This column first appeared in the San Antonio Express-News and on MySA.com on July 29, 2015.
Dear Mr. Premack: My mother is stricken with dementia, and I need to move her to a memory care nursing facility. The facility costs about $6,000 a month. She fortunately has about $4700 monthly income after taxes, so she’s about $1,300 shy of affording the bill. Part of her income comes from an annuity my father bought before he died; she gets the income from it, but can’t draw out a lump sum. Her house is paid up, worth about $300,000, and I think a home equity loan would help pay her bill. I am Agent in her Durable Power of Attorney, which I got from LegalZoom and she signed with a neighbor notary. I asked a bank about the equity loan, and they won’t accept this Power of Attorney. Why would it be a problem? Are there any solutions? – J.B.
Historically, equity loans were forbidden in Texas as unconstitutional. In the late 1990’s the banking industry pushed the legislature into passing an amendment to the Texas Constitution to authorize equity loans and reverse mortgages. The voters of Texas approved the amendment in 1997, and after some adjustments to the laws, home equity lending is now big business in Texas.
The wording of the Constitution, however, mandates that an equity loan be closed “only at the office of the lender, an attorney at law, or a title company.” Doing so would, theoretically, protect homeowners from putting liens against their homes in too casual a setting – like with a notary under pressure from a loan shark. Whether the restriction actually has that protective effect or not is a matter for debate, but the restriction exists nonetheless.
Equity lending is overseen by the Texas Finance Commission, which decided a borrower could close on a loan through the mail or through an agent acting under a Durable Power of Attorney (POA). Those procedures were challenged in court, and eventually the Texas Supreme court ruled – in Finance Commission v. Norwood – that the Financed Commission procedure was unconstitutional. The court recognized that using a POA is a well-established legal tool that can be used to close on an equity loan, so long as the constitution is honored. Since the constitution requires that closing the loan be at the lenders’ office, an attorney’s office or a title company’s office, and since the POA is part of the closing, the POA itself can only be used if it has the proper wording and was signed at the lender’s office, an attorney’s office or in a title company.
The bank won’t give her an equity loan over your signature as Agent because it is illegal for them to do so. The POA which you offered was prepared via the internet and was signed by your mother with a neighbor notary. It cannot, under the Norwood decision, be used to close on an equity loan because it was not signed at the lender’s, at the attorney’s or at the title company’s office. This is a major fault with documents downloaded on the internet, and is another reason to avoid Legal Zoom and its kind.
But you should not feel bad, since the Norwood decision has actually protected your mother by stopping you from making a poor financial choice. Borrowing the money to pay for your mother’s nursing care would be excessively expensive. Let’s say that you decide to borrow $62,000 against her house to cover 4 years of the $1300 shortfall. Current loan rates are around 5.8%. The $62,000 would actually be consumed in about 2 years because, in addition to the $1300/month nursing bill, you now have a loan payment of $1150/month. To borrow enough for 4 years the loan must be around $170,000, which would pay for her care and make the monthly loan payments. If she dies after 4 years, only about $130,000 of the home’s value will remain.
Compare that to selling the house now for $300,000. Put that money in the bank at 1% interest, and the net annual outlay to cover her nursing care is about $12,600. If she dies after 4 years, about $250,000 of the home’s value will remain. You have eliminated paying interest to the bank and have saved about $120,000. Talk to your mother’s accountant and talk to a Certified Elder Law Attorney about your next steps.
Paul Premack is a Certified Elder Law Attorney with offices in San Antonio and Seattle, handling Wills and Trusts, Probate, and Business Entity issues. View past legal columns or submit free questions on legal issues via www.TexasEstateandProbate.com or www.Premack.com.