Note Broker Agreements: Fee Agreements and Non-Circumvention

A note broker agreement is the written deal that says who pays a broker, how much, when the fee is earned and who may not go around whom. The usual pair is a fee agreement and a non-circumvention and non-disclosure agreement, often called an NCND. Both protect less than most people assume, and whether either holds up depends on your state’s law and on whether the person collecting the fee was allowed to collect it.

This page is about the documents themselves. How two brokers divide the work and the pay on one deal is a separate subject, set out in co-brokering a note deal.

The paperwork you are likely to see

Names vary from one broker to the next, so read what each document does rather than what it is called.

Some brokers fold several of these into one document. That is fine, as long as each part is clear on its own.

What a fee agreement should spell out

A fee agreement is a contract, and its value lies in the details that settle arguments before they start.

• Who pays: the note holder, the buyer, or nobody directly because the fee comes out of the gap between the buyer’s price and the holder’s net. The ways a broker gets that money are covered in how a note broker earns a fee.
• The amount, as a flat figure or a percentage, and a percentage of what: the unpaid balance, the price the buyer pays, or the cash the holder receives.
• The moment the fee is earned. Signing, an accepted offer and funding are very different points.
• How it is paid. A fee paid through the closing by the title or escrow company is cleaner than one the broker has to chase afterwards.
• What happens if the deal changes shape, such as a partial purchase in place of a full sale, or a lower price after the buyer’s checks.
• Any exclusive period, how long it lasts and how either side ends it.
• A tail: how long after the agreement ends a sale to a buyer the broker introduced still earns the fee.

An illustrative example

The figures below are round numbers chosen to show the arithmetic, not typical fees. A note has an unpaid balance of $120,000. A buyer agrees to pay $93,000 and the holder is to receive $90,000, leaving $3,000 for the broker at closing.

Now look at how the wording moves the money. A fee of 3% of the balance is $3,600, while 3% of the holder’s $90,000 is $2,700. Same percentage, $900 apart, so the base matters as much as the rate.

Timing matters even more. Suppose the buyer’s title search turns up a problem and the sale dies. If the agreement says the fee is earned at funding, nobody owes anything. If it says the fee is earned when the holder accepts an offer, the broker may claim $3,000 from a holder who never received a dollar. That is why many careful agreements tie the fee to funding and to payment through the closing, title and escrow process.

Non-circumvention: what it can and cannot protect

Circumvention means cutting someone out: a buyer who was introduced by a broker goes straight to the holder, or a second broker contacts the first broker’s buyer on the same note. A non-circumvention clause is a promise not to do that.

Where it tends to work

It is strongest when it is narrow. A clause that names the note, names the party introduced, states a period such as 12 months, and states the remedy, usually the fee that would have been earned, gives a judge something definite to enforce. A dated email that identifies the introduction and is acknowledged by the other side helps prove it happened.

Where it tends to fail

• Against someone who never signed it. A note holder who signed nothing with a second broker is not bound by that broker’s agreement with a buyer.
• Over information that is already public. A recorded mortgage or deed of trust names the lender, and anyone can find it in county records, as recording a mortgage makes clear. Showing that a buyer learned of a holder only through you is hard when the holder’s name is on file at the county.
• When it is vague or very broad. Promises covering “all contacts” with no end date may be read narrowly or treated as an unreasonable restraint, and states differ on how they handle restrictive clauses.
• When enforcing it costs more than it recovers. A lawsuit over a $3,000 fee can cost more than $3,000.

The practical protection is a short list of named introductions, payment through the closing, and working with people whose conduct you have already seen.

Confidentiality and the payer’s information

A note file holds private details about the payer: income, payment history, sometimes a Social Security number. The holder shared it for one purpose. A confidentiality clause should limit who receives it, require it to be returned or destroyed if the deal does not go ahead, and allow a redacted summary until a buyer is serious. Federal privacy rules under the Gramm-Leach-Bliley Act and state privacy laws can apply to people who handle this kind of information, so ask your attorney whether they apply to you.

The licensing question behind every fee

A signed fee agreement does not make a fee lawful. In some states, taking a fee for arranging the sale of a note secured by real estate can require a real estate, mortgage broker or loan broker license, depending on the facts. Work that touches new residential lending, such as arranging seller financing or a loan modification, can also bring in the SAFE Act and the state rules for mortgage loan originators. Pooling money from several investors to buy notes raises securities law questions of its own.

The consequence that catches people out is collection. In some states, a person who needed a license and did not have one cannot go to court to recover the fee, whatever the agreement says. Before you rely on any fee agreement, check your state’s rules and talk to an attorney. The questions to bring are listed in licensing and note brokering: what to check in your state.

If you are the note holder asked to sign

Read four lines before anything else: who pays the fee, when it is earned, how long any exclusive period runs, and whether you can still accept an offer that reaches you directly. Ask whether the figure you are quoted is the net amount you will receive at closing. If an agreement would bind you for months before you have seen a single price, it is reasonable to ask for a shorter term or to get a price on your note first and compare.

Templates, forms and attorney review

Free NCND and fee agreement templates are easy to find, and they are a fair way to learn what the clauses look like. They are a poor substitute for advice. A form written for another state, or for commercial real estate or business brokerage, may use terms that mean something different where you work, or promise a fee your state does not let you collect. Have an attorney who knows your state’s rules review the form once, then use it consistently, so every introduction you make is covered by the same clear terms.

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