9th Circuit: Mortgage Underwriters Are Not Exempt

The U.S. Court of Appeals for the 9th Circuit recently held that mortgage underwriters who worked for Provident Savings Bank were not "administrative employees," and thus did not qualify for exemption from the overtime protections of the Fair Labor Standards Act (“FLSA”). McKeen-Chaplin v. Provident Savings Bank, No. 15-16758, 2017 WL 2855084 (9th Cir. July 5, 2017) (available at McKeen-Chaplin). In doing so, the Court deepened a split among the circuits on this issue.

In McKeen-Chaplin, the plaintiff filed suit against the Bank, arguing that she and a putative class of mortgage brokers had been improperly classified as exempt, and were therefore entitled to overtime. The Bank, in turn, argued that the employees were correctly classified as exempt under the administrative exemption. Both parties filed motions for summary judgment, and the trial court entered judgment for the employer, finding that the underwriters met the requirements for the administrative exemption. The 9th Circuit reversed that decision.

In its analysis, the Court applied the Department of Labor’s "short duties test" for determining whether the administrative exemption applies. See 29 C.F.R. § 541.200(a). Under this test, an employer has the burden of proving that:

1. The employee is paid not less than $455 per week;
2. The employee performs, as his or 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. Those duties require "the exercise of discretion and independent judgment with respect to matters of significance."

An employee’s "primary duty" is defined in the regulations as "the principal, main, major or most important duty that the employee performs." See 29 C.F.R. § 541.700(a). 

In McKeen-Chaplin, the 9th Circuit found that the primary job duties of the Bank’s mortgage underwriters did not satisfy the second prong of the short duties test because those duties go "to the heart of [the Bank’s] marketplace offerings, not to the internal administration of [the Bank’s] business." In so finding, the 9th Circuit noted that the underwriters’ primary duties involved the review of mortgage loan applications using guidelines established by the Bank and investors in the secondary market, including Fannie Mae, Freddie Mac, and the Fair Housing Administration.

Although the employees "thoroughly analyz[e] complex customer loan applications and determin[e] borrower creditworthiness in order to ultimately decide whether [the Bank] will accept the requested loan," they do not, themselves, determine how much risk the Bank should take on. Instead, they simply apply the guidelines to determine whether the proposed loan will fall within the range of risk the Bank has already determined it is willing to take. If, after applying these guidelines, an underwriter approves the loan, other Bank employees are responsible for finalizing and funding the loan. The underwriters’ duties, the Court found, were not related to the management or general business operations of the Bank or its customers:

"… 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."

In so holding, the 9th Circuit applied the reasoning of the 2nd Circuit in Davis v. J.P. Morgan Chase & Co., which held that J.P. Morgan’s mortgage underwriters were not exempt administrative employees because they perform work that is "primarily functional rather than conceptual" (available at Davis), and rejected that of the 6th Circuit in Lutz v. Huntington Bancshares, Inc. (available at Lutz). In Lutz, the court held that mortgage underwriters were exempt administrative employees because they decided whether banks should take on certain kinds of credit risks, which the 6th Circuit determined was ancillary to a bank’s principal production activity of selling loans. 

The 9th Circuit also rejected the district court’s finding that the underwriters were exempt because they exercised a "quality control" function for the Bank, noting that "to permit the administrative exemption of an assembly line worker who checks whether a particular part was assembled properly – simply because that role bears a resemblance to quality control – would run counter to the essence of the FLSA." 

In light of McKeen-Chaplin, employers of mortgage underwriters in the 9th Circuit should carefully review the job descriptions and actual job duties of these employees to determine whether, given the Court’s analysis, they are properly classified for FLSA purposes. Given the potential complexity of this issue, as well as the stakes, legal counsel should be consulted for appropriate guidance.