June 4, 2006
The Hidden Dangers Of Broker Agreements
As a mortgage broker I come across wholesale broker agreements daily. Of course, all of them are drafted by the lenders attorneys and intended to fully protect them under almost every conceivable circumstance. Who can blame them? They have every right to watch out for their own interests. The problem is that over 90% of mortgage brokers don’t even read those contracts and sign them without understanding the possible consequences, which could potentially destroy their business and drive them in to bankruptcy.
For example almost all broker contracts have an Indemnification clause, which states that broker shall indemnify and hold harmless the lender from any loss or damage incurred by the lender as a result of the broker agreement or any related transactions while the agreement is in place. So what does this mean? Let’s say you lock a rate for your borrower and because of underwriting delays the lender fails to fund the loan within the lock period. If the borrower suffers a loss because the rates have gone up since you locked the rate or penalized by the seller for not closing on time, the borrower would potentially have a claim for damages against the lender. Guess who has to pick up the legal fees if a lawsuit is filed.
Another example is when the lender wants the broker to buy back a loan because of an early payment default. This is a ridiculous term to begin with, since the broker never sold the loan to the lender in the first place. But some contracts have this clause and they enforce it whenever they can.
More often than not, when you ask lenders to modify their contracts they will say it cannot be changed and that everyone has signed the same contract (see the last paragraph of the attached addendum). Reading and negotiating contracts are extremely time consuming and complicated tasks for most of us but if you choose to take the easy route by signing every contract that crosses your desk, chances are you will eventually end up paying a hefty price for it. The easiest way to deal with multiple contracts is to have your own addendum drafted and ask all the lenders to sign it. To give you an idea of what an addendum could look like and what modifications it should contain, I have drafted one and attached it below. Please note that I am not a licensed attorney and this is not legal advice. In fact, the best advice is to seek legal assistance prior to signing any agreement.
Contract Addendum
This standard contract addendum is an integral part of the broker agreement entered in to by _________________________ (broker) and __________________________________ (lender). Notwithstanding the terms in the Broker Agreement drafted by the lender, the provisions of this addendum are hereby expressly made a part of the Broker Agreement between broker and lender.
Notwithstanding anything to the contrary the terms and provisions of this addendum supersede, govern and control all provisions in the Broker Agreement that may conflict therewith. A facsimile copy of the Broker Agreement or this addendum and any signatures hereon shall be considered for all purposes as originals. This contract and/or addendum may be executed in several counterparts, each of which shall be construed as an original, but all of which shall constitute one instrument.
The parties hereby amend the broker agreement dated ___________________2006, as follows:
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Any reference to attorney’s fees to be paid by broker is deleted.
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Any reference to broker waiving its statuary/legal rights is deleted.
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Any reference to broker indemnifying or holding harmless the lender is deleted.
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Broker does not agree to defend the lender for any reason.
- Each party shall be responsible for its own defense against all claims, liabilities, and losses and expenses, including reasonable costs, collection expenses and attorney’s fees, which may arise because of the negligence, misconduct or the fault of its agents or employees in the performance of its obligations under this agreement.
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It is hereby acknowledged by both parties that broker does not investigate, validate, authenticate or underwrite the loan application/credit packages and their supporting documents provided to broker by prospective borrowers or other third parties. Therefore, broker will not be held liable or accountable for any loss incurred by the lender after the final approval and settlement of the loans submitted to lender by broker. However, broker will in good faith cooperate with lender in detecting/preventing fraudulent activities and/or avoiding the submission of forged documents, while handling and processing the loan applications.
- Any reference to broker re-purchasing loans from the lender is deleted.
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Any limitations placed on broker soliciting borrowers after the funding of loans by the lender shall not exceed 120 days.
- Lender shall hold in confidence and not disclose to any third party without broker’s written consent, all information relating to broker received by lender and/or lenders representatives in connection with this agreement and/or the transactions contemplated herein.
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As a material inducement for enticing broker to execute the Broker Agreement, lender hereby expressly states it is offering broker the best contractual terms and conditions the lender has ever offered to any other broker and no other broker has ever obtained less restrictive/onerous or more lenient/preferential terms and conditions compared to those offered to broker.
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Lender’s Authorized Officer
