Residential loan underwriters are administrative employees exempt from overtime
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Friday, March 4, 2016

Residential loan underwriters are administrative employees exempt from overtime

By Lorene D. Park, J.D. A divided Sixth Circuit affirmed a district court’s decision that a class of residential loan underwriters were administrative employees within the meaning of 29 U.S.C. §213(a)(1) and 29 C.F.R. §541.200(a), and therefore were exempt from the FLSA’s overtime provisions, because their job duties related to the general business operations of the bank and they exercised discretion and independent judgment when performing those duties. Summary judgment was therefore properly granted. Judge White dissented, finding triable issues on whether the plaintiffs’ primary duty included the exercise of discretion and independent judgment on matters of significance (Lutz v. Huntington Bancshares, Inc., March 2, 2016, Suhrheinrich, R.). The loan process. The residential loan process begins with the creation of a product, such as a 30-year fixed-rate mortgage. The product development group develops a product’s profile, assessing the bank’s “risk appetite” for the product and creating guidelines, such as maximum loan-to-value or debt-to-income the bank will accept from a customer. Another group then sets the interest rate. A loan originator discusses products with a customer before selecting a loan and starting the application process. A loan processor ensures that all documentation is in the file, such as a credit report and income statements. For most applications, that information is uploaded onto the bank’s underwriting software program, which generates an electronic file. Underwriters’ function. Once the application file is complete, the underwriters (like the plaintiffs in this action) review the file to perform two functions: (1) confirm that the information is accurate, using cash-flow analysis and worksheets to calculate the applicant’s income and comparing the information provided to the credit-bureau report; and (2) decide whether the customer qualifies for the desired loan. The underwriting software initially recommends whether to approve, and underwriters essentially review that recommendation using the bank’s guidelines (which span thousands of pages) and lending criteria, as well as pertinent regulations. Underwriters are “expected to exercise their judgment regarding credit decisions objectively,” and they can take actions beyond the guidelines. If a customer does not meet lending criteria but otherwise satisfies compensating factors (like having a co-signer), underwriters can approve the loan by making an “exception” or “adjustment.” They can also make a “counteroffer” that alters the application, and they have discretion to “flag” an application that satisfies the guidelines but is otherwise suspicious. The loan process ends when an underwriter approves or denies a loan. FLSA overtime suit. The named plaintiffs filed a class action claiming the bank failed to pay overtime in violation of the FLSA. The court certified a class of underwriters who worked with residential loans and later granted summary judgment for the bank, ruling that the underwriters were administrative employees under 29 U.S.C. §213(a)(1) and 29 C.F.R. §541.200(a). It reasoned that the underwriters’ job duties related to the general business operations of the bank and that they exercised discretion and independent judgment when performing those duties. Affirming, the Sixth Circuit first set forth the three elements required for the administrative exemption to apply and explained that the parties disputed only whether the underwriters’ primary duty was “the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers;” and whether their primary duty included “the exercise of discretion and independent judgment with respect to matters of significance.” Directly related to management or general business operations. In determining whether the underwriters’ work directly related to management or general business operations, the appeals court applied an “administrative-production dichotomy,” distinguishing those who perform work directly related to assisting with running the business from those who work on a manufacturing production line or selling a product in a retail or service establishment. Here, the underwriters performed administrative work because they assisted in the running and servicing of the bank’s business by making decisions about when it should take on certain kinds of credit risk, something ancillary to the bank’s principal production activity of selling loans. Exercise of discretion and independent judgment. The appeals court further agreed with the district court that the underwriters exercised discretion and independent judgment, evaluating possible courses of action and making a decision. While their authority was “heavily tempered” by the guidelines, the underwriters still had authority to waive or deviate from the guidelines in certain instances. “By imposing stipulations, creating exceptions, proposing counteroffers, and flagging applications, underwriters exercise independent judgment to depart from a straight approval or denial of a loan application based solely on the Guidelines,” explained the court. Moreover, the underwriters’ exercise of discretion and independent judgment concerned “matters of significance.” While they might not determine the bank’s overall risk guidelines, they made decisions that significantly impacted the business, and they did determine the risk the bank would accept for any particular loan. For these reasons, the underwriters satisfied the disputed elements of the administrative exemption and summary judgment for the bank was affirmed. Dissent. Judge White disagreed, finding issues of fact on whether the underwriters’ primary duty included the exercise of discretion and independent judgment on matters of significance. In Judge White’s view, they made no “holistic decisions; rather, like loan originators and processors, they are links in a chain that culminates in delivering loan products.” Moreover, they did not, as the majority asserted, “balance risk against security,” and the loans they cleared were subject to independent review by two separate groups at the bank.

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