13 Reasons Why 30% of LOs Fail the National Loan Originator Exam

The first time “pass” rate of the national loan originator exam has fallen to 69 percent.  This is an indication that the test is not too easy.  A high pass rate means an exam is too easy.  A low pass rate means an exam is too hard.  The numbers that tell a different story are the repeat test takers.  Test candidates who fail the LO exam the first time and retake the exam pass the exam only 44 percent of the time.  The SAFE Mortgage Licensing Act is working the way it was intended.

This blog post is for loan originators seeking help who are trying to pass the test the second, or third time.  Test candidates must wait 30 days between tests and if they fail after their third attempt, they have to wait 6 months before taking the test again.  I know it sounds unfair, but in all seriousness, not everyone is going to be able to pass this exam. The six month cooling off time is like a forced reflection period for a candidate to either get serious in addressing their repeated fails or get serious about studying.  The SAFE Mortgage Licensing Act of 2008 is only the beginning.  Over the next decade loan originators will slowly transform from being less like retail salespeople and more like professionals. The loan originator exam will never be as easy as it was in 2010.

I teach the SAFE Pre-Licensing course for new to newer loan originators which is a 20 hour course. I also teach an exam prep course for experienced loan originators and have had the opportunity to interact with hundreds of loan originator students. In this blog post I’d like to share some reasons why folks are not passing the exam so those who need help can identify their challenges and meet or reset their goals.  The following reasons are numbered for conversation sake and do not appear in any particular order.

1. One reason why people are not passing the loan originator exam is the same reason why people all over the world don’t pass comprehensive exams: Not enough studying. A 20 Hour pre-licensing course is definitely not enough time to teach and learn all the complex knowledge required to pass the national LO exam.  20 hours could be three, 7-hour days or two, 10-hour days.  Take a look at the test content outline.  There’s NO WAY an average human, who has never been in the mortgage lending industry, is going to be able to learn let alone understand, memorize and apply this content with only 20 hours of education.  One reason the number of classroom hours was set at 20 may have been because during 2010 there were a huge number of experienced LOs who worked at non-depository lenders who needed this course. Two days is plenty of time to spend with an experienced originator but not someone brand new.  In the future, expect the pre-licensing hours to be expanded to a full week of education. Until then, some students will have to spend way more time outside of the classroom studying on their own.

NMLS Resource Center2. “There’s no good study material available”
NMLS-approved course providers are not allowed to take the test only for the purpose of telling everyone what’s on the test.  In fact, we agree to NOT do this.  If we’re caught doing this we lose our ability to teach NMLS approved courses! If you think about it, if it were that easy to cheat on the exam then why bother with the SAFE Act? Why not just give anyone who wants a license a license and not test them.  The Nationwide Mortgage Licensing System (NMLS) does not provide a study guide book. Instead they encourage test takers to seek out study material from course providers….however, slow down a bit and you’ll see right inside the test content outline, NMLS TELLS YOU WHERE THE TEST QUESTIONS COME FROM. Look at page 3 of this pdf.  Those who are seeking good study material don’t have to pay to get it.  It’s all available for free. However, that means you’ll have to actually read it. More about reading soon.

3. Wanting the answers/not wanting to study
Loan originators ask their compliance person for the answer when they have a question about Fannie Mae, RESPA, disclosure requirements, etc.  So in attacking this exam, LOs expect to call a course provider and have that course provider hand them a set of 100 questions that will be on the exam. And by the way, anyone who claims to “have THE 100 questions you MUST know” is probably wrong. Any list of questions floating around out there will eventually make their way to NMLS and I’m sure they’ll pull those questions. Okay, so maybe you don’t expect the answers but you expect someone to sell you a book that tells you what will be on the exam.  That book doesn’t exist either.  What about a book that summarizes the test content outline?  Yes there are books available and I think those books would be very helpful for some folks but no book will tell you the exact test questions you’re going to get! Relying only on a book is a mistake.

4. “I know the material, I just can’t pass the test.”
It’s possible you don’t know the material. Re-read numbers 1-3. Or perhaps you have test anxiety.

