacity? 

According to Veda Johnson, who has been a geriatric nurse for ten years working in nursing homes and hospitals in Orlando, Florida, where the elderly population has been growing rapidly for the last ten to fifteen years, assessing the mental acuity of an elderly patient is not simple. There are several kinds of tools in the form of scales or assessments, like the Glasgow Coma Scale for example, that are used to evaluate how “alert and oriented” an elderly person might be. Unlike nurses, lawyers seeking to determine whether elderly clients have sufficient legal capacity do not have any professional tools available to them. There is no standardized procedure or even a universally accepted legal definition. And in both the medical arena and the legal field determining if a person is losing her mental faculties is never a yes-or-no question. 

Each lawyer must make an independent, holistic determination on a case-by-case basis, each time weighing all the facts and circumstances.   Some attorneys rely on their personal observation of the older person plus comments from those who spend time with the older individual. But, determining if one has legal capacity is not the same as rationally determining what makes sense to the according to attorneys’ predilections. So attorneys must be aware of keeping their own prejudices at bay when making a determination. While bizarre or inexplicable behavior can be interpreted as evidence of diminished capacity, eccentricity is not the same as incapacity. But, as one might imagine, the dividing line can be exceedingly difficult to draw. 

The Model Rules governing lawyers’ ethics nationwide are primarily aspirational, but should at least guide lawyers’ decisions about where the line falls. States may also have ethic rules on what constitutes legal capacity in the context of representing elderly clients. In Massachusetts, for example, Rule 1.14 of the Massachusetts Rules of Professional Conduct lays out what lawyers must do if they suspect that a prospective client lacks legal capacity. The rule does not specifically speak to elder attorneys; however, 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.” Entering into a reverse mortgage transaction is more complex than contracting for other secured loans (like home equity loans, for example) so a reverse mortgage can be considered a “major transaction.” 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 legal capacity for other contractual matters. If this is the case, there are a few options for lawyers that allow them to represent an elderly client.

Powers of Attorney

One option is obtaining a power of attorney. There are three kinds of power of attorneys. There is the non-durable power of attorney which terminates when the person who created it becomes legally incapacitated. A durable power of attorney, on the other hand, continues to be valid even after the principal becomes incapacitated. The third kind of a power of attorney is the springing power of attorney which becomes effective only upon the happening of an event that has been designated in the terms of the document. All powers of attorney terminate automatically upon death.

It is better for seniors to create power of attorneys when they are legally competent and in good health. But, if there are already health problems, early signs of dementia or Alzheimer’s disease, one should be created immediately. By creating a durable power of attorney for finances, with gifting authority, for example, seniors can appoint someone else to handle their personal finances, including the authority to transfer your assets even after they become incapacitated.

Guardianships

Guardianships are a more formal option than powers of attorney. They involve going through a legal process in the probate courts. There are generally three types of guardianships. First, guardianship of the estate, or as it is also known, conservatorship, which is limited to substitute decision making for matters concerning the incapacitated person’s property (assets). Second, guardianship over the person, which gives the guardian control over decisions affecting the “person’s person”, such as: where to live or whether to consent to medical treatment. Third, plenary guardianship, which grants guardians the power to make decisions over both the person’s property and person. Within the context of these three forms of guardianships, most state statutes permit probate courts to appoint limited guardians; which means, as the name implies, that such guardians have no more power than is necessary to meet the needs of the persons over whom they are appointed.

Joint Ownership Arrangements

Powers of attorney and guardianships are not the only ways of making sure that an older person will have a mechanism in place for taking care of financial affairs when that person is no longer able to do so. Joint ownership arrangements can also be used. The specific forms include joint tenancy, tenancy in common and, for married couples, tenancy by the entirety. The types of joint ownership arrangements have many characteristics in common. One such feature is what happens when one joint owner dies - the other owner automatically assumes ownership and control of what was owned in common. Creating a joint tenancy can be quite simple. Adding a new signature on a bank account or changing a deed on real estate may be sufficient; no special forms are needed. But, creating a joint tenancy can have complex financial, tax and legal consequences, thus, it is probably advisable to consult a lawyer or financial professional for advice before creating one. 

Revocable Trusts

Another alternative to guardianship is creating a revocable trust to hold the older person’s (a.k.a. settlor’s or grantor’s or trustor’s) assets. The trustee of the trust might be a close friend or relative or perhaps a bank’s trust department or some other financial institution. The trust may be structured with the settlor as the sole trustee or in conjunction with another trustee who will take over completely if the settlor is no longer willing or able to handle financial matters. By definition, a revocable trust can be modified as long as the settlor is legally capable of making that decision. If the settlor becomes legally incapacitated, and there’s no alternate settlor, then the trust becomes irrevocable and only terminates upon the settlor’s death.

