Employment Law Daily Mortgage underwriters not exempt from overtime under administrative exemption
Friday, July 7, 2017

Mortgage underwriters not exempt from overtime under administrative exemption

By Ronald Miller, J.D.

Mortgage underwriters employed by a bank were entitled to overtime compensation for hours worked in excess of 40 per week, ruled the Ninth Circuit. Applying the analysis used by the Second Circuit, rather than the Sixth Circuit, the appeals court held that, because the mortgage underwriters’ primary job duty did not relate to the bank’s management or general business operations, the administrative exemption to the FLSA’s overtime requirements did not apply. Here, the appeals court determined that the underwriters’ duties went to the heart of the bank’s marketplace offerings, not to the internal administration of its business, so that it could not prove that the mortgage underwriters qualified for the administrative exemption (McKeen-Chaplin v. Provident Savings Bank, FSB, July 5, 2017, Thomas, S.).

Guidelines. The bank sells mortgage loans to consumers purchasing or refinancing homes and then resells those funded loans on the secondary market. Its mortgage underwriters review mortgage loan applications using guidelines established by the bank and investors in the secondary market. Mortgage underwriters are responsible for thoroughly analyzing complex customer loan applications and determining borrower creditworthiness in order to ultimately decide whether the bank will accept the requested loan. After the mortgage underwriter approves the loan, it is sent to other bank employees who finalize the loan funding. Whether a loan is funded ultimately depends on factors beyond the underwriter’s control.

A mortgage underwriter employed by the bank brought a collective action under the FLSA seeking overtime compensation. The district court granted conditional certification, and initially denied the parties cross-motions for summary judgment, and set the matter for trial. Later, on reconsideration, the district court concluded that the underwriters qualified for the administrative exemption, based on its finding that their primary duty included “quality control” or similar activities directly related to the bank’s general business operations. This appeal followed.

Administrative exemption requirements. The bank had to prove that the underwriters met all three requirements of the administrative exemption in the Department of Labor regulations, 29 C.F.R § 541.200(a). Here, it was undisputed that the salary requirement was satisfied. To satisfy the second requirement, an employee’s primary duty must involve office or “non-manual work directly related to the management policies or general business operations” of the bank or its customers. This requirement is met if the employee engages in “running the business itself or determining its overall course or policies,” not just in the day-to-day carrying out of the business’ affairs.”

The Sixth Circuit recently held in Lutz v. Huntington Bancshares, Inc., that mortgage underwriters were exempt administrative employees, explaining that they “perform work that services the Bank’s business, something ancillary to the Bank’s principal production activity.” The Sixth Circuit disagreed with the Second Circuit’s holding in Davis v. J.P. Morgan Chase & Co. that “the job of underwriter falls under the category of production rather than administrative work.” However, given the undisputed facts in this case, the Ninth Circuit concluded that the Second Circuit’s analysis in Davis should apply.

The Ninth Circuit observed that the bank’s mortgage underwriters did not decide if it should take on risk, but instead assessed whether, given the guidelines provided, the particular loan fell within the range of risk the bank had determined that it was willing to take. Consequently, the underwriters did not assess what was in the bank’s best interest, but were told what was in the bank’s best interest, and then ensured that the product being sold fit within criteria set by others.

Codified examples. Moreover, the appeals court found that the DOL’s codified examples of exempt administrative employees, including descriptions of claims adjusters, and employees in the financial services industry, buttressed its conclusion. The DOL has specifically analyzed mortgage loan officers and made clear that they “do not qualify as bona fide administrative employees” because they “have a primary duty of making sales for their employers.” While mortgage underwriters are distinct from mortgage loan officer in the mortgage production process, they are not so distinct as to be lifted from the production side into the ranks of administrators.

The Ninth Circuit concluded that where a bank sells mortgage loans and resells the funded loans on the secondary market as a primary font of business, mortgage underwriters who implement guidelines designed by corporate management, and who must ask permission when deviating from protocol, are most accurately considered employees responsible for production, not administrators who manage, guide, and administer the business.

Quality control. The district court concluded that the underwriters performed work that related to “qualify control,” such that it constituted “work directly related to management or general business operations,” within the meaning of § 541.201(b). However, the appeals court found that this legal conclusion was not supported by the record evidence. The undisputed facts established that the bank used an outside company to perform quality control functions. Further, a pre-closing qualify control process generated reports that were sent to the underwriters. Third, the loan servicing department performed post-closing quality control. Fourth, the internal audit department reviewed the loan process annually. The district court made no finding regarding the legal significance of the quality control functions that the record established were in place at the bank. Accordingly, the Ninth Circuit reversed the district court’s grant of summary judgment in favor of the bank.

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