5. Test Anxiety
I  have met several LOs who are have a high degree of test anxiety that goes way beyond normal nervousness.  Yes, passing the test is important. In their mind, people with high test anxiety go from “not passing” to “living in a van down by the river” in one heartbeat.  Test candidates get themselves all worked up so they can’t eat, sleep, think, or do anything let alone actually learn and understand the test content.  There’s lots of tips and ideas that have been written about dealing with test anxiety and even a little self-quiz you can take here.  One thing the experts agree on is that a person with high test anxiety isn’t going to be able to learn much while studying.  If you want to pass the LO exam, you must deal with your anxiety first and foremost before taking any exam prep classes.  There is no time in anyone’s classroom to give personalized psychological counseling.  Besides, most of the instructors teaching classes whether they’re live or online specialize in mortgage lending not test anxiety. Your challenge is different. Know thyself….pass the test.  Maybe your anxiety comes from not wanting to be honest with yourself about a possible learning disability.

6. Maybe you have an undiagnosed learning disability.  As I’ve mentioned in other articles, back in the 1970s there were no para-educators available to follow kids around giving rambuncious kids extra support. Instead students survived in other ways. Humans listen and talk at a much faster and higher rate than we read and write.  Some LOs are high functioning talkers but low functioning readers.  Some people are dyslexic or have other bona fide learning disabilities that they know about but don’t want to deal with the stigma associated with being labeled.  Well if you want to pass the LO test this might be that point in your life where you finally are going to have to come out of the closet and get some help.  Repeated on purpose: Most of the instructors teaching classes whether they’re live or online specialize in mortgage lending and not learning disabilities. Ask your primary care physician for a referral to a doctor or counselor who specializes in diagnosing learning disabilities in adults.  The Nationwide Mortgage Licensing System will make reasonable accomodations for people with documented learning disabilities.  See page 14 of the MLO Testing Handbook for more details.

7. Subprime LOs who fell out of the industry during 2008 and are trying to re-enter the business are having a very, very hard time passing this test.  The main reason is because they think they already know how to originate and don’t want to spend the time studying or don’t think they have to study so they repeatedly fail the test. Anyone who entered the industry around 2002, left the industry in 2007 or 2008 and only originated subprime received very little compliance training if any. 2011 is a radically different world compared with 2007. If you still think stated income loans should come back, if you still believe that a pay option ARM is “the right product for the right person” and if you think it’s unfair that people can’t use seller downpayment assistance programs please do not re-enter the industry.

8. “The test contains trick questions!”
Actually, the test doesn’t have any trick questions.  Test writers try very hard NOT to write trick questions. The reason the test question sound tricky is because LOs are not use to looking up answers and reading the statute.  Instead they ask their boss or the compliance person, their processor or the person sitting next to them for the answer and move on.  People use language differently in different parts of the U.S.  Teaching a class in Oklahoma or Idaho is vastly different compared with teaching in Seattle or Virginia.  Test writers can’t use spoken language and coloquialisms from different parts of the U.S. when writing test questions for an exam to be delivered in all 50 states. The only fair way to write test questions is to copy and paste directly from the law.  That’s why the test questions sound and look “tricky” but really the trick is on you. If LOs would simply study directly from the law, the test questions would look very, very familiar. Re-read number 2.

9. You’re ESL
English language learners are my best students. Why? Because they are typically more emotionally mature, know good and well that they have to listen, ask lots of questions, and study over and over again to pass this test.  ESL LOs…you WILL pass the test. Read more here.

10. The test has too many “situational” questions
So you know RESPA. You know TILA.  You’re scoring high on all your practice exams but the test isn’t going to be as easy as just knowing that you have to send out early disclosures within 3 days of the application.  Instead the test will contain situational questions that will require you to understand how and also why TILA and RESPA interact with each other. This requires you to look at a test question and understand what information you DON’T need and cast it aside. Only then will you be able to understand what content the test writer is testing you on.  This means memorizing test questions is a bad way to study. Instead you’re better off studying the laws and rules that govern mortgage lending.  Mortgage loan origination is all situational. These are highly appropriate questions for the exam and I hope we see more in the future.

