The U.S. Court of Appeals for the Ninth Circuit recently held that mortgage underwriters were not exempt under the federal Fair Labor Standards Act (FLSA) and were therefore entitled to overtime compensation for hours worked in excess of 40 per week.

After analyzing the specific details of the underwriters’ responsibilities, the Ninth Circuit panel concluded that, because the underwriters’ primary job duty did not relate to their employer bank’s management or general business operations, the administrative employee exemption to the FLSA’s overtime requirements did not apply. 

Recognizing that there was a split between the Second Circuit and Sixth Circuit as to whether the underwriters are exempt, the Ninth Circuit adopted the Second Circuit’s conclusion that “the job of underwriter falls under the category of production rather than administrative work,” and, thus, the administrative exemption under the FLSA does not apply. 

A copy of the opinion is available at: Link to Opinion.

The plaintiff and the other members of the class were mortgage underwriters for the defendant bank. The bank sold mortgage loans to consumers seeking to purchase or refinance homes, and then the bank would resell the funded loans on the secondary market. 

The mortgage loan application process was streamlined. A loan officer or broker worked with a borrower to select a particular loan product. A loan processor then ran a credit check, gathered further documentation, assembled the file for the underwriter, and ran the loan through an automated underwriting system. The automated system then applied certain guidelines based on the information input and then returned a preliminary decision. 

From there, the file went to a mortgage underwriter, who verified the information put into the automated system and compared the borrower’s information against the applicable guidelines, which are specific to each loan product. The underwriters were responsible for thoroughly analyzing complex customer loan applications and determining borrower creditworthiness in order to ultimately decide whether the bank will accept the requested loan. The underwriters could impose conditions on a loan application and refuse to approve the loan until the borrower satisfied those conditions.

The decision as to whether to impose conditions is ordinarily controlled by the applicable guidelines, but the underwriters could include additional conditions. They could also suggest a “counteroffer” — which would be communicated through the loan officer — in cases where a borrower did not qualify for the loan product selected, but might qualify for a different loan.

Underwriters could also request that the bank make exceptions in certain cases by approving a loan that did not satisfy the guidelines. After an underwriter approved a loan, it was sent to other bank employees who finalized the loan funding. According to the underwriters, whether a loan was funded ultimately depended on factors beyond their control. Another group of bank employees then sold the funded loans in the secondary market. 

Initially, the trial court denied cross motions for summary judgment and set the case for trial. But later, on the parties’ joint motion for reconsideration, the trial court concluded that the underwriters qualified for the administrative exemption under the FLSA, based on the finding that their primary duty included “quality control” or similar activities directly related to the bank’s general business operations. Thus, the trial court granted summary judgment in favor of the bank. The plaintiff appealed. 

As you may recall, the FLSA requires employers to compensate its employees time and a half of their regular pay for all hours worked over 40 in a week. Under the FLSA, certain employees “employed in a bona fide executive, administrative, or professional capacity” are exempt from the overtime requirements. See 29 U.S.C. § 213(a)(1).

The Ninth Circuit recognized that the exemptions under the FLSA are to be narrowly construed, and the employer bears the burden of establishing they apply. According to the Court, the FLSA “is to be liberally construed to apply to the furthest reaches consistent with Congressional direction,” and the exemptions “are to be withheld except as to persons plainly and unmistakably within their terms and spirit.” 

In assessing whether the administrative exemption applied, the Court relied on the Department of Labor’s regulations interpreting the FLSA. In order for the administrative exemption to apply, the 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).

At issue in this case was the second requirement. In order to satisfy that requirement, an employee’s primary duty must involve office or “non-manual work directly related to the management policies or general business operations” of the bank or the bank’s customers. See 29 C.F.R. § 541.200. “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.” 29 C.F.R. § 541.201(a). 

This has commonly been referred to as the “administrative-production dichotomy.” Its purpose is “to distinguish ‘between work related to the goods and services which constitute the business’ marketplace offerings and work which contributes to ‘running the business itself.’” DOL Wage & Hour Div. Op. Ltr., 2010 DOLWH LEXIS 1, 2010 WL 1822423, *3 (Mar. 24, 2010). According to the Ninth Circuit, “[t]his 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.”

The Court observed that the Second Circuit and Sixth Circuit had reached conflicting rulings on whether the administrative exemption applied to mortgage underwriters. According the Second Circuit, “the job of underwriter . . . falls under the category of production rather than of administrative work.” Davis v. J.P. Morgan Chase & Co., 587 F.3d 529, 535 (2d Cir. 2009). On the other hand, the Sixth Circuit concluded that mortgage underwriters are exempt administrators, explaining that they “perform work that services the Bank’s business, something ancillary to [the bank’s] principal production activity.” Lutz v. Huntington Bancshares, Inc., 815 F.3d 988, 995 (6th Cir. 2016). The Sixth Court determined mortgage underwriters performed “administrative work because they assist in the running and servicing of the Bank’s business by making decisions about when [the bank] should take on certain kinds of credit risk, something that is ancillary to the Bank’s principal production activity of selling loans.” Id. at 993. 

Turning to the facts of this case, the Ninth Circuit agreed with the reasoning of the Second Circuit, and concluded that the underwriters “did not decide if the Bank should take on risk, but instead assess whether, given the guidelines provided to them from above, the particular loan at issue falls within the range of risk the Bank has determined it is willing to take.” 

The Court continued, “assessing the loan’s riskiness according to relevant guidelines is quite distinct from assessing or determining the Bank’s business interests. Mortgage underwriters are told what is in the Bank’s best interest, and then asked to ensure that the product being sold fits within criteria set by others.” 

The Ninth Circuit also cited to the DOL’s regulations to support its conclusion. “The financial-services industry example also includes descriptors that do not correspond with the underwriters’ primary duty, which aims more at producing a reliable loan than at ‘advising’ customers or ‘promoting’ the Bank’s financial products.” See 29 C.F.R. § 541.203(b). The Court emphasized that underwriters do not “advis[e] customers at all, nor do they market[], servic[e] or promot[e] the employer’s financial products.” 

The Court then summarized its ruling as follows:

“We conclude that where a bank sells mortgage loans and resells the funded loans on the secondary market as a primary font of business, mortgage underwriters who implement guidelines designed by corporate management, and who must ask permission when deviating from protocol, are most accurately considered employees responsible for production, not administrators who manage, guide, and administer the business.”

The trial court had granted the bank’s motion for summary judgment on the basis that the underwriters performed work related to “quality control.” The Ninth Circuit, however, concluded that the record evidence did not support such a conclusion.

The Court concluded that the underwriters’ primary duty did not go to the heart of the bank’s internal operations, but instead went to the marketplace offerings and were related to the production side of the bank’s business.

Accordingly, the Ninth Circuit reversed the trial court’s granting of summary judgment in favor of the bank and remanded with instructions to enter summary judgment in favor of the plaintiff class.