What Fiduciary Does a Mortgage Broker Have to a Borrower?

Under California law, real estate agents have a fiduciary duty to the buyers and sellers that they represent. That means the agent has a legal obligation to act in the best interest of their clients.

This fact is rather clear and widely known. After all, consumers expect that agents representing them offer accurate advice and make decisions that make the most sense for each individual client.

But what about mortgage brokers? Do they owe borrowers a similar fiduciary duty? The answer to this question where it pertains to the state of California is “yes.” Since 1979, California courts have held that mortgage brokers owe a fiduciary duty to borrower following a case taken to the California Supreme Court.

In the case of Wyatt v. Union Mortgage Co., the mortgage broker in question mislead the borrowers about the loan’s interest rate, and failed to point out the serious significance of the mortgage terms regarding late charges and the grace period in relation to late payments. Since this case, mortgage brokers have been bound by the law to provide a fiduciary duty to borrowers.

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What Does a Broker’s Fiduciary Duty Involve?

By law, mortgage brokers cannot accept or charge any type of compensation that benefits the mortgage broker. All lawful instructions provided by the borrower must be carried out, and an accurate accounting of all monies received from the borrower should be provided to the borrower.

Last but not least, a mortgage broker needs to disclose to the borrower all pertinent facts of the loan that the broker knows would impact the borrower’s rights and interests.

Brokers Versus Lenders

It’s important to differentiate between a mortgage ‘lender’ versus a ‘broker’. Whereas a broker owes borrowers a fiduciary duty, a lender does not. The mortgage transaction between a borrower and lender is considered to be at “arm’s length.”

Buyers need to understand that the lender’s interests lie in making money, regardless of whether or not the transaction is beneficial to the borrower. After all, the more interest a borrower pays, for instance, the more money the lender stands to make. The lender isn’t too interested or concerned if the borrower winds up “house poor” as a result of an expensive mortgage. Lenders have the freedom to seek out economic interests in a home loan transaction.

On the other hand, a mortgage broker’s interests lie with protecting the borrower. A mortgage loan broker is in a fiduciary position to act in good faith toward a client, and  doesn’t put his or her own personal economic benefits over that individual. If this duty is breached, the broker is considered to be in violation of the mortgage broker’s license law in the state.

The disclosures that fall under the fiduciary obligations of mortgage brokers include the true interest rate, the financial penalty for making a late payment, and any other pertinent components of the mortgage package.

These duties were eventually codified thanks to Assembly Bill 260, which came into effect on January 1, 2010.

If a borrower believes this duty was not upheld by the mortgage broker, a civil claim can be brought forth. Before a claim for negligence can be established, a duty of care owed by a broker to the plaintiff needs to be settled. If a plaintiff is successful in the case, special damages can be recovered, including the actual monetary value of losses that the broker’s negligence caused. 

More Protection With TRID

Borrowers in a real estate transaction have had even more protection over the last year thanks to the TILA-RESPA Integrated Disclosures, or “TRID.” Commonly known as the “Know Before You Owe” act, the TRID mortgage lending rules are meant to offer borrowers more transparency when it comes to the decision-making process for mortgages.

Instead of having to sift through pages and pages of confusing documents and relying on the lender to disclose all pertinent information regarding the mortgage, TRID takes all the federal disclosures and consolidates it into all into two clear and concise disclosures: The Loan Estimate and The Closing Disclosure. That way, borrowers are able to make a more informed decision about a particular loan before signing on the dotted line.

The Bottom Line

Borrowers should always take their time to do the necessary homework about specific mortgage packages for a home purchase. Considering the magnitude of a real estate transaction, it’s in the borrower’s best interests to get firmly acquainted with this information. Luckily, mortgage brokers are legally obligated to look out for the best interests of borrowers. And with the recent TRID mortgage lending rules that help make the transaction even more transparent, borrowers are even more protected.