11. Part Timers
The national LO test sets a bar and asks people who want to originate to show proof of knowledge of a body of information. Loan origination is no longer a sales job. It’s transforming into a profession. It’s really hard to be a part time doctor, lawyer, engineer, dentist, CPA unless that person is entering semi-retirement. The knowledge, skill set, and industry changes are too wide and deep and the consequences of screwing up are too high.  Welcome to mortgage lending in 2011.  You must be on your game full time or no one will want to hire you. And those companies that do hire part timers are going to have huge liability issues supervising you in 2011 and beyond.  Commit to origination as a profession. Now start over and re-read items 1-3. Part timers have a high opinion of their knowledge of mortgage lending and are sometimes too proud to want to hear that they need more basic education on the entire mortgage lending process.

12. Lack of Basic Education
The SAFE Mortgage Licensing Act does not require a high school diploma or equivalent to become a licensed loan originator. Instead, those without a diploma simply must have proof of three years of experience in the mortgage lending industry.  Subsequently, the national LO exam will be that barrier to entry for folks who may have a learning disability or folks who may not have the ability to think, reason, and understand above a 9th grade level. Some of the math questions on the exam will require a basic understanding of 9th grade algebra. Some of the questions will require the ability to understand how two federal laws relate to each other and to the consumer.  Some people only have the ability to understand one federal law at a time.  Mortgage loan origination today requires the ability to multi-think all day long.  My recommendation: Finish high school first.  The discipline required to obtain a GED will be good practice for studying for the LO exam.

13. Learning Style Not Matched with Study Choice
Visual, auditory, tactile, whole body, emotional…These are all learning styles and passing the test means knowing how you best learn. Learning requires understanding. If you can teach another person something, this is a good sign that you know that concept and will be able to select the correct answer on an exam.  Some people have to see pictures. Other students need to hear the content.  Sometimes instructors tell stories about legal cases. Stories evoke emotion which triggers long term memory.  Sometimes students learn best if they get their whole body involved in the learning process. Everyone is different. Choose a course provider that understands learning styles and find one that matches your particular style.  In my experience, most students have a mixed style so find an instructor/course provider that mixes it up for you. One student had me on the phone grilling me with questions about my course for at least 15 minutes. We figured out that we’d be a good match for each other. She attended my course and passed the test the next day.  Don’t be afraid to call course providers and ask lots of questions.

Every test candidate is different. Some people listen at a higher/faster rate than they can read and write. Some people need to simply read through 400 sample test questions and that’s all they’ll need.  Some people have undiagnosed learning disabilities.  If you’ve taken the LO exam and failed, re-evaluate your learning style, the time you’ve spent studying and any of these other ideas and try again.  If you still cannot pass the exam ask yourself how much you love the mortgage lending industry because there are other positions available in lending that do not require an LO license.  And remember, you can always go work at a depository bank.  Bank LOs do not have to pass the exam…..yet.  Someday they will.

About Jillayne Schlicke

Educator in the field of mortgage lending and real estate. Follow me on Google+

Comments

  1. The LO’s who do not pass the test can at least go work for a bank or credit union… they just will not be able to have their NMLS License.

    I think that any mortgage originator should be required to pass the NMLS exam…this would require that Congress amends the SAFE Act to include their banker buddies.

  2. Rhonda, you best believe I point out to prospective borrowers and business partners that there are now two types of LOs. Those who are qualified and those who aren’t!

    The SAFE ACT despite its many flaws has been a good thing as the quality of LO has increased dramatically. I still think the barriers to entry should be even higher, but something is better than nothing.

    I personally didn’t find the test all that difficult. I studied maybe about an hour or so at a Starbucks before taking it. It test compliance issues and other non-sense that has nothing to do with being a good originator imho. It is like when someone knows all the rules of football but never actually played football.

    I can see someone failing on the first try without proper study, but two fails is inexcusable. This isn’t the Bar exam and if someone can’t pass after two tries they shouldn’t be an LO.

  3. Russ, I wonder how many borrowers will notice if/when the person they see someone else’s name and license number on their loan application instead of the person they believe is their mortgage originator?

