Many lenders have no restrictions on whether loan documents can be signed by individuals under powers of attorney. We recently reviewed whether guidelines would be wise.
This article deals with powers of attorney granted by individuals, not powers of attorney granted by companies.
The starting point is, that there is no doubt that a valid power of attorney can be created, and so long as the power of attorney is registered, the attorney can sign documents in relation to land. There are statutory protections for people dealing with attorneys. However, it is likely those statutory protections won't save lenders who have allowed the attorney to enter a transaction which the lender knew or ought to have known was not for the benefit of the donor – the person who granted the power.
Attorneys are also prohibited both under the general law and legislation from using their power to benefit themselves unless there is an express clause is the power allowing the attorney to do so.
We therefore conclude that there are a few key issues lenders should review when documents are signed under power of attorney.
- Double check that the transaction is a prudent one for the borrower.
- Review whether the attorney is likely to have exercised undue influence over the donor's decision to borrow or guarantee.
- Ensure that the attorney isn't deriving a benefit unless the power clearly authorises this. Even then, you may not want to lend in these circumstances because this implies that the transaction may be in some way tainted.
The increased focus on prompt approvals makes it difficult for lenders to consider transactions on a case by case basis. Formula lending obviously brings with it risk. The challenge for lenders is to identify mechanisms to highlight risk transactions so that they can be considered on a case by case basis.
The fact that a power of attorney is being used may only come to light at the time when documents are signed. Accordingly, settlement teams should be instructed to refer to credit if documents are signed under power of attorney.
Example: Mary is aged 80 and her son obtains a power of attorney. The son convinces Mary to borrow on a reverse mortgage and uses the power of attorney to sign. The son has told Mary that some of the money will be used to maintain her lifestyle and some will be used by the son for his own purposes. Only the attorney is ever subject to the 100 point check (or in Queensland the identification of mortgagors). The son takes much of the money for his own purposes. It is more likely than not, that this transaction will be set aside as unconscionable on the basis that the lender knew or ought to have known that the son was exercising undue influence over Mary and that the transaction was an imprudent one for Mary.
You will be able to imagine many examples that are not confined to the reverse mortgage world. Powers of attorney should be highlighted when identified by settlement teams and the proposed loan reviewed.
There are cases where the use of a power of attorney will be entirely appropriate – eg borrower overseas. However, simply because the borrower is sick or unable to sign, is not by itself a sufficient justification without examining the benefit and whether there has been undue influence.
Usually where a borrower or guarantor is overseas, it will be practical to obtain a fax confirmation from the borrower or guarantor specifically authorising the attorney to enter the specific transaction.
Warning bells would not be appropriate in circumstances where the power of attorney is given for the specific purpose of entering the transaction or for other self evident reasons.
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Sydney |
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Jon Denovan |
t (02) 9931 4927 |
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.