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Mortgages: Brokerage Agreements
By Alvin Arnold, Esq.
To avoid disputes over a brokerage commission, it is prudent to have a written brokerage agreement setting forth the terms and conditions of the broker's employment, including the role the broker will play in the transaction. In some states, mortgage brokerage agreements are not enforceable unless they are in writing. However, even if a writing is not required, it can help in avoiding disputes.
Exlusive or Not Exclusive
A brokerage agreement can be non-exclusive (i.e., the borrower may seek financing on his own and through other brokers) or exclusive. If exclusive, the borrower is prohibited from using other brokers but can obtain a loan on his own. An exclusive brokerage agreement may go further and create an "exclusive right to broker," pursuant to which all loan applications must be made through the broker and the borrower is precluded from obtaining a loan directly.
If the agreement is non-exclusive, the broker is entitled to a commission only if the broker is the procuring cause of the financing. If the borrower and broker both initiate contact with the same lender, the broker's entitlement to a commission will turn on whether the broker was the procuring cause.
When Commission is Earned
Absent an agreement to the contrary, a mortgage broker earns a commission after introducing the borrower to a lender ready, willing and able to make the loan (i.e., issue a commitment) on the terms requested by the borrower. When that is the agreement, a commission may be due on the issuuance of a commitment on terms requested, even if the borrower does not accept the commitment or the loan does not close within the specified time frame—even if the failure to close is due to the imposition of additional conditions by the lender subsequent to the borrower's acceptance of the the loan commitment. Conversely, if the commitment deviates from the terms specified in the brokerage agreement, no commission should be due.
If Loan Does Not Close
From the borrower’s perspective, it would be best to provide that no commission is due if the loan does not close for any reason, including the borrower’s own default under the loan commitment. But to permit an applicant to avoid a commission when the failure to close is the borrower's own fault may be unfair to the broker; consequently, it is not uncommon for the brokerage agreement to require payment of a commission if the failure to close is due to the borrower's willful default under the commitment or his failure to accept a commitment on the terms requested.
A brokerage agreement with a willful default clause, however, does not end all disputes; questions arise sometimes as to the meaning of the phrase "willful default." For example, it has been held that a voluntary agreement between a borrower and a lender to cancel a commitment is not a willful default and so a broker might want a provision that a commission is due if the commitment is canceled by agreement.
Avoiding Disputes
How can the parties avoid a dispute over the meaning of the term "willful default?" The agreement might provide that no commission is due unless the failure of the loan to close is due to the borrower's willful default after the terms of the loan documents are agreed upon by the borrower and the lender. However, as loan documents are usually not finalized until the closing, this in effect abrogates the willful default exception.
The broker, on the other hand, may not accept a willful default clause but may agree that no commission is due if the loan does not close because specified conditions in the commitment that are beyond the borrower's control are not satisfied, e.g., if the appraisal is too low or the lender does not approve leases for the proposed project. The borrower then may insist that other conditions be included. For example, if an existing loan prohibits prepayment, the borrower may want a provision that no commission is due if the existing lender refuses to permit prepayment. Is a commission due if the loan closes but is not fully advanced? The parties might agree to payment of a portion of the full commission based on the amount of the loan that has been funded.
When Terms Other Than Requested
If the borrower accepts a commitment with additional terms or on terms that differ from those requested, the broker should still be entitled to a commission. Conversely, the brokerage agreement might permit the borrower to reject a commitment if it contains additional or nonconforming terms that are unacceptable to the borrower.
Absence of an Agreement
Generally, in order to recover a commission a broker must be employed by the borrower. The burden of proving the existence of an employment contract is on the broker. Absent a contract, a borrower may still be liable to a broker on a quantum meruit basis, i.e., on a showing that the broker rendered services under circumstances implying a promise to pay the value of the services. (In some jurisdictions, a broker is entitled to a commission only if licensed.)
Party Responsible for Commission
It is important for both parties to be clear about who is responsible for the commission. If the specific borrower has not yet been determined, it may be important to include a description of potential borrowers and specify that the one signing the mortgage will be liable for the commission.
If the borrower is an entity with limited assets, whose principals will not be responsible for the commission, the broker may require a guaranty or some form of security for the commission. The borrower, on the other hand, should be careful to observe proper formalities in executing and administering the brokerage agreement to avoid personal liability.
Alvin Arnold is the editor of the Monitor. He can be reached at (212) 885-8235.
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