CREATION OF AGENCY RELATIONSHIPS

CREATION OF AGENCY RELATIONSHIPS

The relationship of principal and agent can be created by agreement between them, referred to as an actual
agency, by ratification or by estoppel, or as the result of the conduct of the parties and the agent's inherent
relationship with third parties (i.e., an ostensible or implied agency). Typically, the status of the real estate
broker performing as a special agent of a principal in a real property or real property secured transaction is
created by an express agreement (an actual agency). When created in this manner, the basic principles of
agency law arising out an agreement are applicable.

1. Employment Contract

The duty to know and understand the agency relationship being constructed by an agreement or occurring as a
result of the conduct of the parties is placed primarily upon the broker. When a real estate broker and a
principal enter into an employment contract authorizing the broker to act on behalf of the principal, an actual
agency relationship is created. (Civil Code § 2299). Since a real estate broker draws clients from all walks of
life, it is incumbent upon the broker (in view of the broker's knowledge and expertise) to see that the
employment agreement with the principal establishes the agency relationship, is in a correct form, and is
constructed according to the circumstances and in a fair manner.

2. When is the Agency Relationship Established?

As indicated above, the relationship between an agent and a principal is usually based upon an agreement, either
expressed or implied. In the real estate industry, the most common and standardized agency agreement is that
which arises between a seller or lessor of property, or an owner of a property who is an intended borrower and
his or her broker. Such agency agreements are known as "listings." Agency agreements can also be made
between an agent and a prospective buyer, lender, or tenant/lessee. Agreements with buyers, tenants/lessees, or
lenders are more common in non-residential transactions, although the use of such agreements for residential
sales appear to be increasing. In any case, an agency agreement must be in writing for the agent to be able to
enforce a commission claim based upon a breach of contract theory. (Civil Code § 1624(d); Phillippe v. Shapell
Industries (1987) 43 Cal. 3d 1247, 1255-1258).

3. Right to Compensation

A. Breach of Contract vs. Tort Theory

The broker's right to compensation and the amount must be clearly set forth in the listing agreement. The
obligation to pay compensation to the broker must be in writing. A real estate broker can act upon a letter
received from an owner, whether voluntarily sent by the owner or in answer to the broker's solicitation. When
relying upon letters, the broker should be very careful to see that the letter contains an employment clause, or
authorizes the broker to find or procure a buyer, tenant/lessee, or a lender, and describes the compensation the
broker is entitled to receive as a result of accomplishing the purpose and scope of the agency.

Civil Code § 1624(d) and the Phillippe case mean that a broker is not entitled to recover a commission under a
breach of contract theory, unless there is a signed agreement between the broker and the principal. The
agreement can be a listing agreement, some other form of agency agreement, or the agreement to pay the
commission may be set forth in the purchase agreement itself. For instance, one court held that a defaulting
buyer was liable to the buyer's agent for a $100,000 commission on the grounds that the broker was a third party
beneficiary of the purchase agreement between the buyer and seller. (Chan v. Tsang (1991) 1 Cal.App.4th
1578).

Similarly, loan brokers should have but often do not have written agreements with their principals. Even
without written agreements, loan brokers may be able to enforce payment of their compensation by reference to
other loan documents and disclosures exchanged between the borrower and the broker that identify the
commissions, fees, costs and expenses being paid to or charged by the broker, and which obligate the borrower
for the payment of such compensation. However, if there is no written agreement obligating the principal to
pay compensation, the real estate broker generally will not be able to recover the compensation, regardless of
the extent to which services were rendered for the benefit of the principal.

An example is where a seller and broker enter into a 90 day listing agreement which expires before a buyer is
found. The seller instructs the broker to continue working on finding a buyer, but does not sign a written
extension of the listing agreement. Can the broker recover a commission if a buyer is procured? Answer: Quite
probably not.

An agency agreement and all extensions or modifications of it must be in writing to be enforceable. In this
case, the listing agreement expired and the agent is working without an agreement. The broker may very well
be a continuing agent of the principal for purposes of soliciting for buyers, but the broker is without a written
agreement for compensation. Should the broker be successful in producing a buyer willing, ready, and able to
purchase the property pursuant to the terms, conditions, and covenants authorized and agreed to by the
principal, unless the broker is able to successfully argue the principal waive the termination date of the listing
contract the broker may be unsuccessful in enforcing compensation. The result of the argument may create a
conflict with Business and Professions Code § 10176(f).

