The Ninth Circuit Court of Appeals issued a decision last week holding that mortgage underwriters are not exempt from the overtime requirements of the Fair Labor Standards Act (FLSA). The July 6 decision, which furthers a split among several federal circuit courts, has the potential to profoundly impact the pay practices of companies that employ mortgage underwriters, particularly those with employees located in the western part of the United States.

In McKeen-Chaplin v. Provident Savings Bank, the appeals court reversed the district court's holding that mortgage underwriters qualified for the "administrative exemption" from the FLSA overtime requirements. Named plaintiff Gina McKeen-Chaplin and other mortgage underwriters were responsible for reviewing mortgage loan applications for Provident Savings Bank ("Provident"), which sold mortgages to consumers and resold the mortgages to investors. The underwriters' duties consisted of applying guidelines established by Provident and analyzing loan applications to determine borrowers' creditworthiness. The underwriters also imposed conditions on certain loan applications based on their analysis. In addition, they recommended alternative loan products, which were communicated to applicants by a loan officer. The underwriters could also request that Provident make exceptions to its guidelines in certain cases, but they were not involved in finalizing loan funding or the sale of approved loans on the secondary market.

McKeen-Chaplin alleged that she and other underwriters often worked in excess of 40 hours in a workweek and, therefore, were owed overtime compensation of time and one half their regular rates of pay for each excess hour worked. Provident disagreed, arguing that the underwriters are exempt from the overtime-pay requirements of the FLSA under the so-called "administrative exemption." The exemption is generally reserved for white-collar workers whose primary duties involve the exercise of discretion and independent judgment on matters of significance to the business, which must include the business management or general operations. The district court ruled that the underwriters' primary duties qualified them as exempt under the administrative exemption because they included "quality control" that directly related to the bank's business operations.

The court of appeals disagreed. In an opinion by Chief Judge Sidney R. Thomas, the court focused on the distinction, imposed by Department of Labor (DOL) regulations interpreting the scope of the FLSA exemptions, between "work directly related to running or servicing of the business" and "working on a manufacturing production line or selling a product in a retail or service establishment," known at times as the "administrative-production dichotomy." According to the DOL, those engaged in management of the business are exempt from the overtime-pay requirements of the FLSA, while those involved in making the goods it sells or performing the services a business provides are not exempt. The court noted that reaching a conclusion about which side of the DOL's line underwriters' duties fall on is complicated and that two other circuit courts of appeals, the Second Circuit (which ruled underwriters are nonexempt) and the Sixth Circuit (which ruled they are exempt) have reached opposite conclusions.

Based on the facts of McKeen-Chaplin's case, the court sided with the Second Circuit and concluded that the Provident underwriters are entitled to overtime pay. Specifically, the court determined that underwriters' work consisted of assessing whether or not a particular loan fit within the guidelines the employer-bank established, as opposed to determining how to set those guidelines themselves. "Assessing a loan's riskiness according to relevant guidelines," it found "is quite distinct from assessing or determining Provident's business interests." Underwriters, according to the court, do not engage in activities generally deemed exempt within the financial services industry, such as advising customers or promoting products. Therefore, the court held that underwriters are not exempt from overtime pay and ordered summary judgment in favor of McKeen-Chaplin and the other plaintiffs.

The opinion furthers the split among the circuits, with the Ninth Circuit (covering nearly all of the western United States) and Second Circuit (New York and parts of New England) concluding that underwriters are nonexempt, and the Sixth Circuit (Michigan, Ohio, Kentucky, and Tennessee) concluding that underwriters are exempt. The McKeen-Chaplin decision is also noteworthy in that it included U.S. District Judge Michael M. Baylson of the Eastern District of Pennsylvania sitting by designation. Judge Baylson joined in the McKeen-Chaplin opinion, signifying that at least one judge whose jurisdiction is within the Third Circuit agrees with the Ninth Circuit’s analysis. Unless and until the divergence among the circuits is resolved by the Supreme Court, employers with mortgage underwriters must take care to review the underwriters' duties and ensure they are properly classified under the FLSA. Even employers whose underwriters reside outside of the Second and Ninth Circuits should be prepared for their employees to challenge their classification if they are currently considered exempt and therefore ineligible for overtime.

Ballard Spahr's Labor and Employment Group routinely assists employers in navigating the FLSA's overtime rules, including their application to underwriters and other mortgage-banking employees. The firm's Mortgage Banking Group routinely assists mortgage entities in all facets of compliance with laws and regulations affecting the industry.


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