Legal Alert

Mortgage Banking Update - January 23, 2025

January 23, 2025

January 23 – Read the newsletter below for the latest Mortgage Banking and Consumer Finance industry news, written by Ballard Spahr attorneys. In this issue, we discuss the challenge to the CFPB's new medical debt rule, the proposed ban on certain consumer contract terms, the re-establishment of regulatory sandbox and no-action letter programs, the adjustment of various penalty amounts, and much more.

 

This Week’s Podcast Episode: The Impact of the Election on the CFPB: What to Expect on Key Regulatory Issues During Trump 2.0

This podcast episode is part two of our December 16 webinar, where we discussed the impact of the election on CFPB rulemaking. Part one consisted of a “fireside chat” with David Silberman, who held several senior-level positions at the CFPB for almost 10 years under both Democratic and Republican administrations.

In part two, Ballard Spahr partners John Culhane and Joseph Schuster addressed the following questions:

  1. What will happen to CFPB regulations issued before January 20, such as the CFPB’s credit card late fee rule, which is currently being challenged in a Texas federal court?
  2. What will happen to proposed regulations that may still be finalized before January 20, such as the interpretive rule on earned wage access plans and the proposed contract clause registry?
  3. What will happen to other written guidance from the CFPB, such as the circular on unenforceable contract terms and the advisory opinion on requests for information under Section 1034(c) of Dodd-Frank?
  4. What will be the impact of the Congressional Review Act?
  5. What will be the impact of litigation challenges?
  6. What will rulemaking look like under the new Director?
  7. What will be the impact of the U.S. Supreme Court’s opinion in Loper Bright Enterprises which repealed the Chevron judicial deference doctrine?

Senior Counsel and former chair for 25 years of the Ballard Spahr’s Consumer Financial Services Group, Alan Kaplinsky, hosted the discussion.

A link to the podcast appears here.

For more information about our January 17 webinar featuring Matthew G. Platkin (New Jersey Attorney General who discussed the role of state AGs in a shifting CFPB landscape), click here.

Consumer Financial Services Group

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This Week’s Podcast Episode: The CFPB’s Proposed Data Broker Rule

In this podcast episode, we discuss the CFPB’s recent proposed data broker rule—a proposal that would greatly expand the reach of the Fair Credit Reporting Act.

On December 3, the CFPB issued a proposed rule promoted as one that would require companies that sell data about income or financial tier, credit history, credit score or debt payments to comply with the Fair Credit Reporting Act. The proposal would make it clear that when data brokers sell certain sensitive consumer information, they are “consumer reporting agencies” under the FCRA. That would require them to comply with accuracy requirements. It also would require them to provide consumers access to their information. However, the proposal is much broader than a data broker rule, and the podcast explores the significant breadth of the proposal.

The rule might face an uncertain future, since it was issued by current CFPB Director Rohit Chopra and pushes beyond the boundaries of the FCRA. Chopra’s aggressive regulatory regime is opposed by the Trump administration.

Joining us today is Dan Smith, president and CEO of the Consumer Data Industry Association, which represents the consumer data reporting industry.

The host of the discussion is Alan Kaplinsky, the former practice group leader for 25 years, and now senior counsel of the Consumer Financial Services Group at Ballard Spahr. Joining the discussion are two Ballard Spahr partners: Richard Andreano, the practice leader of our mortgage banking group at Ballard Spahr and John Culhane.

In this episode, we discuss the key aspects of the landmark proposed rule, such as:

  1. The proposal being much broader than one addressing the sale of personal information to various parties, including stalkers, spies and scammers.
  2. The fact that the proposal does not even define what is a data broker.
  3. How the proposal would significantly change the concept of what constitutes a consumer report, including the proposal to treat credit header information as a consumer report.
  4. How the proposal would change the concept of what constitutes a consumer reporting agency.
  5. Requirements that the proposal would add to the written authorization permissible purpose to obtain a consumer report, including requirements regarding revocation of the authorization.
  6. How the proposal would modify the requirements to rely on the legitimate business need permissible purpose to obtain a consumer report.
  7. Whether the CFPB actually has legal authority to essentially rewrite the FCRA.

