Compliance Bulletin

DOL Reverses Course: “Typical” Mortgage Loan Officers Not Exempt
June 7, 2010

In March 24, 2010 the U.S. Department of Labor’s Wage and Hour Division (“WHD”) issued Administrator’s Interpretation No. 2010-1 (hereafter, “Interpretation”), which concludes that employees who perform the “typical job duties” of a mortgage loan officer do not qualify as bona fide “administrative” employees exempt under section 13(a)(1) of the Fair Labor Standards Act.


Unlike its prior letters that are issued in response to employer requests and limited to the specific facts of those requests, this new “administrator’s interpretation” articulates a position based on its own investigations and published case law and a generalized description of what mortgage loan officers do. In doing so, the DOL withdrew its Wage and Hour Opinion Letter FLSA2006-31 (Sept. 8, 2006), which many financial services industry companies, including banks, have relied upon when classifying mortgage loan officers as exempt. In part, the withdrawn 2006 Letter stated:

“Employees in the financial services industry generally meet the duties requirements for the administrative exemption if their duties include work such as collecting and analyzing information regarding the customer’s income, assets, investments or debts; determining which financial products best meet the customer’s needs and financial circumstances; advising the customer regarding the advantages and disadvantages of different financial products; and marketing, servicing or promoting the employer’s financial products. However, an employee whose primary duty is selling financial products does not qualify for the administrative exemption.” (Emphasis added)

The DOL’s current position is that the 2006 letter defined “making sales” too narrowly and, at any rate, it was never intended to be used as an alternative test to 29 C.F.R. § 541.200.

Under that regulation, to fall within the meaning of an “employee employed in a bona fide administrative capacity,” an employee’s job duties and compensation must meet all of the following tests:

  1. The employee must be compensated on a salary or fee basis as defined in the regulations at a rate not less than $455 per week;
  2. The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and
  3. The employee’s primary duty must include the exercise of discretion and independent judgment with respect to matters of significance.

The appropriate application of the administrative exemption for financial services industry employees has been heavily litigated. In 2009 the federal Second Circuit Court of Appeals in Whalen v. J.P. Morgan Chase held that underwriters responsible for approving loans in accordance with the bank’s guidelines did not engage in exempt administrative work. The duties of the bank’s loan underwriters, who typically worked on individual loans, were not considered to be related to setting management policies or to general business operations, but rather to the “production” of loans. Their work was primarily functional rather than conceptual.

Currently pending before the California Supreme Court is a case, Harris v. Liberty Mutual Insurance, that addresses the same issue. While Harris, which is a class action brought by insurance adjusters, was brought in state court under California law, California wage orders are interpreted with reference to the federal DOL regulations. Harris in turn is based on the California Bell v. Farmers Exchange cases, which held that exempt administrative work is engaged in “running the business itself or determining its overall course or policies.”

In both Whalen and Harris, as with the Interpretation, the focus was on the second prong of the regulation. In determining whether a mortgage loan officer’s primary duty is non-manual work directly related to the management or general business operations of the employer, the DOL applies the so-called “administrative-production dichotomy.” This test is based on 29 C.F.R. § 541.201(a), which states that exempt administrative work must be “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.”

Thus, the administrative exemption applies to employees whose primary duty involves servicing the business itself, and who could be described as “staff” rather than “line” employees. The distinction is between work related to the goods and services that the employer offers in the marketplace and work which contributes to running the business itself. Examples of exempt administrative work include work related to the employer’s human resources department, accounting department, quality control, purchasing, advertising, research, and similar areas.

Current Interpretation

The Administrator’s Interpretation is based on the following description of the typical job duties of a mortgage loan officer: receiving leads and contacting potential customers, collecting financial information, running credit reports, identifying appropriate loan products and discussing them with customers, preparing documents for the underwriter or loan processor, and finalizing documents for closings. These duties, according to the WHD, fall on the production side of the dichotomy because they relate to making sales.
Because mortgage loan officers make loans to individual customers, the WHD now does not consider their work to be related to setting management policies or to general business operations. The officers are often compensated by commissions, sometimes with a base salary or a draw against commissions. Employers often train their mortgage loan officers in sales techniques and evaluate their performance on the basis of their sales volume. These factors are indicative of work that relates to making sales.

The administrative exemption could also apply if the employee’s primary duty is directly related to the management or general business operations of the employer’s customers. This provision is meant to place work done for a customer on the same footing as work done for the employer directly, regardless of the size of the customer. Employees acting as advisers or consultants to their employer’s customers may be exempt, for example, by advising a business about obtaining a mortgage to purchase land to build office space.

This implies that the customer engages in some form of business, but there is no fixed requirement that the customer must be a business entity rather than an individual, as long as the work relates to management or general business operations. Work for an employer’s customers does not qualify for the administrative exemption where the customers are individuals seeking advice for their personal needs, such as people seeking mortgages for their homes.

