What Is a Loan Broker Agreement?
Loan broker agreements are contracts that secure the services of brokers in connection with a specific transaction such as leasing property or negotiating credit terms. It is common for brokers to be retained to represent landlords and sellers of real estate and also to represent lenders and borrowers. A loan broker agreement should spell out the rights and obligations of the parties so that all involved can be confident of their duties and entitlements and the terms of their compensation. A loan broker agreement can enhance the understanding of the role of the loan broker and offer guidance in the event of default for either party . While the terms of a loan broker agreement may vary, many will contain standard clauses such as: definition of the property and transactions involved; the scope of services to be rendered by the broker; information that will be required of the parties; confidentiality; term of the contract; extent of the broker’s liability; and dispute resolution procedure.
A loan broker agreement that is clearly written and includes appropriate clauses that spell out the rights and responsibilities of all parties can avoid future disputes over the terms of the agreement. An understanding of the key components in the agreement can help ensure the benefits of the association with the brokerage and delineate the circumstances that warrant terminating the relationship.
Elements of a Loan Broker Agreement
A loan broker agreement contains several critical elements that should be carefully evaluated and understood prior to entering into a loan broker agreement. Generally, a loan broker agreement addresses the following:
Parties. This section identifies the parties to the agreement and hopefully is flexible enough to cover any originating entity. While in most cases, this will be the lender and a third party, an important consideration for lenders is whether the loan brokerage will be offered through a web-site or other web-based platform. This can be important because other federal and state regulations may apply to web-based platforms, such as the Truth in Lending Act, and its implementing regulation, Regulation Z (12 C.F.R. ยง 1026, et seq.), particularly if applicants can enroll, secure financing and/or complete other types of monetary transactions through the web-site.
Services. This section covers and describes the services to be provided to the borrower. In addition to obtaining the best terms for the borrower and coordinating with the applicable lender, this section generally includes what due diligence will be undertaken (such as reviewing preventing eminent domain actions, etc.). This section can also address how the loan broker will be paid, which can be in the form of (a) a fee or commission paid by the borrower, (b) a fee or commission paid by the lender, or (c) some combination thereof, in either case, whether upfront or through a loan origination fee or discount points. In all cases, the payment of such fees must be accurately disclosed prior to release of a lender’s final loan decision to the borrower.
Fees. This section should clearly and unambiguously state the fees that will be charged to the borrower for the services to be provided and when such fees will be earned and billed. This will vary based on type of service provided. Often, the loan broker will be paid on a flat fee or commission basis. Such fees may be earned either upon execution of a binding loan application between the borrower and lender or when a commitment letter is issued by the lender. In some cases, the fees may be de minimis and/or earned upon successful funding of the borrower’s loan. For example, certain fees are earned regardless of whether the loan closes/begins to fund; however, costs related to loan origination, contingencies and access to home construction information, can only be earned and invoiced when the loan is substantially funded.
Duration. This section can be very important for long-term relationships, particularly when real estate/land development is involved. This section should address when a broker’s services will begin and end. Certain services, such as conducting an environmental review of the site or title search (potentially including a preliminary title report), may only be necessary prior both to and after receiving a bid from a lender. Further, such services may be long-term in other circumstances, particularly if the site is currently improved. As discussed below, the duration of the loan broker agreement can be an important factor in determining the broker’s relationship with title insurance and escrow companies.
These are only high-level issues to consider when evaluating a specific loan broker agreement. Careful attention to these issues, among others, will help ensure an efficient transaction that adequately protects the creditor/lender, particularly as it relates to the services to be provided, use of fee disbursement commitments, and the duration of the relationship.
Legal Aspects of Loan Broker Agreements
Regulations and compliance considerations should be the first thing a loan broker considers when entering into a loan broker agreement. For instance, if the loan broker will be legally obligated to be licensed with the state that the property is located in as both a loan officer and a real estate broker, it cannot be overstated how important it is simply to have the right agreement in place.
To put it another way, if a person or entity is not required to be licensed to conduct certain activities it wants to hire a loan broker for, then it may be unnecessary to have a loan broker agreement at all.
On the other hand, even when it is not necessary to have a loan broker agreement, parties intending to do business with a loan broker are likely to seek and understand better the scope of duties a loan broker will perform that are beyond the scope of statutory licensing requirements, such as helping the parties understand the complicated real estate industry, providing market knowledge and advice, or assisting the parties in understanding the anatomy of mortgage lending agreements.
