Are Brokers Independent Contractors?

The National Association of Mortgage Brokers, the primary trade group for brokers, takes the position that a broker works neither for the borrower nor the lender. Imposing a fiduciary duty on the broker would increase the risk that brokers might be sued whenever a loan went bad. State legislatures, however, have taken different views on the issue. Minnesota last year passed a statute that specifies brokers have "an agency relationship" with borrowers. An agent has the obligation to act in the best interest of his or her principal. On the other hand, Colorado has rejected such a standard, having passed bills providing that a broker has only "a duty of good faith and fair dealing."

Duty to Borrower
In California, a 1979 decision by the state supreme court established the rule that mortgage brokers have a fiduciary duty, at least in respect to home mortgages (Wyatt v. Union Mortgage Co.,598 P. 2d 45). In that case, Wyatt responded to a television advertisement by a broker to seek a second mortgage on his home. The loan officer to whom he was referred gave materially misleading information as to the rate of interest, late payments and size of balloon payments. Subsequently, Wyatt defaulted on the mortgage. When a foreclosure action was begun, Wyatt sought to enjoin the foreclosure and sued for damages. A jury awarded Wyatt $200,000, apportioned between eight corporate and individual defendants, including the broker. The California high court upheld the award, ruling that it was a question for the jury whether the broker had violated the obligation of disclosure and good faith toward Wyatt, who was entitled to rely on the broker's expertise, as reflected in his statements.

Duty to Lender
A 1991 decision by a California appellate court held that a mortgage broker can have an obligation to a lender-client as well (Barry v. Raskov, 23 Cal. Rptr. 463). In that case, Barry was approached by a mortgage broker who was seeking to place a second deed of trust loan that was a "very good investment" and was "paying safely." The broker told Barry his investment would be guaranteed "100%" and that he would receive a check each month "without fail." An independent appraiser regularly used by Raskov appraised the property at a high figure. In fact, the property was worth far less than the appraisal and Barry never received any payments on his loan.

Barry sued the broker, alleging fraud and breach of fiduciary duty. A jury awarded Barry damages of $55,000. The California Court of Appeals affirmed, ruling that a mortgage broker is liable to the lender for the fraud or negligence of an independent property appraiser hired by the broker. The broker had a fiduciary duty to the lender that extended to an independent contractor (the appraiser) under the rationale that an employer of an independent contractor is held liable for the contractor's wrongdoing. Otherwise, said the court, mortgage brokers could evade their fiduciary duties simply by allocating the duties to unlicensed independent contractors.