Who does the mortgage broker represent?

Recently, I had a client ask me to bring a complaint against a mortgage broker for failing to secure financing for a home purchase. It seems that in this time of instability in the mortgage world, there might be more similar complaints. I came across this case from the Texas Supreme Court which hits on an interesting point.

There's an interesting new case from the Texas Supreme Court, (Gaines v. Kelly, 235 S.W.3d 179 (Tex. 2007), which addresses express and implied authority of agents to bind their principal. What's it all about and what does it mean?

The basic facts of the case are that Roger Kelly ("Kelly") had a lease on a large chunk of real estate with an option to purchase. He contacted Robert Thompson (mortgage broker) to help him find financing for the purchase. Thompson contacted Russell Gaines ("Gaines") with Southwest Guaranty Mortgage Corp. to try to get the loan. Thompson received the loan application from Gaines and gave it to Kelly's attorneys. Kelly filled out the application and returned it to Thompson who returned it to Gaines.

According to Kelly, Thompson told him the loan was a "done deal." Of course, it wasn't otherwise we wouldn't be discussing a lawsuit at this point. Gaines requested more information about Kelly's interest in the property and that delay caused Kelly to almost lose the deal and have to take on additional partners to finance the deal without Gaines and Southwest Guaranty Mortgage ("Southwest").

So Kelly sued Gaines and Southwest for breach of contract and fraud based on Thompson's statement that the loan was a "done deal." So the question before the court is (1) Did Thompson have either express or implied authority to bind Gaines/Southwest in the loan deal?

The answer from Judge Medina was NO. Thompson may have been an intermediary between the mortgage company and Kelly, but he never took on the authority to bind Gaines or Southwest on the loan.

Kelly's lawyers pointed out that they sent Gaines a letter referring to Thompson as "your agent." The court said that was not enough evidence to put Gaines or Southwest on the hook. Even if Thompson was an agent for Gaines or Southwest, there was no evidence his agency role included binding either of them to a loan commitment.

There are a lot of different types of agents. The only way to know what authority an agent has is to look at the actions (or inactions) of the principal and not the agents.

Many times, a property buyer will contact a mortgage broker to help secure financing. It's important to remember that the broker is usually just an intermediary. The funding and all those decisions come from the lender. And the lender is the one with the authority to make any financing plan a "done deal."