A link to the episode is here.

Consumer Financial Services Group

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The CFPB Issues Medical Debt Rule; Regulation Immediately Challenged in Federal Court

The CFPB has issued its final rule that will prohibit the inclusion of medical debts in credit reports lenders use to make credit decisions and that will also generally prohibit lenders from using medical debt information in making credit decisions.

But the rule faces challenges on several fronts.

“People who get sick shouldn’t have their financial future upended,” said CFPB Director Rohit Chopra, in issuing the rule.

The bureau said that the rule will remove an estimated $49 billion from the credit reports of about 15 million people. In addition, bureau officials said that the rule will lead to the approval of an estimated 22,000 additional mortgages. Consumers with medical debts may see their credit scores increase an average of 20 points, according to the CFPB.

CFPB officials said that the bureau has found that medical debts do not provide predictive value to lenders making credit decisions. In addition, consumers often report being asked to pay bills that should have been covered by insurance or financial assistance programs, according to the CFPB.

Bureau officials said that the final rule brings regulations in line with the decision by Congress to restrict lenders from obtaining or using medical information.

The CFPB said that the three nationwide credit reporting conglomerates already have announced they would take certain types of medical reports off credit reports.

In addition, two major credit scoring companies, FICO and VantageScore, have announced that they have decreased the degree to which medical bills have an impact on a consumer’s score.

The rule goes into effect 60 days after its publication in the Federal Register.

The law faces opposition in the courts and on Capitol Hill.

Almost immediately, two lawsuits asking for the rule to be set aside were filed in federal court in Texas.

In the first suit, filed in the U.S. District for the Eastern District of Texas, the Consumer Data Industry Association (CDIA) and the Cornerstone Credit Union League, said the CFPB exceeded its authority in issuing the rule. The CDIA, headquartered in Washington, D.C., represents national and regional credit bureaus. The Cornerstone League, headquartered in Plano, Texas, represents almost 600 credit unions, including those in Texas.

In their suit, the groups contended that “In the waning days of the Biden administration, the CFPB upends the carefully balanced framework established by Congress with a Final Rule that plainly exceeds its statutory authority.”

The groups added that the Fair and Accurate Credit Transactions Act permits credit reporting agencies to report medical debt that has been coded to protect the medical privacy of consumers by concealing the name of the provider and the nature of services provided.

“Because the portion of the Final Rule barring [credit reporting agencies] from reporting coded information about medical debt is contrary to law, the Court has an obligation to declare it unlawful and set it aside,” the groups said, in the suit.

They said that Congress determined that coded medical debt struck a balance “between protecting a consumer’s private medical information and ensuring creditors have access to information relevant to the assessment of a consumer’s creditworthiness when determining whether to extend credit to the consumer.”

In the second suit, filed in the U.S. District Court for the Southern District of Texas, ACA International, an association representing third-party collection agencies, law firms, asset buying companies, creditors, and vendor affiliates, headquartered in Minneapolis, Minnesota, and Specialized Collection Services Inc., a woman-owned small collection agency specializing in the collection of medical debt, with a principal place of business in Harris County, Texas, also contend that the CFPB has exceeded its authority in issuing the rule.

The CFPB is taking advantage of peoples’ frustration with medical bills, according to the groups. “A federal agency with no health care experience is exploiting this frustration by making a politically motivated regulation that prevents credit reporting agencies from showing accurate medical debts on credit reports,” they asserted in the suit. “No agency has the power to do that.”

The groups give several reasons for asking that the rule be blocked, including that, “The Final Rule is not based on reasoned decision-making, but rather political ideology.”

On Capitol Hill, the Republican leaders of two committees with jurisdiction over the CFPB made it clear that they oppose the medical debt rule.

