Disclosure When the Broker Also Owns the Lender
Sana is a licensed broker and also holds a minority interest in a private lending company, Northgate Capital. A client, Theo, needs a $410,000 second mortgage to pay out a tax debt. Sana's brokerage can place the loan with a prime lender only if Theo's ratios improve, which would take months. Northgate can fund now at 11.5% with a 2% lender fee and a 12-month term. Sana presents the Northgate option as "the best available solution" without mentioning her ownership interest. Theo signs. Six months later he struggles with payments and learns of Sana's stake.
1. What disclosure obligations did Sana have, and did she meet them?
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Sana had a clear conflict of interest: she stood to benefit personally from placing the loan with Northgate. Licensees must disclose any interest in a lender or in the transaction, in writing and before the client commits, so the client can give informed consent. She also had a duty to present suitable alternatives and their trade-offs.
Sana failed on both counts. Describing Northgate as "the best available solution" without disclosing her ownership is misleading, and it conceals the incentive to steer Theo to the higher-cost product. The disclosure should have stated her ownership interest, the fees Northgate would earn, the cost difference versus waiting or other options, and Theo's right to seek independent advice. The failure supports a complaint and potential discipline, and may give Theo grounds to challenge the transaction.
2. How should Sana have structured the advice and documentation?
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She should have: (1) disclosed the ownership interest in writing at first contact; (2) documented Theo's objectives and the alternatives - waiting for prime qualification, a different private lender, or a debt-restructuring plan; (3) quantified the cost of the Northgate option (11.5% interest, 2% fee, renewal risk at 12 months); (4) obtained Theo's signed acknowledgment of the conflict and consent to proceed; (5) recommended independent legal or financial advice; and (6) ensured the file record showed why the chosen product was suitable. If the conflict was too significant to manage, she should have referred Theo to another broker. The exam point: conflicts are managed by timely written disclosure and consent, not by silence.