  4. Not many. All borrowers care about is their rate. There will be plenty of shops who continue to originate under a licensed LO. I really wish the Safe ACt would have granted 50 state licensing across the board instead of the bureaucratic state licensing morass we have now.

    What i find hilarious is that in previous years banks used to use the “we are a direct lender line” and tried to brand brokers as the used car salesman. Now with the SAFE Act and the shady bank lobbying, the opposite is true! All the unqualified shlubs work for pennies at the big banks and we can document it!

    In the past, when I tried to explain that the best LOs generally don’t work at the Too Big to Fail banks, it was always hard to prove beyond our innate industry knowledge about how things really work. But now, I can actually prove it! LOL.

    It used to be the broker world had the best and worst LOs. With the banks you just got mediocrity across the board. Now the broker industry can claim just the best.

  5. Hi Rhonda,

    The SAFE Act granted a hall pass to depository bank loan originators from taking the prelicensing education, continuing ed, and passing the test. However, bank LOs will still have to register with the Nationwide Mortgage Licensing System and will be given a unique ID number. So as Russ says, yes there are currently two types of LOs: Licensed LOs and Registered LOs. It is up to the industry to educate consumers as to the difference.

  6. Russ, regarding the football analogy, another way of testing LOs would be to do a live, oral exam. I suppose we could have voted to haul LOs before some sort of testing board and asked them to take our loan application, quote rates, explain loan programs, describe the secondary market, draw a picture of the relationship between the TIL and the GFE and answer, VERBALLY, a consumer’s questions such as: “What is the Annual Percentage Rate?” “What is the Amount Financed and why is this not my loan amount?” and so forth.

    On the one hand, I have met LOs who would definitely PASS THIS TEST with flying colors because…..THEY CAN’T READ at a 9th grade/high school level but they can talk your socks off.

    Russ, I think a live, action test would be horrifying for the majority of LOs out there who would have massive test anxiety for something like this. It would also cost way more to deliver and grade. Grading would be somewhat subjective (like a referee with no instant replay) or if we made a live action test objective, it would be very, very, VERY difficult to pass.

    I don’t think the current crop of LOs in our industry are ready for something like this. Although you’ve made your point that you are beyond ready and would not be nervous at all…..I personally think you’d be nervous.

    So we start at about a 9th grade level. What you describe is at about college level.

    Over time the tests ought to become more challenging and when the NMLS is ready for input I’ll send you an email so you can send your suggestions. ;)

    • Jillayne:

      I’d have no problem with a verbal test like that. I actually think it is a good idea, but it would never happen. It would take a significant culture shift in the industry to have that type of barrier to entry. I come from a much different professional background than 99.9% of LOs, so my expectations are VASTLY different in regards to company hiring. I voluntarily left a six figure consulting job to become an LO and have an MBA from a Top 3 business school. Most of my peers and co-workers were Harvard, Kellogg, Wharton, Stanford, U of Chicago, etc MBA grads. Trust me when I say the interview processes at companies like Goldman Sachs, McKinsey & Co, and other prestige companies are extremely thorough. You have interviews over several days and live case interviews to test your ability to apply your knowledge in the real world as well as under pressure. if I were king that is the type of interviewing I would do for LOs (as well as Realtors). But alas, I am not…

      I’ve long stated that the mortgage industry’s standards are way too low for the amount of money we deal with on a daily basis. If the industry were more strict in hiring, the costs associated with fraud, inefficiencies, etc I think would be a lot lower.

      The mortgage industry is a quantity over quality model, so the idea is to get as many MINIMALLY qualified people in the door as possible. The background I come from is a QUALITY over quantity where the hiring model was about finding the most qualified people possible. A much longer term view.

      The SAFE Act is a step in the right direction, but I still think it is lacking in many areas.

  7. Rhonda, regarding unlicensed LOs taking a loan app and having that loan originated under someone else’s LO number….that activity is happening NOW so there’s no doubt in my mind that it will continue to happen indefinitely.

    There are nor will there ever be enough regulators to regulate every loan in every city/state in the U.S. Regulators have to triage and put the cases where consumers are being harmed in top priority.