House Financial Services Committee Chairman Rep. French Hill, R-Ark, said, following the release of the rule that he looks forward to “working with the incoming Trump administration to rectify this misguided action.” He called the rule an “11th-hour effort to appease the White House.”

And on the other side of Capitol Hill, Senate Banking, Housing and Urban Affairs Chairman Tim Scott, R-S.C., said that “the rule will reduce access to credit and important health care services while putting lenders and medical providers at risk.”

John L. Culhane, Jr., Joseph Schuster and Reid F. Herlihy

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The CFPB Proposes Rule to Ban Consumer Contract Terms Bureau Says Limit ‘Fundamental Freedom’

The CFPB has published a proposed rule that would ban companies from using contract clauses that the bureau said limit fundamental freedom, including those that waive a consumer’s legal rights and fine print that suppresses speech.

“For decades, companies have slowly eroded Americans’ rights by slipping clauses into take-it-or-leave-it contracts that seek an unfair leg up by attempting to deny individuals the benefits of a free market,” the bureau said, in releasing the proposed rule. “Over time, fine print governing Americans’ lives has grown to impose increasingly intrusive and unusual burdens on Americans, impinging on fundamental freedoms.”

CFPB officials said they are issuing the proposed rule in an effort to ensure that consumer finance contracts focus on the main terms of a deal, rather than “fine print to take away people’s rights.”

“Companies should not weaponize fine print to deplatform or purge people from the financial system,” CFPB Director Rohit Chopra said.

The CFPB singled out the types of speech it is targeting through the rule, including contract clauses that:

  • Undermine the rule of law by attempting to ensure that large companies cannot use form contracts to opt out of statutes passed by Congress or state legislatures, including protection for elder fraud and servicemembers.
  • Suppress speech by fining, suing or deplatforming consumers based on comments, customer reviews or political or religious views that disagree with company management.
  • Unilaterally update contracts in a company’s favor.
  • Force consumers to turn over property without judicial due process or oversight. This would include prohibitions against “confessions of judgment,” which force consumers to plead guilty even if they have defenses.

The bureau said that while many terms already are unenforceable in various circumstances, some companies still use them. “The rule would create a bright line of prohibition and heightened prohibition and heightened accountability by, for example, giving state Attorneys General authority to enforce these prohibitions against national banks,” the CFPB concluded.

The proposal includes prohibitions on certain practices regarding the following that currently are prohibited by the Federal Trade Commission’s Credit Practices Rule:

  • Confessions of judgment
  • Waivers of exemptions from attachment, execution or other process on real or personal property
  • Assignments of wages
  • Nonpossessory security interests in household goods
  • Practices with cosigners
  • Late fees

The proposal also provides that it would be prohibited to include in an agreement with a consumer for a consumer financial product or service any of the following terms or conditions:

  • Any term or condition that disclaims or waives, or purports to disclaim or waive, any substantive state or federal law designed to protect or benefit consumers, or their remedies, unless an applicable statute explicitly deems it waivable.
  • Any term or condition that expressly reserves the covered person’s right to unilaterally change, modify, revise, or add a material term of a contract for a consumer financial product or service.
  • Any term or condition that limits or restrains, or purports to limit or restrain, the free and lawful expression of a consumer.

Comments on the proposed rule must be received on April 1, 2025.

As with most recent CFPB actions, it is uncertain whether this rule will ever be adopted in its final form. The new Trump administration opposes the aggressive regulatory regime of current CFPB Director Rohit Chopra. In the closing days of the Biden administration, the bureau has issued several proposed rules, final rules, and other regulatory guidance, and has announced several enforcement actions. As a proposed rule, the ban on companies using certain language would be an easy one for the Trump administration to abandon.

Richard J. Andreano, Jr.

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The CFPB Adjusts Various Penalty Amounts Based on Inflation

The CFPB recently issued a rule to adjust maximum penalty amounts under various statutes that it administers. Included among the adjustments are the amounts for the three tiers of civil money penalties that the CFPB may impose for violations of consumer financial protection laws under the Dodd-Frank Act. Specifically, the Dodd-Frank Act initially provided for the following tiers of civil money penalties:

For any violation of a law, rule, or final order or condition imposed in writing by the CFPB, a civil money penalty of up to $5,000 for each day during which such violation or failure to pay continues.

