On March 9, 2015, the United States Supreme Court’s decision in Perez v. Mortg. Bankers Ass’n, U.S., No. 13-1041, effectively ended the use of the Fair Labor Standards Act’s (“FLSA”) administrative exemption for mortgage-loan officers. The exemption status of mortgage-loan officers has been subject to controversy dating back to 1999, when the Department of Labor (“DOL”) determined they do not qualify for the administrative exemption, meaning mortgage-loan officers must be paid overtime. After the DOL issued new regulations in 2004, it changed its position in a 2006 opinion letter by interpreting the regulations as exempting mortgage-loan officers from overtime. Subsequently, in 2010, the DOL changed its position yet again when it withdrew the 2006 opinion letter and issued an Administrator’s Interpretation concluding that mortgage-loan officers do not qualify for the administrative exemption.

The issue before the Supreme Court was whether the DOL used the appropriate procedural mechanisms to accomplish its policy changes. Federal agencies that make rules ordinarily must use the “notice-and-comment” procedure, under which the agency publishes a notice of a proposed rule, invites the public to submit data, views, or arguments, and then considers and responds to those submissions before publishing a final rule. Under the Administrative Procedures Act (“APA”), however, not all agency rules must be created through the notice-and-comment procedure. For example, opinion letters and Administrators’ Interpretations (known as “interpretive rules”) are issued by a government agency without notice-and-comment, and unless interpretive rules are found “arbitrary and capricious,” they are generally valid. In recognition of the breadth of the interpretive rulemaking power, D.C. Circuit Court of Appeals precedent,Paralyzed Veterans of Am. v. D. C. Arena L. P., 117 F. 3d 579 (1997), held that agencies issuing a new interpretation that significantly deviated from a previous interpretation – such as DOL’s 2010 Interpretation – must use the notice-and-comment procedure.

The Mortgage Bankers Association challenged the DOL’s 2010 Administrator’s Interpretation underParalyzed Veteran’s, successfully arguing to the D.C. Circuit that the Interpretation was invalid because DOL did not use the notice-and-comment procedure. The Firm’s prior QuickStudy on the D.C. Circuit opinion can be found here. On appeal, the Supreme Court reversed the D.C. Circuit’s opinion vacating the 2010 Administrator’s Interpretation. In doing so, the Supreme Court all but ended the Paralyzed Veteran’s doctrine, holding the doctrine is “contrary to the clear text of the APA,” and re-affirming that interpretive rules are not subject to notice-and-comment. All nine justices agreed on this point, though the concurring opinions expressed concern for the resulting aggrandizement of agency power. The Supreme Court did not reach the merits of or comment on the substance of the 2010 Administrator’s Interpretation.

Although the issue in this case is a seemingly arcane web of administrative procedure, the mortgage industry now faces the practical concern of properly classifying their mortgage-loan officers. In light of the Court’s decision, we recommend that mortgage industry professionals engage legal counsel to re-assess their use of the administrative exemption for loan officers, especially those who “have a primary duty of making sales.”