In October of 2007, Andrea Negroni wrote an article for Mortgage Banking Magazine titled “Mortgage Brokers–What Fiduciary Duties Exist?” Negroni provides a framework for mortgage brokers to begin learning about case law already on the books where courts have imposed fiduciary duties on brokers.
The National Association of Mortgage Brokers has been quite insistent that brokers cannot and should not owe fiduciary duties to their clients. However, the court cases that exist begin with the application of the principal-agent 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 or she 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 comes from the Latin word fiducia, meaning “trust.” A fiduciary is a person who has the power and obligation to act for another under circumstances that require complete trust, good faith and honesty. A fiduciary is said to have substiantially more knowledge and expertise in his or her area of specialization. A fiduciary is held to a standard of conduct and trust above that of a random person. Fiduciaries are obligated to avoid self-dealing and conflicts of interests in which the real or potential benefit to the fiduciary is in conflict with the best interests of his or her client.
For example, a mortgage broker must consider the best loan product for his or her client and not sell loan products on the basis of what brings him or her the highest commission. The best interest of the client must be primary, and absolute honesty is required of the fiduciary.
- Must act in borrower’s best interests with the utmost good faith and fair dealing toward them;
- Must disclose any and all interests to borrowers that are used to facilitate their request. That is, brokers must explain and determine that borrowers understand how everyone in the process benefits from the transaction;
- Must disclose to borrowers all material facts known to the broker that might reasonably affect their rights, interest or ability to receive the intended benefit; and,
- Must not steer or direct borrowers to accept a loan with a less-favorable risk grade than the grade they would qualify for under prudent underwriting standards. This is permitted, however, if borrowers are offered loan products within the risk catagory and choose the higher-risk-grade product after consideration.