For any person that recklessly engages in a violation of a federal consumer financial law, a civil penalty of up to $25,000 for each day during which such violation continues.

For any person that knowingly violates a federal consumer financial law, a civil penalty of up to $1,000,000 for each day during which such violation continues.

Based on prior adjustments, the amounts for 2024 were $7,034, $35,169, and $1,406,728, respectively. For 2025, the amounts increase to $7,217, $36,083 and $1,443,275, respectively.

Consumer Financial Services Group

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Borrowers With Poor Credit Ratings Make Up Majority of BNPL Borrowers

Borrowers with subprime or deep subprime credit scores make up the majority of Buy Now, Pay Later (BNPL) originations, the CFPB said, in a new report.

From 2021 to 2022, borrowers with deep subprime credit scores accounted for 45 percent of BNPL originations, while people with subprime credit cards were responsible for 16 percent of originations.

Because lenders do not typically report BNPL loans to nationwide consumer reporting companies, there is little data about BNPL use—particularly data about consumers with multiple loans and on total consumer debt balances. In March 2023, the bureau issued market monitoring orders to several companies that offer no interest, pay-in-four BNPL loans in an effort to gather that data.

The CFPB said the report provides the first descriptive, consumer-level analysis of BNPL use, leveraging linked BNPL applications and applications with credit records.

Lenders have offered BNPL as an easy source of credit, the bureau said. “The application process is quick, involving relatively little information from the consumer, and the product often comes with no interest,” the CFPB said, in the report. “Lenders have touted BNPL as a safer alternative to traditional credit card debt, along with its ability to serve consumers with limited or subprime credit histories.”

The CFPB said in its report that:

  • More than one-fifth of consumers used BNPL in 2022. Examining consumers with a credit history, the CFPB reported that 21.1 percent financed at least one purchase with a BNPL loan that year, up from 17.6 percent in 2021.
  • About 20 percent of borrowers in 2022 were “heavy users” of BNPL, receiving more than one BNPL loan each month, up from 18 percent in 2021.
  • About 63 percent of borrowers received multiple simultaneous loans at some point during 2022 and 33 percent took out loans from multiple BNPL lenders.
  • BNPL borrowers were more likely to hold balances on other credit accounts.
  • Younger borrowers had more BNPL debt as a percentage of their total debt than older people.

The report draws few conclusions about BNPL use. “The importance of BNPL in the credit profiles of BNPL borrowers underlines the need for further research to understand how this growing financial product causally impacts borrowers’ financial health,” the CFPB concludes.

John D. Socknat

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The CFPB Re-Establishes Regulatory Sandbox, No-Action Letter Programs

In an effort to foster innovation in financial services, the CFPB is reinstituting its programs that allow companies to obtain regulatory safe harbors through no-action letters and sandboxes to test new products and services.

The CFPB had such programs during the first Trump administration, but the Biden administration scrapped them, saying that they were ineffective and unfair. In addition, “The CFPB also determined that the existing policies failed to meet appropriate standards for transparency and stakeholder participation,” bureau officials said.

In describing the new sandbox program, the CFPB said, “By operation of the applicable statutory provision, the recipient has a safe harbor from liability under the relevant statute, to the fullest extent permitted by these provisions, as to any act done or omitted in good faith in conformity with the Approval.”

To obtain the rights to a sandbox, companies must demonstrate that they will promote innovations that solve unmet needs. In addition, they must not compromise the competitive process. To help accomplish that goal, the CFPB will not approve a no-action letter or sandbox on a topic to a single firm and it will reach out to program applicants’ competitors and invite them to apply with respect to the same approval topic.

Companies are prohibited from advertising the receipt of sandbox privileges or no-action letters.