At least in one case, a real estate broker was successful in obtaining a commission based upon a claim arising
out of an intentional interference with a prospective economic advantage. The real estate broker, Mr. Buckaloo,
did not have a written commission agreement with the seller. Based upon an oral contract with the seller, Mr.
Buckaloo expected to earn a commission if the property were sold. Mr. Buckaloo found a buyer and showed
him the property. The seller and the buyer apparently conspired to avoid paying Buckaloo a real estate
commission, and closed the sale without informing Mr. Buckaloo. Mr. Buckaloo sued for intentional
interference with a prospective economic advantage, based upon his allegation he was the "procuring cause" of
the sale.

The Supreme Court saw the inequity in the fact situation and ruled in Mr. Buckaloo's favor. The Court held that
Buckaloo had no contractual right to a commission because there was no compliance with the Statute of Frauds
(Civil Code § 1624) in the absence of a written agreement for payment of the commission. In this case, the
claim for commission was not based upon an alleged breach of contract, but rather it was based upon a tort
theory of recovery. The Supreme Court held that the tort theory of interference with an economic advantage
arising out of the relationship between the parties would support Mr. Buckaloo's commission claim, even
though Mr. Buckaloo would be unable to enforce the underlying oral commission agreement on a breach of
contract theory. (Buckaloo v. Johnson (1975) 14 Cal. 3d 815). Notwithstanding the Buckaloo case, the real
estate broker is well advised to obtain written agreements for payment of compensation when acting as an agent
for a principal in a real property or real property secured transaction.

It is unlawful for any licensed real estate broker to employ or compensate, directly or indirectly, any person for
performing any of the acts for which a license is required who is not a licensed real estate broker, or a real estate
salesperson licensed under the broker employing or compensating him or her; provided, however, that a
licensed real estate broker may pay a commission to a broker of another state. No real estate salesperson shall
be employed by or accept compensation from any person other than the broker under whom he is at the time
licensed. It is unlawful for any licensed real estate salesperson to pay any compensation for performing any of
the acts within the scope of the Real Estate Law to any real estate licensee, except through the broker under
whom he or she is at the time licensed. (Business and Professions Code § 10137).

The above prohibition against sharing commissions with unlicensed persons applies only to a payment made by
a licensee to a non-licensee as compensation for the performance of acts for which a real estate license is
required. Thus, the payment of a portion of a commission by a licensee to a principal in the transaction does not
constitute a violation of § 10137, but if there is a commission rebate to the buyer in the transaction that fact
must be disclosed by the agent to the seller who has paid the commission. (Business and Professions Code §§
10138, 10139, and 10139.5).

To summarize the foregoing discussion regarding breach of contract and tort theories, the following conclusions
should be considered:

1. Commissions can only be paid to a licensed real estate broker who, in turn, may pay all or a portion of the
commission to a licensed salesperson or broker associate provided that the salesperson or broker associate has a
written contract with the broker. (Business and Professions Code §§ 10136, 10137, and 10138 and 10 CCR,
Chapter 6, § 2726).

2. No salesperson shall be employed by or accept compensation from any person other than the broker with
whom he or she is at the time licensed, and no salesperson shall pay compensation for performing any of the
acts for which a license is required to any real estate licensee except through the real estate broker under whom
the salesperson is licensed. (Business and Professions Code § 10137).

3. The listing broker must have a valid, written contract with the principal for whom the broker is acting, e.g.,
the seller landlord/lessor, or borrower. (Civil Code § 1624(d); Phillippe v. Shapell Industries (1987) 43 Cal. 3d
1247).

4. The selling broker must either have a valid written agreement with the buyer, tenant/lessee, or lender or be
the "procuring cause" of the sale, tenancy or loan. (Civil Code § 1624(d); Phillippe v. Shapell Industries (1987)
43 Cal. 3d 1247; Buckaloo v. Johnson (1975) 14 Cal. 3d 815.)

B. Procuring Cause

In addition to showing that the broker has produced a ready, willing and able buyer, the broker must sometimes
show that he or she was the "procuring cause" of the transaction before becoming entitled to a commission.
This definition is particularly important in the case of more than one cooperating broker who has been working
with a buyer, or where the broker is operating under an open listing and more than one broker may be
competing for the payment of the commission. "Procuring cause" may be defined as a cause originating or
setting in motion a series of events which, without breaking their continuity, results in the accomplishment of
the prime object of the employment of the broker. (Pass v. Industrial Asphalt of California, Inc., (1966) 239
Cal.App.2d 776, 782; Rose v. Hunter (1957) 155 Cal.App.2d 3/9, 323).

