Ninth Circuit Holds That Mortgage Underwriters Are Not Exempt Employees

Edgar M. Rivera, Esq.

In McKeen-Chaplin v. Provident Savings Bank, FSB, the Ninth Circuit ruled that mortgage underwriters employed by a bank were entitled to overtime compensation for hours worked in excess of 40 in a work week.  The Ninth Circuit held that, because the mortgage underwriters’ primary job duty did not relate to the bank’s management or general business operations, they did not fall under the administrative exemption to the overtime requirements of the Fair Labor Standards Act (FLSA).

To show that an employee qualifies for the FLSA’s administrative exemption, an employer must demonstrate that the employee’s primary duty involves office or “non-manual work directly related to the management policies or general business operations” of the employer or its customers. This requirement is met if the employee engages in “running the business itself or determining its overall course or policies,” not just in the day-to-day carrying out of the business’ affairs. Said otherwise, “an employee must perform work directly related to assisting with the running or servicing of the business, as distinguished, for example, from working on a manufacturing production line or selling a product in a retail or service establishment.”

Courts of appeals commonly refer to this framework for understanding whether employees satisfy the second requirement as the “administrative-production dichotomy.” Its purpose is to distinguish between work related to the goods and services that constitute a business’s marketplace offerings and work that contributes to running the business itself.  This requirement is met if an employee engages in running the business itself or determining its overall course or policies, not just the day-to-day carrying out of the business’ affairs.

Provident Savings Bank (“Provident”) is a bank that sells mortgage loans to consumers purchasing or refinancing homes, then resells those funded loans on the secondary market. Mortgage underwriters review mortgage loan applications using guidelines established by the bank and investors in the secondary market to determine borrower creditworthiness in order to ultimately decide whether the bank will issue the requested loan. After the mortgage underwriter approves the loan, it is sent to other bank employees, who are responsible for finalizing the loan funding. Whether a loan is funded ultimately depends on factors beyond the underwriter’s control.

The U.S. Circuit Courts of Appeals have differed on the question of whether mortgage underwriters are exempt from the FLSA’s overtime requirements under the administrative exemption. In Davis v. J.P. Morgan Chase & Co., the Second Circuit Court of Appeals decided that mortgage underwiters were not exempt, holding that “the job of underwriter falls under the category of production rather than administrative work.” The Second Circuit stated:

Underwriters […] performed work that was primarily functional rather than conceptual. They were not at the heart of the company’s business operations. They had no involvement in determining the future strategy or direction of the business, nor did they perform any other function that in anyway related to the business’s overall efficiency or mode of operation. It is undisputed that the underwriters played no role in the establishment.

The Sixth Circuit, however, disagreed with the Second Circuit, holding in Lutz v. Huntington Bancshares, Inc., that mortgage underwriters were exempt administrative employees, reasoning that they “perform work that services the Bank’s business, something ancillary to the Bank’s principal production activity.”

Here, in McKeen-Chaplin, the Ninth Circuit agreed with the Second, finding that the mortgage underwriters did not qualify for the administrative exemption and, as such, should have been compensated at the overtime premium rate for hours worked in excess of 40 in a work week. The Ninth Circuit noted that the bank’s mortgage underwriters did not decide if the bank should take on risk, but instead assessed whether, given the guidelines provided, the particular loan fell within the range of risk the bank had determined that it was willing to take. Consequently, the underwriters did not independently assess what was in the bank’s best interest, but were told what was in the bank’s best interest, and then ensured that the product being sold fit within criteria set by others.

Moreover, the U.S. Department of Labor has specifically analyzed mortgage loan officers and has made clear that such workers “do not qualify as bona fide administrative employees” because they “have a primary duty of making sales for their employers.” While mortgage underwriters are distinct from mortgage loan officer in the mortgage production process, they are not so distinct as to be lifted from the production side into the ranks of administrators.

If your employer has violated your rights under wage-and-hour laws, including failing to pay you overtime, contact The Harman Firm, LLP.