Court of Appeals Holds that FLSA Offers No Exemption for Mortgage Underwriters

A decision issued by the Ninth Circuit Court of Appeals a week ago held that the overtime criteria of the Fair Labor Standards Act (FLSA) does not offer an exemption for the mortgage underwriters. Following the decision that occurred on July 6, which adds to a growing division among various federal circuit courts, can significantly affect the pay practices of organizations that hire mortgage underwriters, especially those organizations having employees situated in the western areas of the United States.

In the case of McKeen-Chaplin v. Provident Savings Bank, there was a reversal of the holding of the district court by the appeals court that mortgage underwriters are entitled to the ‘administrative exemption,’ particularly from the criteria of the FLSA overtime rules. Gina McKeen-Chaplin, a plaintiff along with other mortgage underwriters, were in charge of scrutinizing applications for mortgage loans at Provident Savings Bank (“Provident”), which offered the mortgages for sale to purchasers and offered the mortgages for resale to investors. Meanwhile, the obligations of the underwriters comprised of integrating the rules built up by Provident and scrutinizing applications for loans to ascertain the creditworthiness of borrowers. The underwriters additionally constrained conditions on specific loan applications on the basis of the scrutiny. Additionally, they suggested optional loan products, which the loan officer disseminated to the applicants. The underwriters could likewise ask that Provident include some exceptions to its rules in specific cases, but they didn’t participate in finishing the loan funding or the need to use the secondary market to sell the approved loans.

McKeen-Chaplin claimed that she and other underwriters frequently worked more than 40 hours in a workweek and were not compensated for the time plus one-half of their normal pay-rates for each extra hour worked. In this regard, Provident dissented, contending that there is an exemption for the underwriters from the excess-pay criteria of the FLSA under the purported ‘administrative exemption.’ This is an exemption that is typically held for workers who engage in white-collar jobs in which their fundamental duties are comprised of the activity of discretion and independent judgment on issues central to the business, which has to incorporate the general operations or business management. Also, the district court ruled that the fundamental obligations of the underwriters entitled them to an exception under the administrative exemption due to the inclusion of “quality control” that is directly identified with the business operations of the bank.

The court of appeals did not agree. In Chief Judge Sidney Thomas’ opinion, 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.” As indicated by the DOL, individuals occupied with the business management are also under the exemption of the overtime-pay criteria of the FLSA, while others engaged in the production of goods sold or engaged in the services provided by a business are not under the exemption. The court emphasized that achieving a decision concerning which side of the DOL’s line the duties of the underwriters fall on is complicated and that the courts of appeals’ two other circuits, the Second Circuit (ruling underwriters are not under the exemption) as well as the Sixth Circuit (that has ruled are under the exemption) have also agreed on opposite decisions.

Given the facts of McKeen-Chaplin’s case, the court took sides with the Second Circuit and decided that the Provident underwriters qualify for overtime pay. In particular, the court decided that the work of the underwriters was comprised of evaluating whether or not a certain loan aligns within the rules of the employer-bank set up, rather than deciding how to set those rules themselves. “Assessing a loan’s riskiness according to relevant guidelines is quite distinct from assessing or determining Provident’s business interests.” Underwriters, as indicated by the court, are not participating in activities broadly deemed to be under an exemption inside of the industry of the financial services, like promoting products or giving customers advice. In this manner, the court retained that underwriters are not under the exemption from overtime compensation and gave a summary judgment to favor McKeen-Chaplin and other associated plaintiffs.

The opinion exacerbates the division among the circuit courts. The Ninth Circuit (which covers almost the entire western part of the United States) as well as the Second Circuit (including New York City and other areas of New England) have decided that underwriters should not be placed under the exemption; whereas the Sixth Circuit (which includes Ohio, Michigan, Tennessee, and Kentucky) has ruled that underwriters are covered by the exemption. The decision of McKeen-Chaplin is also significant because it included the United States District Judge, from the Pennsylvania Eastern District, Michael Baylson, sitting by designation. The judge agreed to the opinion of McKeen-Chaplin, representing that at any rate, a judge, having the jurisdiction within the Third Circuit supports the analysis of the Ninth Circuit. Unless and until the Supreme Court resolves the divergence among all of the circuits, employers that hired mortgage underwriters have to carefully review the duties of the underwriters and make sure they are appropriately classified based on the FLSA exception. Even employers whose underwriters are not in the Ninth and Second Circuits need to be ready for their employees to question their classification.

At this time, the 11th Circuit Court of Appeals  (which includes Florida, Alabama and Georgia) and the 5th Circuit Court of Appeals (which includes Mississippi, Louisiana and Texas) have not issued opinions concerning whether mortgage underwriters are exempt from overtime under the FLSA.   However, we feel that the rationale of the 6th Circuit, the 9th Circuit, the DOL and other cases that interpret the administrative exemption are reasonably sound such that we take the position that mortgage underwriter should be entitled to overtime.   Unless and until the Supreme Court agrees to resolve this dispute, employers that hire mortgage underwriters have to carefully review the duties of the underwriters and make sure they are appropriately classified based on the FLSA exception. Moreover, we feel that the same rationale can be applied to other cases involving positions in the healthcare industry such as case managers, long term care case managers, utilization review nurses and social workers.

If you believe that you’ve unfairly had an exemption from overtime compensation applied to your position, we want to hear from you.