Reverse Mortgage Transactions and Legal Capacity

Like lawyers, lenders serving seniors 62 or older who do not have the legal capacity to enter into a reverse mortgage transaction can do so with the person or entity appointed in a durable power of attorney or with a court order guardian. Under the federal home mortgage program, HECM and HUD, guardians and attorneys-in-fact or agents named in durable powers of attorney (together referred to as legal representatives) may execute the legal documents incident to a reverse mortgage transaction, provided that they have the authority to do so by court order or per the terms of the power of attorney contract. Part of any reverse mortgage transaction also involves counseling. The law requires that seniors receive counseling before they obtain a loan. Legal representatives can and must request counseling. Whether counseling sessions are between, counselors and legal representatives or counselors and seniors directly, the reverse mortgage counseling code of ethics requires that all counseling sessions, by HUD-approved HECM counseling agencies be confidential in any event.

Reverse mortgages depend on borrower eligibility and living arrangement so it may be harder for a trust or joint owner of a property to become a borrower in a reverse mortgage loan. The trust, for example, would have to be structured in a way that left the 62-year-old prospective borrower/settlor as owner of the property to be mortgaged and the home must also be the settlor’s primary residence. As far as joint ownership, both owners would have to be reverse mortgage eligible. Thus, using revocable trusts or joint ownership as mechanisms to protect seniors at risk of losing legal capacity has some drawbacks. An elder lawyer and financial professional can help seniors and their families decide what options are best for them.

Getting to Sure in an Unsure World: A Charge for Elder Lawyers

Representing elderly clients involve many unique issues for legal and financial professionals. Assessing legal capacity is one of those issues. Many elder attorneys have developed intake forms that include questions which are useful in assessing the legal capacity of prospective clients (as well as run-of-the-mill questions about finances and ownership.) Asking what seems like simple questions like “What day is it today?” as well as questions about medications can be good when trying to decide: (a) does this person have the required legal capacity become a client; and (b) can this person enter into a major transaction like a reverse mortgage? At the end of the day the answers provided may merely help lawyers become more sure (or less certain) about the prospective client’s legal capacity, but at least lawyers would be doing their part in “getting to sure” about that client’s mental capacity as a legal matter.

Gosselin Law provides comprehensive elder law, estate planning and reverse mortgage services.  These services include Medicaid applications; emergency elder law matters; real estate transactions; guardianship; estate tax matters; wills; trusts; Medicaid annuities; Annuity planning for Medicaid; Medicaid trusts; special needs planning and related areas.  Gosselin Law can be reached at 781-729-0313 or toll free 877-325-6746.  Serving Massachusetts and New Hampshire.

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Reverse Mortgage - Beer, Donuts & Golf?

Posted on June 15, 2007 by John Gosselin
Massachusetts lawyers act as title companies in virtually all real estate transactions in Massachusetts. This has been the case for several hundred years. Not to bore you with history, but I need to set the scene, it all goes back to the China Trade when wealthy merchant marine captains would set out for years long voyages in search of fortune. While they were away they entrusted their Boston lawyers to conduct their business for them with the banks and protect their families generally. This led to lawyers in Massachusetts taking on the role of trustee for wealthy families, but also put them firmly in control of the transfer of real estate and bank relations. Until recently the Massachusetts Real Estate Bar called it "conveyancing", I guess to make it sound more British.
Whatever the case, lawyers as title companies and corporate title companies in most other states developed rapidly after World War II due to the large number of returning veterans seeking the American Dream. As mortgage lending became more commonplace and title insurance more lucrative for title insurance agents, lawyers embraced conveyancing as a money making practice area. For the first several hundred years of real estate closings in Massachusetts conveyancers were highly skilled technicians who were able to interpret the often cryptic records of land ownership left to us by our ancestors. It was tedious and persnickety work. The fees were based on the work performed by the lawyer and a lawyer could make a good day's wage for drafting mortgages and recording deeds. In the early 1970's title insurance became a required element for most mortgages. Title insurance for the most part is an assurance to a mortgage lender that it is in first lien position on a particular parcel of land on which it has placed a mortgage lien. In its simplest form title insurance is what enables the American financial community to provide ready capital and reasonable rates to the market place as it helps to commoditize mortgages so they can be converted into financial vehicles on Wall Street.

The basic protection of title insurance is vital and beneficial to both mortgage lenders and their customers. In Massachusetts, virtually all title insurance is sold by lawyers as agents for the major title insurance underwriters, companies include: Ticor Title Insurance - Fidelity Financial; Stewart Title; Old Republic; LandAmerica (Lawyers & Commonwealth brands); and Talon Group - First American. Each of these companies offers a similar product developed in cooperation with the American Land Title Association which serves as the trade association for the title insurance industry.