In explaining the no-action letters, the CFPB said they are designed to ensure that recipients promote innovations that solve unmet needs in consumer financial products and services. Minor adjustments to existing products or services would not qualify for such privileges, according to the bureau.

Companies risk the revocation of sandbox rights or no-action letters if they change the product or service that qualified for the privileges, the bureau said. Sandbox approvals and no-action letters will expire in two years, although recipients of sandbox approvals can apply for an extension. Recipients of sandbox approvals and no-action letters will be required to consent to the CFPB’s supervisory examination authority, if the recipient is not already subject to this authority. This may discourage non-supervised parties from seeking sandbox approvals or no-action letters.

The bureau said that in an effort to “promote transparency and rigorous ethical standards,” the CFPB will post applications for privileges on an open docket and will accept comments for 60 days.

The CFPB said it will not consider applications from former CFPB attorneys who are now representing firms as outside counsel. Bureau officials said they are concerned that former CFPB employees would use their relationships to obtain special treatment in the no-action letter program. They also said they are concerned that it might appear that those attorneys received special treatment.

In addition, companies that have been prosecuted for violations of consumer financial law during the past five years are not eligible for the program.

The terms of both programs provide that submitting no-action letter or sandbox applications under false pretenses, or with misleading or incomplete information, may be a violation of law and may be referred for potential prosecution. Query whether this may discourage parties from applying, fearing an application that they consider to be accurate and complete will be deemed to be misleading or incomplete.

The future of the two programs is uncertain. The first Trump administration established no-action letter and sandbox programs under different terms, and the new administration opposes the work of current CFPB Director Rohit Chopra. If the Trump administration does not like the design of the programs, it could easily revise or terminate them, since they have not gone through the formal regulatory process.

Richard J. Andreano, Jr., Ronald K. Vaske and John L. Culhane, Jr.

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The CFPB Calls on States to Be More Aggressive in Enforcing Consumer Financial Protection Laws

The CFPB is calling on state governments to increase their focus on consumer financial protection laws.

“Enforcing consumer protection law has long been a state-federal partnership in which the states have often taken the lead,” the CFPB said, in a report that includes legislative and regulatory language that states may use. “Over the last century, in response to evolving markets, states have refreshed the core standards of fair dealing that form the bedrock of consumer protection law. States should once again refresh their UDAP statutes to address the challenges of the modern economy.”

Many of the suggestions mirror the CFPB’s work, the bureau said. Those suggestions include addressing so-called “junk fees” in consumer financial products and services, and the banning of abusive practices to prevent companies from obscuring product features or exploiting their market power.

Many of the suggestions mirror legislative language in the federal Consumer Financial Protection Act (CFPA), according to the CFPB.

With regard to “junk fees,” the CFPB recommends that states add the following prohibition to their UDAP laws:

“(a) Hidden Fees Prohibited. It is an unfair and deceptive practice for any business to offer, display, or advertise any price of a good or service without clearly and conspicuously disclosing the total price.

(1) In any offer, display, or advertisement that represents any price of a good or service, a business must disclose the total price more prominently than any other pricing information. However, where the final amount of payment for the transaction is displayed, the final amount of payment must be disclosed more prominently than, or as prominently as, the total price.

(2) A business must disclose clearly and conspicuously, before the consumer consents to pay for any good or service:

i. The nature, purpose, and amount of any fee or charge imposed on the transaction that has been excluded from total price and the identity of the good or service for which the fee or charge is imposed; and

ii. The final amount of payment for the transaction.”

While the suggested language appears to be aimed at fees that are not disclosed, in various statements, such as regarding mortgage loan closing costs, the CFPB has appeared to label any fee, even if for valid and necessary services, as a “junk fee:” “Families who manage to save up for a down payment and get approved for a mortgage often get an unwelcome surprise: closing costs that all too often are full of junk fees.” The Mortgage Bankers Association found the CFPB statements on mortgage closing costs to be “baffling” and that “[t]he illogical use of the term ’junk fee’ contradicts even the White House’s own definition, which cites the lack of disclosure of the fee being charged.”

