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The Impact of Power of Attorney on Mortgage Transactions

March 24, 2025

Using a Power of Attorney in mortgage transactions can be both convenient and risky. It allows borrowers to authorise another person, known as the agent or attorney-in-fact, to act on their behalf in various legal matters, including the execution of mortgage documents. However, improper use or fraud can lead to serious consequences for all parties involved.

Understanding Power of Attorney in Mortgage Transactions

Power of Attorney (POA) is a legal document that gives one person the authority to act on behalf of another. In the context of mortgage lending, it is often used when the borrower cannot attend the closing due to incapacitation, military service, or being out of the country. There are several types of POA, each granting different levels of authority:

A limited or specific Power of Attorney is commonly used in mortgage lending. It allows the agent to perform specific tasks, such as signing documents for a particular property, for a limited time or under specific circumstances. This type of POA typically becomes null if the principal becomes incapacitated or dies. A general Power of Attorney grants broader authority but also becomes invalid if the principal is incapacitated. A durable Power of Attorney, on the other hand, remains effective even if the principal becomes incapacitated, making it suitable for long-term financial management.

POA Requirements for Closing

  • Notarization: The POA must be notarized.
  • Recording: In many cases, it needs to be recorded in the property's county records.
  • Validity: It must be valid at the time of signing.
  • Specificity: It should clearly state the intention to secure a loan on a specific property.
  • Agent Authority: The agent must have explicit authority to execute loan documents on behalf of the borrower.

For example, Fannie Mae requires that the POA be durable, recorded, and reference the specific property. This ensures that the agent has the legal authority to bind the borrower in the transaction.

Lender Policies and POA Use

  • Approved Agents: Most lenders do not allow employees of the lender or title company to act as agents under a POA for the transaction, except under certain conditions.
  • Valid Purpose: The use of POA is generally accepted if the borrower is incapacitated, serving in the military, or has a valid reason for absence.
  • Risk Assessment: Lenders must carefully assess the risks associated with POA usage, as improper use can lead to invalid transactions and legal disputes.

For instance, Stacey Sprain notes that while POA can streamline mortgage closings, it increases risk, especially if not properly executed or used without a valid reason. Similarly, Rob Steeg emphasizes the need for caution when dealing with POAs, particularly in cases of self-dealing.

Case Study: Risks of Self-Dealing

The case of Richland State Bank v. Benny L. Depingre et al. highlights the risks of self-dealing.

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