It’s never too late to apply for a loan to cover the expense of opening or expanding a business, or for real estate investment. Many people remain active and successful entrepreneurs well into their 60s, 70s, and beyond.
However, lawmakers have viewed financial elder abuse as a growing concern, which has prompted the passage of legislation designed to protect seniors from being defrauded. Laws at the state level, such as the California Elder Abuse and Dependent Adult Civil Protection Act, offer broad definitions as to what constitutes financial abuse, and outline legal remedies for when it occurs.
These new laws, and the penalties for violating them, effectively identify senior borrowers as potential victims from the outset, while pointing the finger at lenders as potential perpetrators. This has forced lenders to vet their clients even more thoroughly than ever. As a result, Socotra Capital and many other commercial lenders are requesting an ‘acknowledgement of borrower health’ when dealing with clients over the age of 55 or 65, depending on the state.
When you ask a borrower for information about their health, this can be frustrating and embarrassing on a couple fronts. For one, you’re asking them to provide intimate personal information. Secondly, you’re requiring them to reach out to a reliable third party who can provide your firm with proof that they are healthy and have the necessary mental acuity.
When we specify “reliable third party,” we don’t mean a close friend or relative. Because of the way these laws and legal guidelines are structured, such borrowers must be evaluated by a primary care physician, licensed doctor, or attorney-at-law to determine their mental aptitude.
Whether it’s the result of a serious illness or manipulation, there are dire consequences for lenders who don’t require proof that older borrowers are fully in command of their faculties. If a lender fails to perform their due diligence, even though they likely had no reason to believe that a borrower was less than capable, contracts can be nullified and the lender held liable.
Regardless of the level of danger—real and perceived—faced by borrowers over the age of 55 or 65 laws passed to protect borrowers place the responsibility on lenders to ensure that the borrower can understand a contract.
The Equal Credit Opportunity Act prohibits lenders from discriminating by age, gender, race, and other attributes. No lender can tell a prospective borrower that they’re too old to apply for a loan, or decline them based on that alone.
But while the ECOA says you can’t discriminate against borrowers for their age, there are plenty of state laws and regulations that specifically discuss competence, and how it is determined for older potential borrowers.
For example, the California Probate Code and California civil code states that a competent person understands their rights, responsibilities, the risks, potential benefits, and consequences of their decisions. These standards are further elaborated on within California’s Due Process in Competence Determinations Act, which lists what determines a person’s capacity to enter a contract. It also specifies that mental and physical disorders can play a factor in limiting the competence of a person, but then states that a diagnosis of impairment is not enough to determine a person’s ability to sign a contract!
Essentially, if a borrower is showing signs of impaired short- and long-term memory, or struggles to remember where they are, legally they may not be allowed to sign a contract themselves. But lenders cannot make that judgement for themselves! If we are to perform our due diligence to fully protect a client, we must rely on a qualified third party to provide us with documentation confirming their ability to sign a contract.
Nobody likes to have their competence brought into question. And no lender wants to complicate the lending process or risk angering borrowers. Unfortunately, the nature of these laws essentially forces lenders to take these additional steps.
Socotra Capital currently requires that all borrowers over the age of 65 in California, and 55 in Nevada, obtain an acknowledgement of borrower health from their doctor or other qualified third party. In doing so, we fulfill government requirements for ‘protecting’ our borrowers, while ensuring the well-being of our investors and our business.
If you’re intending to add this requirement to your loans, be respectful when explaining your rationale for incorporating this document into your due diligence practices. Despite the potential setbacks, it is worth the effort of going the extra mile to protect your business, and potentially saves all involved parties a lot of legal grief in the future.