Compensation-Overtime Pay for Mortgage Underwriters

The Ninth Circuit Court of Appeals issued its decision in McKeen-Chaplin v. Provident Savings Bank, FSB, (“PSB”)  No. 15-16758 on July 5, 2017.    

The appeal presents the question of whether a class of mortgage underwriters are entitled to overtime compensation under the Fair Labor Standards Act (“FLSA” or “the Act”), 29 U.S.C. § 201 et seq., for hours worked in excess of forty per week. The court decided that because the mortgage underwriters’ primary job duty does not relate to the bank’s management or general business operations, the administrative employee exemption under 29 U.S.C. § 213(a)(1) and 29 C.F.R. § 541.200(a) does not apply,1 and the underwriters are entitled to overtime compensation.

The facts as recited in the opinion are important to understand.  PSB sells mortgage loans to consumers purchasfinancial law practiceing or refinancing homes and then resells those funded loans on the secondary market. Mortgage underwriters at PSB review mortgage loan applications using guidelines established by PSB and investors in the secondary market, including Fannie Mae, Freddie Mac, and the Fair Housing Administration. Loan transactions begin when a loan officer or broker  works with a borrower to select a particular loan product. A loan processor then runs a credit check, gathers further documentation, assembles the file for the underwriter, and runs the loan through an automated underwriting system. The automated system applies certain guidelines based on the information input and then returns a preliminary decision. From there, the file goes to a mortgage underwriter, who verifies the information put into the automated system and compares the borrower’s information against the applicable guidelines, which are specific to each loan product.

Mortgage underwriters are responsible for thoroughly analyzing complex customer loan applications and determining borrower creditworthiness in order to ultimately decide whether PSB will accept the requested loan. They may impose conditions on a loan application and refuse to approve the loan until the borrower satisfies those conditions. The decision as to whether to impose conditions is ordinarily controlled by the applicable guidelines, but the underwriters can include additional conditions. They can also suggest a “counteroffer”—which would be communicated through the loan officer—in cases where a borrower does not qualify for the loan product selected, but might qualify for a different loan. Underwriters may also request that PSB make exceptions in certain cases by approving a loan that does not satisfy the guidelines. After a mortgage underwriter approves a loan, it is sent to other PSB  employees who finalize the loan funding.  Underwriters say that whether a loan is funded ultimately depends on factors beyond the underwriter’s control. Another group of PSB employees sells funded loans in the secondary market.  The key to this fact pattern is that the discretion involved is within the guidelines set forth by PSB.

The law  as applied, FLSA,  require employers to pay employees time and a half for overtime work—that is, work in excess of forty hours per week under  29 U.S.C. § 207(a)(1).    Employees who are “employed in a bona fide executive, administrative, or professional capacity” are exempt from those provisions under 29 U.S.C. § 213(a)(1).   To determine whether employees qualify for the administrative exemption, the Secretary of Labor has formulated a “short duties test.”  A qualifying employee must (1) be compensated not less than $455 per week; (2) perform as her primary duty “office or non-manual work related to the management or general business operations of the employer or the employer’s customers;” and (3) have as her primary duty “the exercise of discretion and independent judgment with respect to matters of significance.” 29 C.F.R. § 541.200(a). An employee’s primary duty is “the principal, main, major or most important duty that the employee performs.” 29 C.F.R. § 541.700(a).   The Court applied the test and held that the underwriters were entitled to overtime (did not fall within the exemption).

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