On July 2, 2013, in Mortgage Bankers Association v. Harris, the U.S Court of Appeals for the D.C. Circuit vacated the Department of Labor’s highly controversial 2010 Administrator’s Interpretation, which declared that mortgage loan officers do not qualify for the administrative exemption from the overtime wage provisions of the Fair Labor Standards Act (FLSA).

The saga began on March 24, 2010, when the DOL issued its first ever “Administrator’s Interpretation,” without notice, reversing its prior position on the status of mortgage loan officers as exempt “administrative” employees. The Administrator’s Interpretation vacated an Opinion Letter issued by the Wage and Hour Administrator less than four years previously, on September 8, 2006. In the earlier 2006 Opinion Letter, the DOL had determined that mortgage loan officers generally met the requirements of the administrative exemption to the FLSA’s overtime requirements. The DOL’s abrupt abandonment of this position in its 2010 Administrator’s Interpretation was done without following the Administrative Procedure Act’s (APA) notice and comment rulemaking procedure.

The DOL’s reversal of course presented an immediate challenge for employers in the financial services industry who had relied in good faith on the 2006 Opinion Letter that mortgage loan officers qualified for the administrative exemption. Essentially, on March 24, 2010, the DOL created immediate liability for statutory overtime where none previously existed.

The Mortgage Bankers Association (MBA), a national association representing the real estate finance industry, filed a lawsuit challenging the DOL’s issuance of the 2010 Administrator’s Interpretation because it failed to follow the regulatory process required by the APA. In its opinion reversing the district court order that had denied the MBA’s motion for summary judgment on this issue, the D.C. Circuit emphasized what it considered a very straightforward rule: “When an agency has given its regulation a definitive interpretation, and later significantly revises that interpretation, the agency has in effect amended its rule, something it may not accomplish [under the APA] without notice and comment.” Having stated the rule, the court explained that during litigation the DOL conceded the existence of two definitive, and conflicting, agency interpretations: the 2006 Opinion Letter and the 2010 Administrator’s Interpretation, one holding that mortgage loan officer’s qualified as administratively exempt, the other holding they did not.

The crux of the DOL’s position in MBA v. Harris was that it was not required to comply with the APA regulatory process because, in order for that process to be triggered, a third “substantial and justified reliance” element must also be satisfied. In other words, the DOL argued, unless the regulated industry “substantially and justifiably relied” upon the agency’s previous interpretation of the law, the agency is not required to follow the APA regulatory process in order to change its position. During oral argument, the DOL stipulated that the MBA would prevail if “reliance” is only considered as a factor in determining whether the agency’s opinion was a definitive interpretation of the law such that a change in the interpretation (and therefore, the meaning of law) would require notice and comment procedures.

Relying on its decision in Paralyzed Veterans of America v. D.C. Arena L.P., the D.C. Circuit Court held that reliance is not a separate and independent element in determining whether the APA’s notice and comment procedures are required to change an agency interpretation of a regulation. Rather, the court stated:

reliance is but one factor courts must consider in assessing whether an agency interpretation qualifies as definitive or authoritative. Or to put matters more precisely, because regulated entities are unlikely to substantially — and often cannot be said to justifiably — rely on agency pronouncements lacking some or all the hallmarks of a definitive interpretation, significant reliance functions as a rough proxy for definitiveness. The converse also holds true. Agency pronouncements effectively ignored by regulated entities are unlikely to bear the marks of an authoritative decision.

Accordingly, and given the DOL’s concession that the MBA would prevail if the only reason the court would look to reliance would be to determine the existence of a definitive interpretation of law, a unanimous three-judge panel ruled in the MBA’s favor. In doing so, the court noted that it was not taking a position on the merits of the DOL’s interpretation, but if the agency wished to readopt its 2010 Administrator’s Interpretation of applicability of administrative exemption to mortgage loan officers, it would have to conduct the required notice and comment rulemaking.

It remains to be seen what, if anything, the DOL will do in response to the D.C. Circuit Court ruling. If it does move forward to changing its 2006 position on the exempt status of mortgage loan officers, it will need to go through the full regulatory process, including publishing notice in the Federal Register, along with the “substance of the proposed rule or a description of the subjects and issues involved,” and it must “give interested persons an opportunity to participate in the rulemaking through submission of written data, views, or arguments,” as required under 5 U.S.C. § 553.

One thing is clear - the D.C. Circuit’s ruling is a warning to the DOL and other federal agencies that if they want to make changes to previously issued definitive interpretations of a regulation, they will be required to follow all of the APA procedures, rather than taking short-cuts.