Mortgage broker representation agreement
A mortgage broker representation agreement is an employment contract a broker and an owner or buyer of real estate, whether an individual or entity, enter into.
The broker’s client may be:
- an owner or buyer of real estate who seeks mortgage funding;
- a holder of a trust deed note who seeks a loan secured collaterally by the trust deed note; or
- a noteholder who seeks to sell a note which is directly or collaterally secured by a trust deed.
In the practice of mortgage loan brokerage, the broker and the client enter into a representation agreement when the client wants the broker to:
- obtain a mortgage secured by their real estate;
- arrange a loan collaterally secured by an existing trust deed note they hold [See RPI Form 104]; or
- sell an existing note directly or collaterally secured by a trust deed. [See RPI Form 112]
The representation agreement obligates the client to pay the broker a stated fee when the broker has fully performed or is otherwise entitled to a fee under the terms of the representation.
Written fee agreement
A broker and their agents prepare a mortgage broker representation agreement form when they come to an agreement with a client to provide services, for a fee, to:
- arrange mortgage financing to fund the purchase of real estate;
- refinance an existing mortgage; or
- further encumber a property to obtain cash. [See RPI Form 104]
On entering into a mortgage broker representation agreement with exclusive right-to-borrow, the client employs the broker to act on their behalf to locate a lender and arrange funding secured by:
- a property to be purchased; or
- a property or trust deed note the client owns or holds. [See RPI Form 104]
The exclusive right-to-borrow agreement grants the broker sole authority to act as the client’s representative to solicit lenders and locate one who will originate a mortgage (or collateralized loan) on terms and conditions the client seeks.
It also specifies the fee amount the client agrees the broker will receive and the conditions to be met for the broker to earn and be entitled to collect the fee.
Formal documentation of an obligation to pay a fee — a written employment agreement the client signed — is the legislatively enacted and judicially mandated requisite to the right to enforce collection of an earned brokerage fee from the client.
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Analyzing the mortgage broker representation agreement
A broker and their agent use the Mortgage Broker Representation Agreement — Exclusive Right to Borrow published by Realty Publications, Inc. (RPI) when entering into an employment with a buyer, an owner of real estate or a holder of a trust deed note, to act as their sole agent for a fixed period of time. The form authorizes the agent to diligently arrange a mortgage secured by the real estate or trust deed note. [See RPI Form 104]
The Mortgage Broker Representation Agreement — Exclusive Right to Borrow contains:
- Representation commitments: the representation period, broker objectives and the amount of any buyer’s or owner’s trust fund deposit are listed [See RPI Form 104 §1];
- Addenda: a credit application, loan purpose statement, acknowledgement of changing conditions, and space for other addenda are included in a checklist [See RPI Form 104 §2];
- Brokerage fee: the amount of the broker fee the client agrees the broker is to receive for their services is entered [See RPI Form 104 §3];
- Mortgage terms: repayment terms for the funds the buyer or owner seeks to borrow [See RPI Form 104 §4];
- Real estate securing the mortgage: the type, address, recorded encumbrances, improvements, fair market value (FMV), property taxes and rental information are disclosed [See RPI Form 104 §5];
- Personal property included as collateral: a description, monetary value, interest and lender are given [See RPI Form 104 §6];
- General provisions: Broker and owner authorizations and a mediation provision are boilerplate [See RPI Form 104 §7]; and
- Signatures of the broker and buyer or owner. [See RPI Form 104]
Related article:
Disclosure of second fees
A broker initially representing a buyer or seller as a transaction agent in a sale occasionally further expects to also receive a mortgage broker fee for originating a mortgage called for in the sales transaction. Here, the broker uses a Disclosure of Mortgage Loan Originator Fee form to inform all interested participants in the transaction of the additional fee arrangements. [See RPI Form 119-1]
Consider a broker and their agent representing a buyer in a sales transaction. In addition to performing agency duties owed to the buyer, the agent intends to receive an additional fee in connection with the mortgage the buyer takes out to fund the purchase price.
To concurrently act as a sales transaction agent and mortgage loan originator (MLO) in expectation of two fees — each for different services — the broker and their agent need to comply with two tiers of law.
The first tier is the federal Real Estate Settlement Procedures Act (RESPA), also known as Regulation X. These federal regs are concerned only with consumer-purpose mortgages, not business purpose mortgages which are exempt as funding an investment, agriculture or business purpose.
RESPA imposes a no-service, no second-fee restriction on real estate brokers and agents who are already acting on behalf of a homebuyer-occupant or home seller (to a buyer-occupant) in a one-to-four unit residential real estate sales transaction. For transaction agents, a referral fee is unlawful activity in the context of consumer purpose mortgages.
When a broker is to receive a fee as a transaction agent, the broker may only receive a fee on the mortgage origination transaction when the broker (or their agents) performs significant services as an MLO endorsed DRE licensee. Thus, the brokerage office needs to perform meaningful activities required of an MLO in packaging the mortgage for funding.
Thus, a broker in a homebuyer transaction may only receive a second fee, in addition to their sales transaction fee, when they or their agents render significant mortgage origination services which otherwise are performed by an MLO or the lender.
A lender or transactional broker is compliant with the no-service, no-second-fee rule when the earnings the broker receives for the second service as an MLO are due for MLO services the broker or their agent rendered. [12 United States Code §2607(c)]
Second, state agency law requires the sales transaction broker receiving a fee in a transaction for any type of property or purpose who additionally receives an MLO fee to disclose to their client all forms of compensation they are to receive which flow from the transaction. Information disclosed includes the total dollar amount of the fees or other consideration and the source of the compensation. [See RPI Form 119]
However, when a broker acts as the buyer’s MLO, agency law requires the second fee to be acknowledged by all participants to the sale and mortgage transactions, including the buyer, seller and lender. [See RPI Form 119-1]
Brokers or their agents have 24 hours after undertaking the mortgage related activity, when performed in expectation of a second fee, to disclose the second fee arrangement and obtain the consent of all participants. Consent precedes any further representation of the client. [See RPI Form 119-1]
Related video:
Analyzing the disclosure of mortgage loan originator fees
An agent uses the Disclosure of Mortgage Loan Originator Fees; By a Sales Transaction Broker published by RPI when acting as a transaction agent in a sale of property and receiving an additional fee for arranging a mortgage related to the transaction. The form allows the agent to disclose to all parties the receipt of a mortgage-related fee in addition to a sales fee on the transaction. [See RPI Form 119-1]
The Disclosure of Mortgage Loan Originator Fees; By a Sales Transaction Broker contains:
- Facts: the type of transaction, date of the agreement, relevant real estate, and identities of the buyer, seller and lender [See RPI Form 119-1 §§1 and 2];
- Mortgage transaction related to the sale: the purpose and principal amount of the mortgage [See RPI Form 119-1 §3];
- Disclosure of mortgage loan originator compensation: the source, form and amount of the broker’s additional MLO fee [See RPI Form 119-1 §§4 and 5]; and
- Signatures of the broker, buyer, seller and lender. [See RPI Form 119-1 §§7 through 10]
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