Agency in Private Money Revisited
By: Dennis H. Doss | Doss Law, LLP
Realtors® are very diligent about clarifying their agency relationships with clients in their written forms. If you have ever opened an offer on a property, the first thing you will see is a disclosure about agency relationships.
Like mortgage brokers, real estate agents are allowed to be dual agents in 42 states, including California. Dual agency is unlawful in Alaska, Texas, Colorado, Florida, Kansas, Maryland, Vermont and Wyoming. In dual agency states, clarifying agency roles is very important.
Why Agency Matters
Agency carries a lot of responsibility. An agent has a duty to use reasonable care in representing his or her client, disclose material facts to the client, be loyal, preserve the client’s confidential information and consider the interests of the client over the agent’s own interests. For this reason, being an agent carries considerable liability if any of these duties are breached. A participant in a loan transaction wants to disclaim agency whenever possible to avoid exposure
Typical Agency Roles in Private Lending
In private money loans, you have several possible agency relationships:
- The procuring broker, is typically the borrower’s agent, but could also be the lender’s agent;
- The co-broker, which could be the borrower’s agent, the lender’s agent or both; and,
- The lender, who never wants to be an agent.
How does a lender or broker make it clear what their role is in a loan transaction and when it ends?
Pre Closing Custom and Practice
You could rely on custom and practice. For the lender, custom and practice means relying on cases, not written disclosures, to avoid being an agent and fiduciary of the borrower. For a broker, custom and practice is less cut and dried. If there is one mortgage broker, custom and practice will regard him or her as a dual agent of both lender and borrower in the absence of an agreement to the contrary. If there are two brokers, in custom and practice they may be dual agents of both sides or represent their respective sides depending on how they comport themselves in the deal.
Post Closing Custom and Practice
What agency exists with the borrower after a loan closes? The typical private money shop will have an inventory of loyal investors who expect them to vet new loan deals and in many cases to stay involved to some degree after the loan is made and until the loan is repaid. That is true even if mechanical servicing is performed by a professional servicer. As to the broker who is a dual agent of both lender and borrower, there is the expectation in custom and practice that the broker will represent the borrower only until the loan closes. After all, in theory the borrower doesn’t need the broker any more since the objective of the agency has been accomplished. Nevertheless, most brokers could do a better job of explaining the end of the agency relationship to their borrower clients. If that isn’t conveyed well or is misunderstood by the borrower, they may feel somewhat betrayed when they get collection calls from their former broker.
Solution
At Doss Law, we recommend that agency relationships be documented clearly and in writing. Relying on custom and practice is not enough.
Our sister on-demand loan document company, DossDocs.com, has developed a new Agency Disclosure form in its Business Purpose loan docs to cover these agency issues in detail. This form clarifies agency relationships, discloses when they end, the broker’s role after closing and the broker’s use of the borrower’s confidential information for collection purposes.
Whether you use DossDocs or your own forms, we think you should address this issue in your loan docs.
