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Agent vs. Independent Contractor

Consumers have two distinct choices when selecting a mortgage broker. A consumer can select a broker who will operate as an independent contractor when handling their transaction. Or they can choose a mortgage broker who will act as the consumer’s agent.

The concept of agency is an area of law where one person – the agent - will be a representative of another – the principal. The agent has a fiduciary duty to the principal, which is the highest standard of care imposed by law. The agent must not put their personal interests before their duty. The fiduciary relationship is highlighted by good faith, loyalty and trust on the part of the agent to the principal.

When operating as an independent contractor, mortgage brokers are similar to merchants who buy at one price and sell at another price. The broker can earn as much on a transaction as they can induce the borrower to pay. In addition, a broker who operates as an independent contractor need not disclose how much they make except where required by law, and they have no obligation to deliver the type of mortgage loan that is best for the borrower.

In contrast, a mortgage broker who acts in an agency capacity will operate as a service provider, not a merchant. The fee for their services is negotiated with clients upfront. Their services include finding the mortgage that best meets the borrower’s needs.

The independent contractor model dominates the mortgage industry, and prevailing industry practices reflect that dominance. Most mortgage brokers charge what the market will bear. This means that unsophisticated borrowers will pay more for their mortgage loan than knowledgeable borrowers. And even knowledgeable borrowers will often pay more than they should simply because of the complexity of the mortgage shopping process.

The agency approach recognizes that shopping for a mortgage is difficult for borrowers, but mortgage brokers are experts at the process. The optimal arrangement for a borrower is to hire a mortgage broker as their agent and to utilize the shopping expertise of a broker for a fixed fee. Utilizing an agent, and not an independent contractor, will provide a borrower with the best opportunity to obtain the lowest “price" - interest rate and fees -on a mortgage loan.

Obtaining the lowest price is only part of the advantage of using an agent instead of an independent contractor. As agent, the mortgage broker agent has an obligation to provide un-biased advice to the borrower throughout the process, with always the borrower’s best interests in mind.

At Reed Mortgage Corporation, our fee to act as your agent is similar, if not less than, the amount of the origination fee an independent contractor mortgage broker would charge. We set forth the amount of our fee and the nature of our services in the Mortgage Loan Origination Agreement we sign with our customers.