    Unlicensed LOs….as long as the consumer isn’t being harmed…will probably be much lower on the priority chain.

    I can think of at least five people right now who cannot obtain an LO license and who are engaging in origination activities.

    These folks either have had their LO or mortgage broker’s license revoked, maybe they have a prior felony conviction…maybe they can’t pass the test….and they hold management-type positions instead. “Branch Manager” “Sales Manager” is what their card says yet their days are filled with LO type activities.

    Do the regulators know? Do the company owners know? It’s hard to say. But practitioners in the industry such as processors, underwriters, closers, other LOs….we know who they are.

    I’ve got to think that the company owners know.

    So why do company owners allow it?

    Perhaps fines are too low (definitely). Maybe the unlicensed person is extremely charming and has a perfectly logical explanation for what happened (likely). Maybe the company owner looks at the chances of being caught and the fines and makes a business decision to hire the guy, and pay the fine if caught and realizes after doing some back of the napkin math, that the company would come out thousands ahead if this guy can bring in the business…after fines are paid. I think it’s a combination of all three.

    And nobody in the industry wants to turn these guys in. Why? Because the whistleblowers name then becomes public record and now that person whether they’re a processor, underwriter, LO, etc., is now blackballed from being hired elsewhere.

    Perhaps one solution is an anonymous whistleblower process.

    I have been told that our state regulators WILL take anonymous tips. Let me check with them again…

  8. Hi Russ,

    Regarding LOs who work at a depository bank being schlubs, I need to just chime in here with a quick response.

    I’ve met many bank LOs and some of them are extremely competent. They stay at a depository bank or credit union for many, many reason. Maybe I could interview some of them and write a separate blog post on that topic.

    Recently I’ve met a handful of depository bank LOs who are taking the prelicensing classes and taking the test and getting the license. Why? Because they are feeling the pressure from their Realtors who are pointing out the differences between a registered LO and licensed LO. The bank LOs say they want their license for competitive reasons. They also believe they will eventually be pulled under the entire SAFE Act anyways; that’s just a matter of time.

    • Just calling it like I see it. Things certainly vary by market, but here in Chicago, the majority of bank LOs are either 1) new to the business so they are looking for leads and training or 2) failed brokers on their last stop before being washed out to sea.

      Those are the only two reasons people work at banks here. The independent lenders and brokers pay substantially more and offer more freedom. Very few truly successful LOs choose to be at a Too Big Too Fail bank.

      Just like I am sure there really are strippers who really are paying their way through college, I am sure there are big bank LOs who aren’t shlubs. Both are rare imho and the rock star producers at banks won’t stay there long.

      As Rhonda has pointed out on numerous occassions, just look at how banks advertise recruiting opportunities – Hide Your SRP and no licensing required.

    • I know of some very good bank LOs… they stay at a bank because they like gravy business. They’re paid a lower compensation per loan but rewarded if they produce larger volumes (which I think is NOT good for the consumer). They may have to do some time sitting in branches but the volumes they receive from working at a big bank is worth it to them…the volumes are so high that the lower compensation split isn’t so bad.

      What consumers should be aware of is that even if their bank LO makes less compensation than a licensed (non-bank) LO, they should NOT take their eye of the Note rate/closing cost. I’ve found that most banks seem to have rates higher than what can be obtained elsewhere but promote “no overages” or our LO’s are not paid origination… consumers need to compare.

  9. Hi Readers,

    I’ve just been told by WA DFI that YES they do take anonymous tips:

    “Jillayne,
    Thank you for the note of inquiry. Here are some pointers on anonymous tips. An anonymous tip can be filed on line. Just write anonymous (or any other word) in the fields that are required:

    http://dfi.wa.gov/consumers/complaint.htm

    Anonymous tips can also be filed on a complaint form and mailed to us. One of the main problems with anonymous tips is that the complainant usually does not give us enough information and there is no way for us to contact them.”

    THANKS for getting back to us, DFI!

  10. Ex Mortgage Broker says:

    Like I said all this mess is because banks want to rip off people not because mortgage brokers or loan originators want a fair career, Banks and government are together on this they want to get as must money as they can, no matter what.