The foregoing definition, while often repeated, is somewhat difficult to apply in practice. The broker is
certainly the procuring cause if the parties enter into an agreement authorizing the broker to solicit buyers on
behalf of the seller, and the broker produces a buyer in conformance with the listing agreement. What if the
broker simply introduces the parties who then make their own agreement? Assuming there are no significant
lapses of time, the broker is still probably the "procuring cause". (Buckaloo v. Johnson (1975) 14 Cal. 3d 815).

A common problem occurs when an ungrateful buyer, who was shown property by a broker, goes directly to the
seller or listing broker to make the agreement to either avoid or reduce the amount of commission paid. Based
upon the definition of "procuring cause," the broker who showed the property to the buyer is probably the
"procuring cause", although in the practical world the problems of proof that the broker will face suggest that
the case may be difficult to win.

4. Essential Elements of an Agency Agreement

The essential terms of an agency listing agreement are: (1) The names of the parties; (2) The identity of the
property; (3) the terms and conditions of the anticipated sale, lease or loan; (4) the amount of commission or
other compensation to be paid; (5) the expiration date of the agency; and (6) signatures of all parties concerned.
In addition, an agency agreement concerning owner occupied residential property must contain a statement in
ten point bold print or larger, acknowledging that commission amounts are negotiable and are not set by law.

It is advisable for a real estate broker to include such a statement in all transactions where the broker is acting
within the course and scope of the real estate license and is claiming, contracting for, or expecting
compensation for his or her services.

5. Types of Listing Agreements

The type of listing agreement and the terminology used to designate the form of listing varies somewhat among
localities. The four kinds of listing agreements most commonly used are: (1) the open listing; (2) exclusive
agency listing, (3) exclusive right to sell listing and (4) the net listing. In addition, local real estate boards or
associations either directly or indirectly provide a service known as a multiple listing which is not a listing
agreement. Rather, it is a mechanism and a medium through which information concerning listed properties is

disseminated among a wide group of real estate brokers and their salespersons and broker associates.

When the relationship between the real estate broker and seller results in an exclusive agency, the listing
agreement must contain a definite, specified date of final and complete termination. (Business and Professions
Code § 10176(f). Regardless of the relationship between the real estate broker and the seller, the description of
the real property which is the subject of the listing must be included although it need not be as detailed as
required in an instrument of conveyance or encumbrance. The description should, however, identify the
property with certainty. A description that can be made certain is sufficient, e.g., "My house on Tenth Street,
City," would be acceptable if the owner had but one house on Tenth Street. It would not be acceptable if this
person owned two houses on Tenth Street.

A. Open Listing

An open listing is the most informal of the four principal kinds of listing agreements, and is distinguished by the
fact that the owner retains the right to revoke the listing at any time, to sell the property him or herself, or to list
the property with another broker. Open listings often generate questions regarding a real estate broker's claim to
a commission, because the sale of the property by either the owner or any subsequently hired agent will defeat
the original broker's right to a commission.

B. Exclusive Agency

An exclusive agency is an agreement by which the owner agrees to employ a particular real estate broker and no
other to solicit buyers, tenants/lessees, or lenders. Under an exclusive agency listing, the broker's right to a
commission is protected as against other brokers for the duration of the listing agreement. However, under an
exclusive agency agreement, the owner retains the right to sell, encumber or rent/lease the property on his or her
own and, in that event, the owner can terminate the agency agreement and defeat the broker's claim to a
commission or other compensation.

C. Exclusive Right to Sell

The exclusive right to sell listing affords the real estate broker the greatest protection and makes him or her the
sole agent for the sale, renting or leasing, or encumbering of the property. Under such an agreement, the broker
is entitled to a commission provided only that the property is sold, rented or leased, or encumbered during the
listing period, regardless of who procures the buyer, the tenant/lessee, or lender. In other words, under an
exclusive right to sell agreement, the owner relinquishes both the right to list the property with other agents and
the right to defeat the broker's claim for a commission by selling, renting or leasing, or encumbering the
property him or herself.

It should be noted that in "sheltered" loan transactions arranged by real estate brokers pursuant to Article 7 of
the Business and Professions Code, commencing with § 10240, the period of time during which exclusive
authority may be granted to solicit lenders to procure a loan is limited to 45 days. (Business and Professions
Code § 10243).