This marks one of the key shifts in the DOL’s position—its treatment of work entailed in advising customers on the appropriate financial product to fit their financial needs. In the 2006 Opinion Letter, this function was contrasted with making sales. In the WHD’s current description of a mortgage loan officer’s typical duties, this function is given diminished treatment: the employee simply enters the collected financial information into a computer program, which identifies the available loan products, and then assesses them and discusses the options with the customers. Furthermore, the DOL also withdrew 2001 WL 1558764 dated February 16, 2001, which had suggested that advising borrowers on the selection of loan products could qualify as administrative exempt work.

Other Exempt Categories

The Interpretation applies to employees who spend the majority of their time working inside the employer’s place of business (including those who work from their homes). It does not directly apply to the “outside sales” exemption. Section 13(a)(1) of the FLSA provides an exemption for “any employee employed . . . in the capacity of outside salesman.” Under DOL regulations, this statutory language applies to an employee whose primary duty is making sales and who is “customarily and regularly engaged away from the employer’s place or places of business in performing such primary duty.” 29 C.F.R. § 541.500.

Specifically, the outside sales employee is one who makes sales at the customer’s place of business or, if selling door-to-door, at the customer’s home. “Outside sales does not include sales made by mail, telephone or the Internet unless such contact is used merely as an adjunct to personal calls.” 29 C.F.R. § 541.502. Interestingly, promotional work is considered exempt if it is performed in connection with the employee’s own outside sales or solicitations.

This regulation would appear to be inconsistent in principle with the treatment of some of the “typical” duties described in the Interpretation, such as receiving inside and outside leads and contacting potential customers, which can only be viewed as promotional work performed in connection with the employee’s own sales. The inconsistency is best understood in light of the specific statutory exemption for outside sales work, as contrasted with the DOL’s increasing reliance on the production-administrative dichotomy as applied to the administrative exemption.

Guidance related to the outside sales exemption was provided in the DOL’s 2006 FLSA2006-11, which has not been withdrawn. In it, the employees are described as “sales force” loan officers responsible for originating their own sales by contacting prospective clients. They spend a significant amount of time away from their employer’s place of business, and meet with prospective clients at locations other than the employer’s business, such as at a customer’s home. Communications by telephone, mail, and e-mail are “adjunct” to in-person contacts. They obtain credit information and other necessary documentation for the loan application process. They make in-person calls on real estate agents and brokers, financial advisors, and other potential referral sources to develop borrower leads. They also engage in marketing and promotional activities in support of their own sales. Finally, they have “considerable” flexibility in setting their working hours and to schedule the tasks they perform during the workday.

FLSA2006-11 further allows the real estate sales employees to perform a number of activities at the employer’s place of business without losing the outside sales exemption as long as the inside sales activity is incidental to and in conjunction with qualifying outside sales activity. These activities include updating multiple listings, contacting prospects, discussing prospects with colleagues, preparing documentation for a sale negotiated in outside sales activities, and working with “walk-in” prospects if such activity results in subsequent outside sales activity with the prospect. Employers should consider whether any of their current mortgage loan officers might qualify as outside salesmen.

Effect of Interpretation

The DOL’s comprehensive analysis of mortgage loan officers may reveal its more general approach to the administrative exemption and how the administrative-production dichotomy will be applied to financial services companies. In one respect the Interpretation is less restrictive than the position now being considered in the California Supreme Court in Harris. The language in the Harris decision could be construed to limit the exemption to an exclusive class of employees at the upper echelons of a company. In contrast, the Interpretation specifically recognizes that work performed at lower levels could qualify if it is related to the employer’s human resources department, accounting department, quality control, advertising, research, and similar areas.

Note also that overtime exemptions require individual analysis that is highly dependent on facts of a given case. Employers should examine the work duties of their mortgage loan officers and determine whether they match the “typical” duties described in the Interpretation. As discussed, the exemption for outside sales still applies, as does the exemption for “highly compensated” employees. These are workers who are paid total annual compensation of $100,000 or more, whose primary duty includes performing “office or non-manual work,” and who customarily and regularly perform at least one of the exempt duties or responsibilities of an exempt executive, administrative or professional employee. (See 29 C.F.R. Sec. 541.601).

Thus, for example, an employee may qualify as an exempt highly-compensated executive if the employee customarily and regularly directs the work of two or more other employees, even though the employee does not meet all of the other requirements in the standard test for exemption as an executive.

It is uncertain whether an employer has a right to rely on actions made in good faith reliance on the DOL’s prior opinions. Under 12 U.S.C. Section 259, an employer may not be subject to any “liability or punishment” for a wage and hour violation if the employer’s action was made in good faith “in conformity with and in reliance on any written administrative regulation, order, ruling, approval, or interpretation, of [the DOL].” Still, even if an employer successfully invokes this defense, the protection would not necessarily apply after March 24, 2010 when the Interpretation was released. Although this Administrator’s Interpretation, not being a duly enacted regulation subject to notice and comment, does not have the force of law, it is likely to be given some deference by the courts. Moreover, wage orders issued by California’s Industrial Welfare Commission are interpreted with reference to federal DOL regulations to which the Interpretation pertains. CBA will monitor whether the plaintiffs’ bar will bring actions based on the new Interpretation.

The information contained in this CBA Regulatory Compliance Bulletin is not intended to constitute, and should not be received as, legal advice. Please consult with your counsel for more detailed information applicable to your institution.

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