A debate is simmering in the mortgage industry about whether mortgage brokers who arrange loan transactions act as agents of potential borrowers, or whether they are merely middlemen without agency responsibilities. The compensation structure by which mortgage brokers are paid fees by both borrowers (origination fees) and lenders (yield-spread premiums) has fueled the fire of this debate. * When brokers are paid commissions by both parties to a loan transaction, confusion results about whom the brokers actually "work for." Unfortunately, there is little legal guidance to answer the question "Whom do mortgage brokers work for?" There is some case law, and a few states have enacted laws on the issue, but for the most part, the law is unclear about whether mortgage brokers represent borrowers, lenders, or neither. * As a result of the ambiguity in this area, mortgage bankers, brokers and mortgage industry regulators (including lawmakers) should familiarize themselves with the existing laws and cases that have considered brokers' duties and responsibilities. Understanding the law is crucial in light of recent economic events in the mortgage market (e.g., the spike in foreclosures and subprime market meltdown). It is also important because of increasing media criticism of mortgage brokers, (see, for example, James Hagerty, "Mortgage Brokers: Friends or Foes?," The Wall Street Journal, May 30, 2007; and Ruth Simon and James R. Hagerty, "Debt Bomb: Inside the 'Subprime' Mortgage Debacle-The Middlemen: Mortgage Mess Shines Light on Brokers' Role," The Wall Street Journal, July 5, 2007).
Finally, greater understanding is needed in light of the high number of consumer complaints about the activities of mortgage brokers (see, for example, the State of Maryland's Regulatory Guidelines for Mortgage Lender Licensees, dated June 2005, which cites noncompliance with the state-mandated broker agreement as being the No. 1 regulatory violation).
This article compiles and describes cases and statutes placing fiduciary duties on mortgage brokers, and suggests an emerging trend toward increasing the duties owed by mortgage brokers to their borrower customers.
Are mortgage brokers middlemen or agents?
Currently, few laws on the books specifically outline the fiduciary duties of mortgage brokers. Independent mortgage brokers occupy a somewhat undefined space in the commercial world, being positioned between lenders and borrowers while usually maintaining that they represent neither.
The National Association of Mortgage Brokers (NAMB), McLean, Virginia, insists that "the consumer is the decision-maker, not the mortgage broker"-implying that fiduciary duty should not and cannot be owed to the borrower by the broker. Despite NAMB's position, the law of principalagency relationships, as it has been applied to mortgage brokers by various courts, has often imposed fiduciary duties on brokers.
Agency creates a fiduciary relationship
Agency is a fiduciary relationship that results from the consent by one person (the principal) to another (the agent) that the other (the agent) act on his/her behalf or subject to his/her control. An agency relationship can be created either expressly by oral or written agreement, or it may be implied through conduct.
For a practical example, when a mortgage broker tells a prospective borrower that he will obtain the best loan or the best rate and the borrower relies on him to do so, an agency relationship may result from the broker's conduct.
Fiduciary duties accompanying the agency relationship include the duty of loyalty and the duty of care. The duty of loyalty is the obligation undertaken by the fiduciary (the agent) to exercise his power in a manner that he believes in good faith will best advance the interests or purposes of his principal, and conversely, not to exercise his power for personal benefit. The duty of care requires the agent to act in good faith, as one believes a reasonable person would act, in becoming informed and exercising the power of a fiduciary or agent. …