D. Net Listing

A net listing is one which contemplates the seller realizing a specific net price with the real estate broker's
commission consisting of any sum that is received in excess of the seller's net proceeds. For example, if the
seller enters into a net listing with a broker for a $100,000 net price, the broker would receive no commission if
the net proceeds of the sale are $100,000 or less. On the other hand, if the proceeds of the sale are $125,000,
the broker is entitled to a commission of $25,000.

Because of the potential for creating conflicts of interest between the real estate broker acting as a special agent
and the principal, some states such as Massachusetts and New York limit or prohibit the use of net listing
agreements. Net listings are not illegal in California. However, the net listing can easily lead to a breach of the
agent's fiduciary duties and obligations. Therefore, net listing should be used only with highly sophisticated
clients, or with clients who are independently represented by another professional and, of course, with full
disclosure of all material facts involved in all transactions. (Business and Professions Code §§ 10176(a), (g)
and (h)).

E. Multiple Listing

The multiple listing and the multiple listing service (M.L.S.) creates a means by which information concerning
individual listings is distributed to all participants and subscribers of the service. For example, a seller lists
property for sale with a broker. The broker then transmits a memorandum of the listing which includes
information such as the type of property, its size, location, the listed price and other relevant information. This
memorandum is then transmitted to the M.L.S. which in turn publishes, either in a booklet and/or computerized
data sharing format, the information submitted by the original listing broker. Other brokers throughout the
region are thereby made aware of the existence of the listing and can contact the listing agent on behalf of
prospective buyers for the property.

When this is done, it is common that the listing broker will split any commission received with the broker who
procures the buyer for the property. The broker who cooperates with the listing broker to procure a buyer is
known as the selling broker. The selling broker may be acting as a subagent of the seller, an agent of the listing
broker, or may be performing as the exclusive agent of the buyer.

F. Legal Significance of the M.L.S.

Two features of the M.L.S. are of legal significance to real estate brokers. The first is that information
submitted to M.L.S. may later be admissible in court on the claim that the M.L.S. profile was incorrect and
therefore was a misrepresentation. In addition, when a real estate broker or his salesperson or broker associate
submits a listing to the M.L.S., the broker typically makes a unilateral offer to compensate the cooperating
broker who procures a willing, ready and able buyer. Further, the seller typically authorizes the listing broker to
cooperate and share commissions with other brokers who are members of the M.L.S., for the purpose of
delegating to the cooperating brokers some of the listing broker's responsibilities, i.e., the assignment to solicit
for and procure the buyer.

In such event, the cooperating broker becomes the subagent of the seller, unless the agency relationships are
clearly bifurcated in writing limiting the cooperating broker to performing as an agent only of the buyer. Civil
Code §§ 2079 et seq. [agency disclosure]; Civil Code §§ 2349, 2350 and 2351).

G. In the Context of a Listing Relationship, Authority of an Agent to Perform Authorized Acts on Behalf of the
Principal

A pervasive aspect of agency law involves the agent's authority to act on behalf of the principal. Related to this
concept is whether and to what extent will the principal be liable for agreements entered into, conducts of, or
misconducts or wrongdoing committed by the agent. For instance, an agent, acting on behalf of an owner of
real property, hires a contractor to perform an inspection of and to make certain repairs on the owner's property.
Is the owner contractually obligated to pay for the services? Suppose that unknown to the owner, the agent for
the owner (who is a real estate broker authorized to solicit for and to procure a buyer) falsely represents to the
buyer there is a new roof covering on the property. Is the owner and seller liable for the broker's engagement of
the contractor or for the misrepresentation regarding the roof covering? The answer to both of these questions
is probably yes, depending upon the extent of the agent's authority.

The real estate broker should not confuse the authority of an agent to act on behalf of the principal under the
principal’s express authority, whether written or oral, with the broker's limited authority as a special agent. Real
estate brokers are special agents who are licensed and regulated to solicit and negotiate on behalf of their
principals, but generally not to bind or act in the place and stead of the principals. As special agents, real estate
brokers are authorized within the course and scope of the agency to make certain representations on behalf of
owners and sellers of real property.