It is also critically important that legal and compliance considerations relating to disclosures and consumer protection are carefully considered before entering into a loan broker agreement. Disclosures and consumer protection requirements can vary depending on state and federal laws, and it is important to understand what rules apply to a loan broker before entering into a broker agreement.
For example, the Federal Trade Commission (FTC) has expressed its view that, so long as the loan broker acts at the request of the creditor with respect to the origination of a credit product, services the loan broker’s actions merely in facilitating the credit transaction are not itself debt collection activities. However, because the Fair Debt Collection Practices Act (FDCPA) does not exempt creditors from its coverage, this position results in practical difficulties of determining whether the loan broker acts as a debt collector in a particular case, and could make it difficult for creditors to ensure that their loan brokers comply with the FDCPA.
Another consideration for loan broker agreements might be the annualized notice and information requirements applicable to all creditors under the Mortgage Disclosure Improvement Act, which may require that lenders and their business associates deliver certain information to the consumer at various times. Existing loan broker agreements should be reviewed to determine whether they need to be amended to include certain provisions that would not ordinarily be required under an ordinary loan broker agreement without reference to the new federal law requirements.
Common Provisions in Loan Broker Agreements
Loan broker agreements typically contain these and other common provisions:
Confidentiality: The broker may be privy to highly sensitive information regarding your business finances, including balance sheets, income statements, and any issues that may affect your creditworthiness. Such information needs to be treated with the utmost confidentiality, and the loan broker agreement should include a confidentiality provision that allows you to protect the information you share with the broker.
Dispute resolution: Even if you are careful to vet potential loan brokers, talking through their confidentiality and fee payment terms, there’s always a chance that a dispute will arise in the course of the broker’s work. A typical broker agreement will include a method for resolving disputes between the broker and the lender. This can be as simple as agreeing to arbitrate disputes in a specific jurisdiction. Contesting the agreement in any other way could be prohibitively expensive.
Termination: If your loan application falls through, the lender terminates the agreement (because of failure to fund the deal), or you simply change your mind about working with the broker, you may wish to terminate the broker relationship. The loan broker agreement should detail the terms under which either party may terminate the relationship, and what happens upon termination. For example, you may need to pay a fee to terminate the agreement prior to a specific date.
Representations and warranties: In some cases, you may need the loan broker to go to bat for you, for instance, by vouching for your business where you don’t have the financial statements to back it up. In order to do this, the broker will need to know all relevant information about your company’s finances and background, including its mission statement, goals for expansion, application status, etc. The agreement should include a large space for the broker to fill in information about your business, and list the various ways the broker will represent and warrant the business with lenders.
Indemnification: In many instances, the broker’s duties are subject to the customer complying with certain conditions. For example, if you don’t have adequate financial records, they might not be able to find a willing lender. Unfortunately, if you fall short on these promises, there could be negative effects for the broker, who could be seen as failing in their duties. Therefore, indemnification clauses are often included in loan broker agreements to protect brokers from losses sustained because of your actions or the failure to act for which the broker is responsible.
Advantages of a Properly Crafted Loan Broker Agreement
A carefully crafted loan broker agreement can confer a variety of benefits on the parties, including, but not limited to, the following:
Protection of Interests of the Parties
A comprehensive loan broker agreement can tender valuable protection for specific interest issues of the parties. A clear granting of an express right of first refusal (or first offer) may be the subject of a counterbalance to a conflict of interest (e.g., where the lender is also a real estate broker, the lender will not require the broker to make the same financial offer as a third party when the lender is considering selling the property to the first-refusal entity); similarly, confidentiality protections are valuable at preventing the lender from helping a competing broker/borrower combo get the best deal, instead of rewarding the broker/borrower combo who made the first substantive inquiry.
Limiting Conflicts
In layman’s terms, a broker can serve as the middle man between a borrower and lender. In reality, however, that means the broker serves as the go-between between two separate interests (that may at times work at cross purposes). A typical conflict in this arrangement may occur when the broker represents the interests of a borrower, and has knowledge of the borrower’s bidding position on a particular property , while at the same time representing the interests of a lender that is considering getting into a bidding war with a competing lender. If the first-round broker is able to protect the borrower’s bid well enough to ensure that the borrower comes out on top with a final bid, the second-round broker is neutralized and the borrower’s bottom line suffers.
Specific Agreements to Avoid Ambiguity
A contract must, by definition, serve to protect the interests of the parties. However, there are instances where the parties would benefit from making specific agreements in advance on certain issues. For example, in addition to the express right of first refusal mentioned above, there are many other situations that lend themselves to the creation of an express provision that makes sure the borrower is given the first chance at a property. For instance, when a broker is used, the borrower may want to create a provision that prevents the broker from showing a property to potential buyers until an identified period of time has passed since the broker brought the property to the current borrower’s attention.