    All these test is a bull can you imagine that a teacher, doctor, lawyers, or any other career that will need to study in the university, just because the industry goes bad all license will be suspended.

    like mortgage brokers that have been professional for years and because the big fix ¨the banks¨and ¨the government¨said the bad guys are mortgage brokers we are god so we are punishing them revoking every license in united states this way we will get more money sorry millions of dollars jajjaja we have the power we can do anything, Yes you can just like Gadafii

  11. Sorry, EMB, I see no conspiracy theory going on.
    The mortgage lending industry needed to raise the bar and licensing and testing is a very good place to stary. Mortgage brokers haven’t been professional for years. Some of them have always been and will always be that way…..others, not so much.

  12. I Jillayne and Russ you both should go out!..lol.:)

  13. Russ, opinionated much? “If you don’t pass it the first two times, you shouldn’t be a loan officer” Wow, do you even have a college degree? Pretty full of yourself. I have to say, my “conspiracy theory” side does come out on this one. I agree with Ex Mortgage Broker. You need to swallow a humble pill my friend.

  14. I think the test is ridiculous. There is no reason that any of that information need be memorized. It is all information that can be easily looked up if needed. It is similar to the series 7 requirements. It has nothing to do with understanding the products and who they are good for.

  15. Hi Adam,
    Thanks for stopping by. There ARE some questions on products but it’s more in a general way: What is Fannie/Freddie, what is FHA…basic questions about conventional and conforming government loans and also questions about non-traditional (subprime) loans. There will be basic mortgage math questions as well like how to qualify applicants using simple debt-to-income ratios and FHA mortgage insurance premium calculations….loan-to-value calculations….these are things that loan originators do all day long. The reason there are no question about lending guidelines is because these are a moving target and could possibly change every day. There would be no way to deliver a comprehensive 50-state test on guidelines that are constantly changing. These are things loan originators learn on the job.

    IMO it IS important for LOs to not just memorize but understand the hallmark federal laws governing our industry: RESPA, TILA, ECOA, Fair Housing, SAFE Act, and so forth. <–the intricacies can be “looked up” by you or your compliance staff but the BASICS ARE IMPORTANT.

  16. @Russ: I was recently ranked in the top 200 originators in the the country. I do not see a Russ on the list. I found this information very helpful for new LOs I’m hiring for my team and could do without your opinions about people who should not be originating.

    • Chris, thanks for your comment. I’m new to the industry while coming from 17 years in the health care industry. This information is tremendously helpful.

  17. MissPokey says:

    Wow! This was eye opening to hear. I just took the exam and failed by a few percentages and I thought I was going into it prepared. I took the online 20hr course and the final exam, I passed with flying colors and I knew everything they taught me. But, there were questions pertaining to the Financial Institution requirements and laws, that I didn’t even know existed. I didn’t know that my LO’s at the bank could of possibly not have been licensed and I have done 3 personal loans with him. In a way it makes me mad that the Financial Institutions don’t have higher standards.

    I also have my Real Estate License and took an 80 hr course and took the Real Estate Exam a week after I completed the course and passed the first time. So, I thought this test would be similar style and cover some of the same things, but boy was I in for it. The Federal Law part really got me. I felt like alot of the answers could of been right, just which one was more right. There were things tested on there that were never discussed during the 20hr online course and I was mad. I paid money to learn the content and I don’t feel that it’s fair for a newbie to not get the proper education that is needed and deserved and “that we pay for”, to get all the information needed to pass the exam. It’s like going to get a degree and then given you half the information needed to learn and then expect you to perform the job and pass an exam without learning all the material needed. So, I don’t feel like it’s giving us all the answers. At least tell us what we need to look up and study if your not going to go over it in the course.

    So, now I am studying the Federal Law more myself, but I feel robbed of $110 that I paid to take the test.. I don’t mind looking things up and learning, but how am I suppose to guess what I am suppose to look up or know. No one can do that, maybe people that have been doing it or have been in the business, but that’s not really fair either. So, I feel a bit cheated by taking a compliant online course.

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