H. Consideration in the Listing Context

Consideration is not essential to the creation of an agency. One may gratuitously undertake to act as an agent
and will still be held to certain standards demanded of an agent for compensation. Under the Real Estate Law,
one who acts as a gratuitous agent does not need a real estate license. However, in any transaction subject to
the Real Estate Law, and where there is an expectation of compensation, regardless of the form, time, or
implicitly source of payment, then a license is required. (Business and Professions Code § 10131. et seq.).

Needless to say, compensation or the expectation of compensation is viewed broadly. For instance, benefits
arising out of a joint venture relationship, or even out of the sharing of overhead, have been held to be sufficient
compensation to established licensed activity. (Stickel v. Harris (1987) 196 Cal.App.3d 575, 585; James Jones
v. Kellman (1988) 199 Cal.App.3d 131-136).

Generally, the agreement between the real estate broker and his or her principal provides for the payment of
consideration, usually in the form of a commission. The payment of consideration arises out of the agreement
between the principal and the broker. The agreement can be classified as either unilateral or bilateral. A
unilateral agreement is one in which one party makes a promise to induce some act or performance by the other
party, but the latter can act or not act as he chooses. For example, in the case of an open listing, the intended
seller agrees to pay compensation to the real estate broker if the broker procures a buyer, but there is no
obligation on the part of the broker to do so.

A bilateral agreement is one in which a promise by one party is given in exchange for a promise by the other
party. For example, the exclusive right to sell listing (since the obligation upon the broker to use due diligence
and best efforts to procure a buyer is either express or implied) is a bilateral agreement because it involves an
exchange of promises. As previously noted in this Chapter, it is essential for the real estate broker to be able to
enforce payment of compensation on a breach of contract theory that the agreement retaining the broker be in
writing (Civil Code § 1624(a)(3); Phillippe v. Shapell Industries (1987) 43 Cal. 3d 1247, 1255-1258.)

In the relationship established between the listing broker and cooperating brokers under traditional M.L.S. rules,
the cooperating broker is appointed as a subagent of the principal (i.e., the seller). As a result of such
appointment, the subagent may generally seek compensation from the principal. The more recent M.L.S. rules
result in a unilateral offer of payment of compensation and not of subagency. See the discussion in this Chapter
regarding subagency.

Where the principal's direct authority to cooperate with other brokers is unclear or contradictory, the
cooperating broker has been obligated to seek compensation from the listing broker. (Goodwin v. Glick (1956)
139 Cal.App.2d Supp. 936). When the principal's authority is direct and clear, the cooperating broker has been
able to secure payment of the commission from the principal. (Schmidt v. Berry (1986) 183 Cal.App.3d 1299).
Although legal theories exist such as "third party beneficiary agreements" to support the payment of
commissions to cooperating brokers, the latter may find it difficult to seek compensation directly from the
principal because of a lack of privity of contract between the cooperating broker and the principal.

I. Mortgage Brokers

Real estate brokers perform as mortgage brokers when soliciting or negotiating loans, or when collecting
payments or performing other related services for borrowers or lenders, including holders of promissory notes,
when the loans are secured directly or collaterally by liens on real property. These licensees also perform as
mortgage brokers when offering to sell, buy, or exchange promissory notes on behalf of the holders when the
loans are secured directly or collateral by liens on real property. (Business and Professions Code §§ 10131(d)
and (e), 10131.1 et seq., 10166.01 et seq., 10230 et seq., 10237 et seq., and 10240 et seq., and 10 CCR, Chapter
6, §§ 2840 through 2846).

Mortgage brokers may also engage (when authorized) in the collection of advance fees and in the issuance of
securities, as defined in the Real Estate Law. When issuing securities, mortgage brokers are also subject to the
Corporate Securities Law of 1968 and the applicable regulations of the Corporations Commissioner. (See,
among others, Business and Professions Code §§ 10026, 10085, 10085.5, 10131.2, 10131.3, and 10146, and 10
CCR, Chapter 6, §§ 2970 and 2972; and, among others, Corporations Code §§ 25019 and 25206, and 10 CCR,
Chapter 3, §§ 260.115 and 260.204.1).

Mortgage brokers solicit or negotiate loans to be delivered to financial institutions or to licensed lenders, as well
as to private parties who invest private equity capital to fund loans or purchase promissory notes or interests
therein secured directly or collaterally by liens on real property. When doing so, mortgage brokers act as agents
and fiduciaries of the borrower or lender, or both; or the promissory note holder and the purchasers of such
notes, or both. When acting for both principals in either circumstance, mortgage brokers are dual agents.
(Business and Professions Code §§ 10131 et seq., 10166.01 et seq., 10176(d), 10177(n), 10177(q), 10177.6.,

10230 et seq., 10237 et seq. and 10240 et seq; and Civil Code §§ 2295 et seq., and 2923.1, and 10 CCR,
Chapter 6, § 2840 et seq.).

