LPOA: The Remote Closing Tool Few Are Using

Seeking to offer contactless closings during the COVID-19 pandemic, title insurance providers have quickly advanced various solutions, such as drive-thru closings, remote online notarization (RON), and remote ink-signed notarization (RIN). While these tools were quickly authorized by state and local governments and approved for use by the government-sponsored enterprises (GSEs), one solution – limited power of attorney, or LPOA – has been slow to catch on.

The use of a POA – a legal document authorizing someone to act on your behalf – is not a new concept in real estate, or in general legal, business, or financial matters. The act of one person, known as the “principal,” to appoint another person, known as an “attorney-in-fact,” to make decisions in their absence is a concept that has been recognized for centuries.

Most people are familiar with a “durable” power of attorney, an agreement commonly used to handle the affairs of a person who becomes incapacitated in some way. This type of POA grants the attorney-in-fact the power to act in broad terms, takes effect immediately after a principal signs it, and remains in effect until the principal dies.

The use of a “limited” POA, rather, grants an attorney-in-fact the temporary authority to make specific decisions when the principal is unavailable. In a real estate transaction, an LPOA gives the attorney-in-fact specific powers to consummate the transaction if the principal is unable to personally execute closing documents.

This is also not a new concept, so why is the LPOA acronym being used so much these days? LPOA is garnering attention because the GSEs loosened some of their requirements in response to the COVID-19 emergency, and because remote online notarization (RON) technology is being leveraged to execute the LPOA.

However, it is also the remote closings tool that has gained the least traction since the pandemic altered the way we do business. Here’s everything you need to know about LPOAs, and the guidance you need to add this option to your remote closings arsenal.

Risky business

“The routine use of POA has traditionally been discouraged by title insurance underwriters,” said Danielle Kaiser, Vice President and Eastern Regional Underwriting Counsel for North American Title Insurance Company (NATIC), a member of the States Title family of companies.

According to Kaiser, underwriters’ reluctance is due to the high propensity for fraud in transactions where POAs are used:

“Transactions involving POAs warrant high scrutiny. They may open the door for fraud or for the principal to claim they did not, in fact, give authority to the attorney-in-fact. For example, I may give POA to you, with the intent for you to use it only on this narrow transaction, but then you go and use it to sign a second mortgage. Or you could actually do what I authorized you to do, but then later, I go into foreclosure, and I could accuse you of not actually having had the authority to sign documents on my behalf.”

Any of these scenarios could result in a title claim, “and the transaction would be a total loss,” Kaiser noted.

For these reasons, “lenders are also risk-averse when it comes to POAs,” Kaiser said. In addition, “lenders are concerned because the government-sponsored enterprises and mortgage aggregators aren’t necessarily on board with the use of it, either.”

LPOA best practices

Acknowledging these concerns, title insurance underwriters quickly issued guidance prescribing best practices and requirements for using LPOAs during the national emergency. To empower those who wish to implement this tool, the States Title family of companies recommends that these procedures be followed:

• The POA should be executed, witnessed, and acknowledged or notarized in accordance with applicable state laws, which vary in their requirements.
• The POA should be transaction-specific, and include the legal description of the property, the names of the seller and buyer, and the approximate sales price. It should clearly state the specific powers to execute all closing documents, mortgages, deeds of trust, promissory notes, and other loan documents.
• The POA should contain an expiration date automatically terminating its validity. The date should be in the relatively near future, but also allow enough time for the transaction to close if it is delayed – a six-month expiration date is recommended.
• Any party with a financial interest in the transaction – e.g. a real estate agent or employee of the loan originator – is not permitted to serve as the attorney-in-fact.
• The POA should be obtained as early as possible in the title agent’s file intake process. The agent should obtain an affidavit from the attorney-in-fact stating that:
  • the POA is in effect and has not been revoked by the principal
  • the principal is not deceased
  • the principal is competent and has not been deemed legally incapacitated
  • the principal has not filed for bankruptcy
• The agent should also confirm by phone with the principal their desire to execute the POA and its validity, preferably by email, and document this confirmation in the closing file.
• Finally, the agent should record the POA and attorney-in-fact affidavit prior to the closing.
• Closing or loan proceeds should be made payable to the principal or deposited or wired into bank accounts belonging to the principal.

Fannie and Freddie’s ‘flexibilities’

Prior to the COVID-19 emergency, the GSEs’ single-family seller and servicer guides limited attorneys-in-fact to people with a personal, familial, or fiduciary relationship with the principal. However, once COVID-19 was declared a pandemic and states began to issue shelter-in-place orders, Fannie Mae and Freddie Mac issued “temporary flexibilities” allowing individuals employed by a title insurer (or title agent issuing the title policy if their insurer has issued a closing protection letter relating to the transaction) to serve as attorney-in-fact.

Fannie and Freddie are also requiring lenders to give sellers and settlement agents an overview of how the LPOA will be used and review with the borrower the final terms of the loan, to ensure all parties understand and agree to the terms of the transaction.

The guidance issued by Fannie and Freddie differ slightly from there. 

Originally, the GSEs’ temporary policies extended to loans with application dates on or before May 17. On May 5, the Federal Housing Finance Agency extended the flexibilities “until at least June 30,” so that deadline may change if the COVID-19 emergency persists.

Contact-free: The way to be

Ultimately, lenders must approve the use of an LPOA by a borrower. If the lender does not approve of its use, it may not be used. Title companies are working to educate their lender customers about the temporary flexibilities afforded during this difficult time.

“We’re seeing that many parties prefer a contact-free closing experience, and LPOA is one tool that can be used to give consumers the closing experience they are looking for right now,” Kaiser said.

On a recent October Research webinar, “Evolving Lender Relationships,” mortgage executives discussed the ways title companies have worked to empower their lender customers during the COVID-19 crisis and keep business flowing.

“I’m so impressed with the creativity of this industry,” said Landy Liu, General Manager of Better.com. “The pandemic has sparked a new level of cooperation and collaboration across the title industry. The title industry has stepped in to provide insight and clarity where there is ambiguity. County closures and closing challenges have spurred collaboration between better settlement services and other title agents to work together to facilitate closings.”