In addition, in the event that one or both parties decide it is time to end the relationship, a well-drafted agreement will have provisions to handle conflicts and other issues that must be addressed to ensure a clean, professional separation with both parties protected from future liability.
Potential Issues in Loan Broker Agreements
Even the best-drafted contracts are subject to challenges and the potential for litigation. In the case of a loan broker agreement, one area ripe for challenge is potential ambiguity in reciprocity. For example, if the loan broker provides a lead or referral to a lender, and the lender also does business with brokers, is the lender required to pay a fee to the broker only if the lender accepts that particular lead or referral from the broker? Or is the lender required to pay the broker a fee if the lender accepts another referral or lead from a different broker? Failure to address reciprocity can present a problem if the compensation provision includes an exclusive arrangement, whereby the lender uses no other brokers for the types of transactions covered under the agreement. Another potential pitfall to avoid is drafting a compensation provision that names commission rates and only a specified fee range for fees other than commissions (for example, document preparation fees). In that situation, ambiguity can arise because the compensation provisions may be read to interpret inconsistent rates for the same type of fee (for example, a document preparation fee) in different broker agreements.
Top Strategies for Loan Broker Agreement Negotiation
Negotiating a favorable loan broker agreement is crucial for borrowers to ensure the most beneficial terms for their future transactions. Start by identifying the terms that are considered unacceptable for your needs; these may include exorbitant fees, unreasonable contingencies, or unfair loan terms such as prepayment penalties. Once you’ve clarified your requirements, you can begin discussions with the broker.
When it comes to the negotiation itself, establishing clear channels of communication is essential. If formal meetings aren’t possible, opt for video conferences and ensure all relevant parties are included in communications. You should also pick a single point of contact with the broker, which will streamline the process and avoid confusions.
Be prepared to compromise, as both parties may need to bend on certain points for mutual benefit. Having a fallback position in advance can make it easier to negotiate successfully. Finally, review the contract carefully before signing it; if necessary, consider having a lawyer look over the agreement to ensure you’re protected. In general, negotiation is about being flexible and knowing which demands are non-negotiable beforehand.
Sample Loan Broker Agreement Template
Because of the importance of a loan broker agreement, one reason why we offer to review one for no cost is to help ensure that the basic protections are in place. We also provide here a sample of the categories of provisions and terms which make up a typical loan broker agreement. You can see how comprehensive, yet flexible, a loan broker agreement really is. You can use a sample loan broker agreement template to start the process of drafting a loan broker agreement. And as discussed above, if you are not using an attorney or advisor to draft the agreement, it is critical that you take the time to ensure that your contract has the necessary provisions and protections, while doing your best to make them apply in a practical manner to your business.
Drawn broadly, the basic structure of a loan broker agreement generally includes the following elements:
- Agreement: a statement that the parties intend to enter into an agreement
- Appointment: the appointment of the broker to act as a loan broker for the lender
- Representations: each party represents, and warrants (the legal concept of warranty means that a fact stated in a representation is true), that they have the ability to enter into the agreement and that by doing so , no other contracts will be violated
- Terms of the Services: a very general description of the services to be provided by the broker
- Renewal: the renewal of the agreement
- Termination: the process by which either party can terminate the agreement
- Indemnification: the parties indemnifying each other for breaches of the agreement
- Governing Law: the law that will govern the agreement
- General Provisions: the basic provisions that appear in all contracts such as confidentiality, limitation on liability, entire agreement, modification, etc . .
While we have not seen many loan broker agreements that are less than several pages, realistically it is possible for a loan broker agreement to be as short as several paragraphs. For example, in an agreement between a bank and broker, the following provisions could be included to cover the basic contractual concerns of the parties:
- The bank appoints the broker as its exclusive broker in the region.
- The broker agrees to timely perform its services and to abide by all regulations.
- The bank can terminate the agreement with 7 days notice.
- The broker must keep confidential any confidential information it receives from the bank.
- Any dispute will be governed by New York law.
In the commercial context, this agreement is simple and covers the basic points. It will cover most situations and deal with the company’s usual responsibilities as a borrower. However, it may not be appropriate for all situations, and doing so may create more issues than it solves.
What you don’t see in such a minimal contract are the specific requirements and conditions that are tailored to the specific needs of the parties. It is recommended that you have an attorney experienced in the area of finance draft the contract to ensure that it accurately reflects your concerns and interests.