Using a Power of Attorney in Mortgage Lending

A well-prepared Power of Attorney can be a convenient way to close a mortgage loan when a borrower/buyer cannot attend the closing. It can also create additional risks for the Lender, so it is vitally important that Lenders carefully examine each proposed Power of Attorney to ensure that it is appropriate and valid for a particular transaction.

TITLE COMPANY APPROVAL

If a Title Company is closing the transaction, it is prudent to provide them with a copy of the Power of Attorney well before closing for their approval.

FANNIE MAE REQUIREMENTS

Even if a lender does not intend to sell a loan to Fannie Mae, following Fannie Mae requirements for a Power of Attorney can be a helpful guide. Fannie Mae’s requirements for a Power of Attorney are as follows:

• The Power of Attorney must be notarized
• It must be recorded in the Real Property Records of the county in which the property is located
• It must be valid at time of signing
  • Examine the Power of Attorney to verify that it does not contain a termination date prior to closing
  • Most closers attempt to speak with the maker at the time of closing to verify that the Power of Attorney is still in effect
  • Verify that the Power of Attorney is “Durable”– that it will remain effective even upon the incapacity of the Maker
  • Exception – If the agent is the borrower’s attorney or a relative of the borrower
    • Example – A single borrower may not give their Power of Attorney to another person to buy a home in the borrower’s name unless that person is the borrower’s attorney or the borrower’s relative.
    • Example – If there are 2 borrowers, one borrower may give the other borrower a Power of Attorney if at least one borrower will be present at closing, even if the co-borrower is unrelated or not the borrower’s attorney.
    • Lender, Employee of Lender, or Affiliate of Lender
    • Title Company or employee of Title Company
    • Real Estate Agent with a financial interest in transaction
    • There is an exception to these prohibitions, if certain conditions are met

    HOME EQUITY/HOME IMPROVEMENT LOANS

    In 2013, the Texas Supreme Court’s decision in Finance Commission of Texas v. Norwood clarified that if a Power of Attorney is used to close a Home Equity loan, the Power of Attorney must have been executed in the office of the Lender, a Title Company or an Attorney. Lenders may verify the location of execution in one of three ways:

    1. A written statement in the Power of Attorney acknowledging the place of execution
    2. An Affidavit from a person present at the Power of Attorney execution, stating the location of signing
    3. A statement in the notary block, stating the location of signing

    Using a Power of Attorney to close a Home Equity loan should be done very carefully. Fannie Mae will not purchase a Home Equity loan closed with a Power of Attorney.

    Although the Supreme Court’s ruling dealt specifically with Home Equity loans, the Court’s logic also applies to Home Improvement loans. If a Power of Attorney is used to close a Home Improvement loan, the Power of Attorney should have been executed in the office of the Lender, a Title Company or the office of an attorney.

    TEXAS STATUTORY DURABLE POWER OF ATTORNEY

    In Texas, the legislature has created a Statutory Durable Power of Attorney that is the widely used and accepted throughout the state. The form is available at Texas Estates Code 751.051. The form is “Durable” because the Power of Attorney will continue to be effective even if the maker becomes incapacitated.

    The Texas Statutory Durable Power of Attorney should be the preferred form for Lenders. Most Lenders are familiar with the form and it is easy to understand. While other forms of Power of Attorney may be valid, using alternative forms adds a layer of risk and these alternative forms should be carefully reviewed by the Lender, the Lender’s attorney and the Title Company.

    The Texas Statutory Durable Power of Attorney may be modified slightly to fit the circumstances for which it is being used. For example, if it is being used for a Home Equity or Home Improvement loan, a certification of where the Power of Attorney was executed may be added. There is also a space in the Statutory Durable Power of Attorney to describe its specific purpose.

    BAIRDLAW REVIEW

    Lenders who close loans through a Power of Attorney should have legal counsel review the form to verify that it has been properly prepared. Our firm regularly reviews Powers of Attorney for our clients. If you have concerns about a particular Power of Attorney, you may email it to docs@bairdlaw.com and we will verify that it is appropriate for a particular transaction. The email for our review should include:

    • An executed copy of the Power of Attorney
    • The type of loan contemplated
    • The names of all borrowers on the loan

    
    If you have any questions on Powers of Attorney, please give us a call at 210-828-5844.
    
    Sincerely,
    
    Michael Fritz Baird
    BairdLaw, PLLC
    242 West Sunset Ste 201
    San Antonio, Texas 78209

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