Boy, this blog is really boring. Where's the beer, donuts & golf? Title insurance is sold in Massachusetts based on a formula of coverage per thousand dollars of loan amount or purchase price. There are essentially two core products, lender title insurance to protect the lender's interest and owner title insurance to protect the home owner's equity in the real estate. There are a few other bells and whistles, but it is essentially a vanilla product to consumers. Title insurance in Massachusetts is underwritten by lawyers by virtue of completing a title examination and reviewing the summary or title abstract to assess risk. Title insurance is paid for by the consumer as part of the closing costs. The other major closing cost paid by the consumer for title services is ordinarily paid in the form of an attorney fee. In my 17 years of working in the mortgage and real estate industries in Massachusetts not only has this fee decreased in nominal terms, but taking inflation into account it has actually decreased by more than 50%. Did he say attorney fees have decreased by 50% in real terms over the past two decades? Yup. What gives? Title insurance agents are paid a commission for underwriting and selling title insurance. A big, big commission. In Massachusetts, lawyers are paid an average of 70% of the title insurance premium in addition to their attorney fee. Lenders direct which lawyer will conduct which real estate closing. Lawyers who do closings have become specialized in handling large volumes of real estate transactions thanks to the Internet (for searching records) and transaction management systems (like the company I co-founded, E-Closing) to e-recording (like the other company I co-founded, SimpliFile). It can be a very financially rewarding business in Massachusetts, just like in the rest of the states where most closings are conducted either directly by the title insurance companies or by corporate style title companies (not lawyers). Closing lawyers want to close loans quickly, efficiently and profitably.

You said there would be beer, where's the beer? Due to a number of factors, such as the large number of law schools in Boston, the overall high profit in closing mortgage loans and the relative ease of entry into the closing business; conveyancing is a highly competitive business in Massachusetts. The most successful closing lawyers are expert marketers who can swing a golf club with bankers and tell great stories at the 19th hole (NOTE: for those that don't know, the 19th is where the beer can be found). They have attractive and persuasive staff calling on their customers with donuts and smiles, not unlike those Pfizer or Merck representatives with the trays of sandwiches and freebies for doctors. There is nothing wrong with any of this, it's how the forward mortgage and closing business is done. In addition, the lawyers will send potential borrowers to the lenders that they work with as a way to keep the skids greased and to show good faith in the relationship. The lenders rely on referrals from their closing lawyers and in many cases make it a declared ab initio to any new business.

My law practice includes, as you would expect, a significant number of mortgage lenders and banks that hire me to develop strategies for reverse mortgages, automate closing processes and conduct training programs for loan and branch staff. A few weeks back I was asked to meet with one of the leading mortgage companies in the Northeast (by dollar volume) to discuss making them a market leader in reverse mortgages. We discussed my role in marketing, training, product selection, etc. As compensation we discussed my role conducting reverse mortgage closings in the states where we are licensed for the title business (MA, NH, ME, RI, NY). I explained how my law firm has special expertise in this business. We treat reverse mortgage closings very differently than conventional mortgage closings. This is due, more than anything else, to the fact that we consider ourselves elder law lawyers first and not only lawyers engaged in the business of closing mortgage loans. We add significant value to every mortgage loan that we close through compassion, experience and patience. A reverse mortgage closing should be unlike any other closing.

First, we assist the borrower with understanding their estate planning and asset protection planning issues. Then, we evaluate their government benefits to determine the appropriate lending program and to counsel them on potential traps in the reverse mortgage lending process that may lead to adverse consequences. We call borrowers in the morning when they are most awake and can understand what we need from them. We plan two hours for each closing. We show up on time. W e s p e a k s l o w l y. AND LOUDLY. We bring felt tip pens to make signing easier for arthritic hands. We enlarge the document copies so tired eyes can actually read them. We speak English. We welcome them to have their children or best friend at the closing. We stop to drink the tea and stale cookies that we are offered. We ask about that Army medal proudly hung above the mantel. We touch their hands when they tell their life stories. We tell them about our kids and where our parents grew up. We tell them to call us if they have any questions (and we mean it). We bring their first disbursement checks to their bank for them and call so they don't worry about it getting in the bank. We thank them for their time.

The big mortgage company said that my thoughts on the subject were quaint but that "business is business" and they didn't have the time to coddle every borrower. "We need to fill the pipeline and get these numbers up, we want to be number one!!" "Ever read the Lorax by Dr. Seuss?", I thought to myself. They decided that they would continue to use the golf buddies of the company founder for closings, because, I quote "they will be able to refer us the reverse mortgage business to help us grow, our closing lawyers get business because they give us business and close deals no matter what." Ouch. Where are they going to find impoverished elders? The golf course.

When elders consider borrowing on a reverse mortgage many emotions become part of the equation. A good friend in the reverse mortgage business (he is actually "number one" in my book) always says "reverse mortgages are not sold to people, they are presented and it either makes sense or it doesn't." If mortgage lenders treat reverse mortgages as just another product in their arsenal and not as the special estate planning tool that it is, we will be seeing abuses of the elderly of epic proportion in the coming years.

NOTE TO MORTGAGE LENDERS (in Massachusetts and elsewhere): Make the connection between a compassionate elder law lawyer that cares about the protection and well being of the elder community and the closing of a reverse mortgage (invite them to go out with the title company or loan originator to check on the borrower's well being.) Be like those far away ship captains knowing that their loved ones are in the safe hands of a Boston lawyer focused on nothing more than their well being. Don't be swayed by what makes you happy in the forward world (beer, donuts, golf?), what will make you a happy lender in the reverse mortgage industry is tea, stale cookies and bingo.

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