Seven states on Wednesday launched a standardized and mandatory process to more thoroughly license and track tens of thousands of mortgage brokers.
The effort could be expanded on by congressional Democrats, who are expected this year to continue pushing for tighter national standards.
Mortgage brokers have come under scrutiny over the last year as home loan defaults grew and housing market troubles worsened. Experts say loose licensing standards made it easy for shady operators -- even those with criminal records -- to work in the business.
Although mortgage regulations vary dramatically from one state to another, the new system creates a uniform application for mortgage brokers and a database that banking regulators -- and eventually consumers -- can use to identify brokers who try to work in one state after being banned from another. Consumers should have access by next year.
Idaho, Iowa, Kentucky, Massachusetts, Nebraska, New York and Rhode Island are the initial states participating. The system is mandatory for brokers doing business in those states, and they can be penalized for operating without a license.
Altogether, 42 state agencies -- including those in Washington and Puerto Rico -- have committed to joining the system by the end of 2009.
The state system applies to mortgage brokers and loan officers at state-regulated banks but not employees at nationally supervised banks.
A bill passed by the House in November would require all states to participate in the licensing system and would mandate criminal background checks for everyone involved in selling home loans.
The bill also would require minimum education standards for brokers and completion of a written test.
Of the 53 state agencies that regulate mortgage lending, 41 require criminal background checks, 32 require continuing education and 17 mandate some sort of testing, according to an association of state banking regulators.