The accurate representation of mortgage terms
The essential terms of a mortgage are to be disclosed to the borrower by a broker soliciting or arranging a mortgage.
For example, consider a real estate broker who advertises they can arrange mortgages with a low monthly payment schedule — a “bait and switch” advertising trick, as mortgages of the type advertised are not really available. A borrower, seeking a mortgage with the low payment schedule advertised by the broker, retains the broker to perform these services.
The borrower asks specific questions of the broker concerning the interest rate, late charges, due date, the final balloon payment and mortgage closing costs.
The broker tells the borrower the balloon payment will be “small.” The broker further misrepresents the probable interest rate and the day of the month on which late charges are incurred. The broker provides the borrower with “approximations” of the closing costs that are significantly lower than the actual closing costs. The broker also fails to accurately disclose other important mortgage aspects, such as that the monthly payments are interest only, or that late charges are equal in amount to the monthly interest payment.
Further, the financial disclosure statement the broker prepares and hands to the borrower is lengthy and contains complex wording. Rather than reading the disclosure statement, the borrower relies on the broker’s oral representations and signs the mortgage documents.
On closing, the borrower ends up with a mortgage with less favorable terms than verbally represented by the broker. The borrower incurs additional and unexpected expenses, such as high late charges, an early due date and graduated monthly payments. The additional expenses ultimately create an excessive financial burden for the borrower. The borrower defaults on the mortgage and the secured property is sold at a foreclosure sale.
Later, the borrower discovers the broker was aware of the actual mortgage terms and costs for origination before the borrower signed the mortgage documents.
Here, the broker’s failure to disclose the actual interest rate, the exact amount of the late charge, the size of the balloon payment and the actual closing costs breached the broker’s agency duty owed to the borrower.
The borrower can recover all their money losses caused by the broker’s misrepresentation and for failing to discuss important provisions in the mortgage documents. [Wyatt v. Union Mortgage Company (1979) 24 C3d 773]
As the borrower’s broker arranging a mortgage, a licensee needs to fully and accurately disclose all essential facts of the mortgage transaction which may affect the borrower’s decision to participate in the transaction. [Calif. Business and Professions Code §§10130, 10131(d), 10176(a), 10176(i)]
The broker’s duty to disclose, and their obligation to deal fairly with borrowers, commences on their first contact with prospective borrowers to solicit employment. Thus, the broker will disclose essential facts before entering into a listing agreement. [Realty Projects Inc. v. Smith (1973) 32 CA3d 204]
Even after the broker is employed as the agent of the borrower, their duty to disclose and provide accurate representation is not completely fulfilled by merely providing the mortgage documents to the borrower. The provisions in the documents need to be discussed with the client to ensure the client has an understanding sufficient to make a well-informed decision regarding the mortgage. [Bus & P C §10241]
Mortgage broker solicitation of a mortgage borrower
Mortgage borrowers and holders of trust deed notes frequently retain the services of a broker to represent them. The service they render is to locate a lender or trust deed investor who will make a mortgage or buy or lend on a trust deed note.
Typically, the mortgage broker solicits these borrowers and note holders seeking to represent them by locating institutional or private money lenders or investors and arranging the financing sought. When soliciting employment as a mortgage broker, the broker may not represent the existence of a willing lender when one does not exist.
Consider a real estate owner who contacts a broker to arrange a trust deed mortgage.
The owner informs the broker of their desired mortgage terms. The broker is asked whether they know of a lender willing to originate such a mortgage. The broker does not now know of a lender who would be willing to make the mortgage sought by the owner, but states they can arrange funding for this type of mortgage.
Based on these representations, the owner enters into a mortgage broker listing with the broker. [See RPI Form 104]
The broker’s attempts to locate a lender are unsuccessful.
The owner later discovers the broker never knew of a real estate lender who would originate a mortgage on the borrower’s terms. The owner files a complaint with the Department of Real Estate (DRE), claiming the broker had a duty to honestly represent the fact that no lenders were known by the broker who made mortgages on the terms sought at the time the owner employed the broker.
The broker’s false claim that a lender existed is cause for the DRE to revoke or suspend the broker’s license. [Bus & P C §10177(d)]
Also, the broker may be fined up to $10,000, imprisoned up to six months or both. [Bus & P C §10185]
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This article was originally published November 2019 and has been updated.