The Dodd-Frank Act provides that the CFPB shall have no authority to declare an act or practice abusive in connection with the provision of a consumer financial product or service, unless the act or practice:

“(1) materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or

(2) takes unreasonable advantage of—

(A) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;

(B) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or

(C) the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.”

With regard to the CFPB encouraging states to incorporate the abusive concept into their UDAP laws, the report provides:

“The prohibition on “abusive” practices has some advantages over unfairness and deception that can be useful for dealing with contemporary problems, and the CFPB recommends that states incorporate it into their consumer protection statutes.

For example, “material interference,” which is one form of abusive acts or practices, accurately describes many common tactics used online against consumers, such as pop-up or drop-down boxes, multiple click-throughs, or dark patterns. Although these practices can often be described as a deceptive act or practice under the CFPA, the FTC Act, and similar state statutes, an “abusive” claim can more easily capture modern dark pattern schemes than a theory of deception.” (Footnote omitted.)

In addition to cracking down on “junk fees” and abusive acts, the CFPB urges states to:

  • Ensure that Attorneys General have adequate investigatory authorities and can pursue remedies that protect consumers and make them whole.
  • Remove various evidentiary hurdles to protecting consumers. For instance, some states require that plaintiffs prove individual monetary harm, that frustrates private rights of action, the CFPB said.
  •  Guarantee that consumer financial protection laws also protect businesses.
  •  Authorize forms of private enforcement that can remain viable despite requirements for forced arbitration.
  •  Ban common schemes in the modern economy, including the abuse of personal data.
  • Provide consumers with the right to direct a company to delete the nonpublic personal information the company has about them, and require companies to only collect the minimum data necessary to provide their product or service.
  • Allow for consumers to obtain equitable relief, punitive damages, and other remedies to deter misconduct.

The report does not discuss how the Trump administration may manage the CFPB once President-Elect Donald Trump takes office on January 20. Trump transition officials have made it clear that they do not like CFPB Director Rohit Chopra’s aggressive regulatory regime.

Richard J. Andreano, Jr.

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The CFPB Issues Compendium of Bureau Guidance Issued Between October 2021 and January 2025

As the Biden administration came to a close, the CFPB released a compendium of guidance documents issued by the bureau between October 2021 and January 2025.

“CFPB guidance documents have provided clarification on the best interpretations of the federal consumer financial laws for those tasked with enforcing them, as well as the courts,” Brian Shearer, the bureau’s assistant director in the Office of Planning and Strategy and CFPB General Counsel Seth Frotman, wrote in an introduction to the volume.

The guidance documents include Consumer Financial Protection Circulars, Bulletins, Advisory Opinions, and Interpretive Rules. The officials pointed out that virtually all of the documents in the 363-page document were published in the Federal Register.

Because they are guidance documents, which do not go through the regulatory process, they do not carry the same force as rules. Critics have said that Chopra has relied on guidance documents too much.

The CFPB officials disagreed. “We believe that the interpretations set forth in these documents, which reflect the best reading of the federal consumer financial laws, will prove durable,” the bureau officials wrote.

Shearer and Frotman acknowledged the Supreme Court’s Loper decision, which overturned the Chevron deference doctrine. That doctrine directed courts to defer to a government agency’s interpretation of ambiguous statutory language as long as the interpretation was reasonable.

“In that spirit, our hope is that these CFPB guidance documents implementing the federal consumer financial laws prove useful to courts in their interpretation of those laws, as well as to the various enforcers of them,” Shearer and Frotman wrote. “Indeed, in many instances, courts have agreed with interpretations articulated in CFPB guidance documents.”