When loans are arranged to be delivered to financial institutions or to licensed lenders, mortgage brokers
typically are the agents and fiduciaries of at least the borrowers in such transactions. Depending upon the facts,
mortgage brokers may also become the agents and fiduciaries of financial institutions or licensed lenders
funding the loans for defined purposes, e.g., obtaining appraisal and credit reports or completing and delivering
required disclosures or issuing required notices of rights on behalf of the lenders/creditors. In such fact
situations, mortgage brokers are typically dual agents. (Business and Professions Code §§ 10131 et seq.,
10176(d) and 10177(q) and Civil Code §§ 2295 et seq. and 2923.1).

When acting within the course and scope of the real estate broker’s license, mortgage brokers are not solely
performing as facilitators or intermediaries. Pursuant to applicable law, mortgage brokers must generally be
agents and fiduciaries of at least one of the principals to the loan transactions or to the purchase and sale of
promissory notes. When loans are delivered to private parties, mortgage brokers must be the agents and
fiduciaries of the private parties, whether funding loans or purchasing existing promissory notes or interests in
either the loans or the notes. Generally, mortgage brokers are also the agents and fiduciaries of the borrowers in
such transactions. (Business and Professions Code §§ 10131 et seq., 10176(d), 10177(n), 10177(q), 10230 et
seq., 10237 et seq., and 10240 et seq.; and Civil Code §§ 2295 et seq., and 2923.1, and the Real Estate
Commissioner’s Regulations pertaining thereto, including 2840 et seq., and Corporations Code §§ 25004,
25100(e), 25102.5, and 25206 and the Corporations Commissioner’s Regulations pertaining thereto, including
10 CCR, Chapter 3, §§ 260.115 and 260.204.1).

Regardless of the nature of the intended loan transaction or the type of security property, mortgage brokers act
as special agents and fiduciaries of their principals pursuant to Civil Code § 2297. When performing mortgage
brokerage services, as defined, mortgage brokers are agents and fiduciaries of the borrowers and may be agents
and fiduciaries of the lenders/creditors. (Business and Professions Code §§ 10131 et seq., 10166.01 et seq.,
10176(d) and 10177(q), and Civil Code §§ 2295 et seq. and 2923.1).

Whether mortgage brokers act as the agents and fiduciaries of the borrowers or the lenders/creditors, or for the
promissory note holders or the intended purchasers, or for both principals in the same transaction as dual agents,
the common law as well requires mortgage brokers to place the interests of their principals ahead of their own.
This duty and obligation to represent and act in the interests of their principals is incumbent upon mortgage
brokers, regardless of the nature of the loan transaction, the services being provided, or the type of security
property, including when acting as servicing agents, or in connection with loan modifications, extensions, or
forbearances. (Business and Professions Code §§ 10131 et seq., 10166.01 et seq., 10176, 10177, 10230 et seq.,
10237 et seq., and 10240 et seq.). (Realty Projects, Inc. v. Smith (1973) 32 Cal.App.3d 204, 108 Cal. Rptr. 71
and Wyatt v. Union Mortgage Co. (1979) 24 Cal. 3d 773 [157 Cal. Rptr. 392; 598 P.2d 45] and Montoya v.
McLeod (1985) 176 Cal.App.3d 57, 64, 221 Cal. Rptr. 353 and Barry v. Raskov (1991) 232 Cal. App. 3d 447,
283 Cal. Rptr. 463 (Cal. App. 2 Dist.) and California Real Estate Loans, Inc. v. Wallace (1993) 18 Cal.App.4th
1575, 1580).

An agency relationship is established when a person represents a principal in dealings with third persons.
Agents are fiduciaries with rare exception when performing within the course and scope of the agency.
Mortgage brokers are agents and fiduciaries with prescribed duties and obligations when performing within the
course and scope of the real estate broker’s license. (Civil Code § 2297). However, fiduciary relationships may
exist with principals even when no third persons are involved. Examples include the relationships between
doctors and patients (principals) and between lawyers and clients (principals) when the services are performed
in the absence of third persons.

