Seven States joined hands to launch a standardized process to license and monitor thousands of brokers in their state. This effort could be extended to other states through the efforts of the Democrats who are pushing for tighter national standards.

Initially the seven states are Idaho, Iowa, Kentucky, Massachusetts, Nebraska, New York, and Rhode Island. 42 other state agencies including those in Washington DC and Puerto Rico have committed to join by the end of 2009.

The system is mandatory for brokers doing business in the said states. Brokers operating without a license can be penalized.

Over the past year, mortgage brokers have come under fire as they are seen partly contribute to the increasing home loan defaults and worsening housing market. Experts say lax standards in issuing license made it easy for shady and/or fly by night operators.

In the new system, the mortgage regulations still differs from one state to another but the new system crafted a uniform application process for mortgage brokers. Also, it produces a database that banking regulators, and eventually consumers, can use to see brokers’ track records. It is seen that consumers will have access by next year.

Lending-reform legislation will confront tough deliberations in congress this year, but mortgage industry consultant Howard Glaser said the consensus emerging from Democrats and Republicans is clear: More oversight of mortgage brokers is necessary.

“To have true uniformity, you would need to have a federal rule,” Glaser said. “It shouldn’t make a difference where you live.”

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 would also mandate 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 have require some sort of testing requirement, according to the state banking supervisors group.

John Ryan, executive vice president of the banking supervisors group, said his group can’t force states to strengthen their laws, but many are already doing so. “We’ve focused on where we could get consensus,” he said.

The National Association of Mortgage Brokers fought the banking supervisors’ effort, arguing that bank loan officers should be subject to the same standards.