Consumer Financial Services Group

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The U.S. Supreme Court Clarifies That the Preponderance Standard Applies to FLSA Exemption Cases

Employers confronted with individual or class action lawsuits or government investigations under the federal Fair Labor Standards Act (FLSA) have the burden to prove that employees are exempt from the law’s minimum wage and overtime provisions. The United States Supreme Court ruled on January 15, 2025, that the burden of proof on employers should not be heightened and instead the customary preponderance-of-the-evidence standard applies. The decision is a victory for employers, but also a reminder that misclassifying employees as exempt from overtime or minimum wage requirements can result in significant penalties and substantial litigation expense.

The FLSA guarantees a federal minimum wage for covered workers and requires overtime pay for individuals working more than 40 hours per week. Certain employees are exempt from these requirements based on their duties and total compensation. If employees are misclassified as exempt from overtime when their duties and compensation do not meet the FLSA criteria, they may be entitled to pay for overtime that they should have received. Litigation over these types of misclassification claims is rampant, with a large volume of single plaintiff claims and class action claims alleging violations of federal and state wage and hour laws.

Courts have been split on the standard of proof in FLSA exemption cases, with some courts applying the preponderance-of-the-evidence standard for employers to prove that an exemption applies, which is a lower threshold (greater than 50 percent chance of being correct) and others imposing a more difficult clear-and-convincing standard of proof (highly and substantially more likely to be true than untrue). The Supreme Court’s decision in E.M.D. Sales, Inc. et al. v. Faustino Sanchez Carrera, et al., clarified that the preponderance-of-the-evidence standard of proof applies for FLSA exemptions.

In E.M.D., a grocery distribution company’s sales reps claimed they were misclassified as outside sales employees who were exempt from overtime. The sales reps sued EMD under the FLSA for time and one half pay for weeks when they worked more than 40 hours, plus double damages and legal fees.

The district court held that EMD was required to prove that the reps’ primary duties involve making sales, and the employee is customarily and regularly engaged in doing so away from EMD’s place of business by the higher clear-and-convincing evidence standard, but EMD failed to do so. The U.S. Court of Appeals for the Fourth Circuit affirmed the district court’s decision.

The U.S. Supreme Court disagreed. Justice Kavanaugh wrote in the majority opinion that since the enactment of the FLSA, the default standard of proof in civil litigation has always been the lower preponderance-of-the-evidence standard. The Supreme Court has only deviated from that standard in three circumstances: (1) when a statute requires it, (2) when the Constitution requires it, and (3) where the government seeks to take unusual coercive action, such as taking away a person’s citizenship. The Supreme Court held that none of the three scenarios applied to FLSA burdens of proof.

The employees argued that the heightened standard is necessary to carry out the FLSA’s public purpose in a well-functioning economy where workers are guaranteed a fair wage. However, the Justices were not “persuaded by the employees’ policy-laden arguments” and further stated that the public interest in FLSA cases does not fall entirely on the side of employees but “reflects a balance of competing interests.” Therefore, the Supreme Court “must apply the statute as written and as informed by the longstanding default rule regarding the standard of proof.” As a result, the Supreme Court remanded the case back to the Court of Appeals to apply the preponderance-of-the-evidence standard instead of the clear-and-convincing evidence standard that the District Court applied.

Although the Supreme Court’s decision eases the evidentiary burden of proof on employers, businesses still face significant risk if they do not regularly check and update their classification of employees as exempt from overtime, under the “white collar” and other FLSA exemptions. Employers should regularly review and update job descriptions and rectify potential misclassification issues. Many employers have made the business decision to classify “close calls” on exemptions as non-exempt from overtime to seek to avoid the disruption and expense of wage and hour litigation, but even reclassifying can be tricky, as certain employees are resistant to being reclassified as non-exempt and having to track their hours worked. Employers should not undertake examinations of wage and hour issues without appropriate resources and review of recent court rulings on exempt status across all job categories. Ballard Spahr’s Labor and Employment Group regularly assists employers with FLSA and state wage and hour law job classifications, as well as overtime and minimum wage compliance, including for tipped employees, to wade through this complex area of law to avoid expensive litigation and government agency investigations, and to prepare to successfully defend against such claims.

Nalee Xiong and Jay Zweig

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