Black's Law Dictionary describes a fiduciary relationship as "one founded on trust or confidence reposed by one
person in the integrity and fidelity of another". A fiduciary has a duty to act primarily for the principal’s benefit
in matters connected with the undertaking and not for the fiduciary's own personal interest, including the
requirement mortgage brokers place the economic interests of the borrower ahead of the broker’s own economic
interest. (Business and Professions Code §§ 10131 et seq., 10166.01 et seq., 10176, 10177, including 10177(q),
10230 et seq., 10237 et seq., and 10240 et seq., and Civil Code §§ 2295 et seq. and 2923.1(a)).

Mortgage brokers are providing mortgage brokerage services when acting for compensation or in expectation of
compensation (whether paid directly or indirectly) to arrange or attempt to arrange residential mortgage loans as
exclusive agents of the borrowers. Mortgage brokerage services are also provided when mortgage brokers act
as dual agents for the borrowers and the lenders/creditors. Mortgage brokerage services, as defined, require the
residential mortgage loan be made by an unaffiliated third party. (Civil Code § 2923.1(b) (3)).

However, mortgage brokers may not rely solely on the language requiring the residential mortgage loan to be
made by an unaffiliated third party. For example, mortgage brokers may undertake to act as agents and
fiduciaries of the borrowers to procure lenders/creditors in intended loan transactions and then elect to make the
loan with funds the brokers own or control (whether directly or by an affiliated party). In such circumstances,
mortgage brokers are acting as principals and as agents and fiduciaries of the borrowers (and are agents and
fiduciaries of private parties who may join with the mortgage brokers to fund the loan or purchase the
promissory note or an interest therein. (Business and Professions Code §§ 10131 et seq., 10166.01 et
seq.,10176(d), 10177(q), 10230 et seq., 10237 et seq., and 10240 et seq., including 10240(b,) and 10 CCR,
Chapter 6, § 2840 et seq.; and Civil Code §§ 2295 et seq. and 2923.1(c); and Corporations Code §§ 25019,
25004, 25100(e), 25102.5, 25206 and 10 CCR, Chapter 3, §§ 260.115 and 260.204.1.).

Residential mortgage loans are defined to mean consumer credit transactions secured by residential real
properties improved by four or fewer residential units. (Civil Code § 2923.1(b) (4)). Real estate brokers
performing as mortgage brokers are licensed and authorized to not only make or arrange residential mortgage
loans, but to make and arrange loans secured by other than 1 to 4 residential units, e.g., land, income producing
property, and the like. Mortgage brokers are agents and fiduciaries, as well, in non-residential mortgage loan
transactions. (Business and Professions Code §§ 10131 et seq., 10230 et seq., 10237 et seq., and 10240 et seq.,
and Civil Code § 2295 et seq.).

The agency relationships between mortgage brokers and borrowers and lenders/creditors, or promissory note
holders or the intended purchasers of such notes, or when providing services to borrowers or lenders/creditors
(including acting as loan servicing agents) must be disclosed and consented to by the principals in each
transaction. Mortgage brokers are subject to this duty and obligation regardless of the nature of the transaction
or the type of security property, including when performing services on behalf or borrowers or lenders/creditors,
such as loan modifications, extensions, or forbearances. The appropriate standard of care requires mortgage
brokers, in writing, to disclose to and obtain consent from their principals to the agency relationships intended
before proceeding to act on behalf of their principals. (Business and Professions Code § 10176(d)).

Significant duties and obligations are imposed on mortgage brokers pursuant to federal and state law when
performing as agents and fiduciaries of one or more principals in loan transactions. Even when not acting as
agents and fiduciaries of both principals (dual agents) in loan transactions, the duties and obligations imposed
upon mortgage brokers include (among others), completing and delivering disclosures and notices of rights
required under applicable law. Mortgage brokers are also subject to specified disclosures and notices and may
not engage in prohibited conducts or in material loan terms in loan transactions that qualify as “high-cost”,
“higher-cost”, or “higher-priced”, as defined. (12 USC 2601 et seq.; and 24 CFR Part 3500 et seq.; USC 1601
et seq. and 12 CFR 226 et seq.; Business and Professions Code §§ 10131 et seq., 10166.01 et seq., 10176,
10177, 10230 et seq., 10237 et seq., 10240 et seq. and 10 CCR, Chapter 6, § 2840 et seq.; and Financial Code
§§ 4970 et seq. and 4995 et seq.).