Education and Licensing of Residential Mortgage Loan Originators:
Wide Variation from State to State
by Andrea Lee Negroni, JD
Partner, Goodwin Procter, LLP
Washington, DC
(202) 974-1000

This article examines the wide variation in educational requirements applicable to licensed mortgage companies and mortgage loan brokers in the states. The trend toward requiring any professional or classroom education at all is fairly recent, but it appears that eventually all the state licensing agencies will adopt at least a minimum standard of education for mortgage originators.

A mortgage loan originator is a person whose job it is to find borrowers for lenders, or who acts as a middleman between a lender and a borrower. Basically, mortgage originators are salesmen (or women) who obtain loan applications from consumers and submit them to lenders for approval and funding. A mortgage loan originator is customarily paid as a percentage of the value of the loan. If the loan originator is employed by the lender, he is usually referred to as a "loan officer;" loan originators who are self-employed or contract with many lenders are referred to as "mortgage brokers."

The activities of loan originators are significant because applying for and obtaining a home mortgage loan is a major financial undertaking; indeed, the home mortgage is often referred to as the largest financial transaction most people ever undertake. In addition to taking the application, a diligent mortgage loan originator assists the would-be borrower to understand the financing options available (walking through such choices as fixed vs. adjustable rate, 15-year or 30-year term, a higher down payment or financed mortgage insurance, balloon payment or amortizing loan, prepayment penalty or not, etc.), understand and correct credit problems, understand the loan agreement itself, and more. In fact, many borrowers rely on loan originators to learn everything they need to know about the loan prior to closing. Thus, loan originators have an extraordinarily responsible role to play in a major financial transaction. Obviously, then, the state has an interest in ensuring that this function is competently performed.

In the field of residential mortgage lending, loan originators are customarily licensed at the state level; virtually all states have licensing requirements (a few, such as Alaska, Colorado and Wyoming do not.) Typically, the regulator is the Department of Banking, Department of Finance, or similar agency. Often, the Department of Banking will have a specialized staff devoted to supervision of mortgage companies, such as the Mortgage Banking Division in the New York Banking Department.

Among the first states to license mortgage brokers was Florida, whose Mortgage Brokerage and Mortgage Lending Act (Ch. 494, Fla. Stats.) is more than 40 years old. Florida’s Department of Banking and Finance was also among the first to require continuing education as a condition of mortgage broker licensing. Since 1992, those seeking to become licensed as Florida mortgage brokers have been required to complete 24 hours of classroom education. To ensure that the education is effective, the applicant must also take and pass an examination.

When Florida adopted this education requirement in 1991, it was one of a handful of states that required classroom education as a condition of licensing. Today, more and more states require education and more than a handful require testing. Recently (since 2001), Alabama, Georgia, Ohio, Pennsylvania and West Virginia have added an educational requirement for mortgage loan originators, either in connection with licensing, or with license renewal.

Other states, which do not yet impose educational requirements on loan originators, have adopted a minimum experience level for licensing. Such states include Hawaii, Illinois, North Carolina, Oregon, and Rhode Island. In another variation on the education and experience requirement, a few states have established their licensing requirements in the alternative, i.e., an applicant for a mortgage license can have either the required education or a minimum level of education. States following this pattern include Kentucky and South Carolina.

As things stand in May 2002, the breakdown of states with educational requirements versus those with none, is about half and half. Of the states with a requirement for classroom education, the highest number of hours appears to be Georgia’s, which is 40 hours. At 24 hours are Arizona, Florida, and Indiana. States like Alabama, California, and Texas are still in the double digits, requiring between 12 and 15 hours of education a year for a loan originator to maintain his license. In the single digits (between 6 and 9 hours a year) are Maryland, Pennsylvania and West Virginia.

It is clear that the bar to entry into the mortgage loan origination business is being raised by state regulators, through requirements for education, testing and the like. What remains to be seen is whether the increased education and will result in increased benefits for the mortgage-buying public. Data collection and comparison of the regulators’ experiences with their licensed populations would be useful in determining a benchmark for intangible qualifications such as education and experience.

About the Author: ANDREA LEE NEGRONI (alnegroni@goodwinprocter.com) is a partner in Goodwin Procter, LLP’s Washington DC office. As part of the Financial Services Group, she counsels consumer creditors on laws related to product development, distribution and loan servicing. She is a nationally recognized expert on the subject of mortgage company licensing and is the author of Residential Mortgage Lending: State Regulation Manual, and its 3-volume supplement, Residential Mortgage Lending: Brokers (© West Publishing), and co-author of Pratt’s State Regulation of Second Mortgages and Home Equity Loans (© A.S. Pratt & Sons).

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