Wednesday, April 27, 2016

FYI: 6th Cir Holds Residential Loan Underwriters Not Entitled to Overtime Pay Under FLSA

The U.S. Court of Appeals for the Sixth Circuit recently that residential mortgage loan underwriters are not entitled to overtime pay because their job duties related to general business operations of the bank, and they performed those duties exercising discretion and independent judgment.


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


The plaintiffs, former bank employees, filed a class action suit against a bank, alleging that it failed to compensation them for overtime work in violation of the federal Fair Standards Labor Act ("FLSA"), 29 U.S.C. §§ 201-219.  The plaintiffs moved to conditionally certify a class.  The district court certified a smaller class, comprised of underwriters working only with residential loan products.


The district court ruled that these underwriters are administrative employees within the meaning of FLSA, 29 U.S.C. § 213(a)(1) and 29 C.F.R. § 541.200(a), and therefore exempt from overtime pay under 29 U.S.C. § 207(a)(1).


In reaching its decision, the district court found that the bank's residential mortgage loan underwriters worked in a "bona fide administrative capacity" under the FLSA.  The district court also held that the work of the underwriters was similar to the examples of administrative work that the United States Department of Labor ("DOL") provided in its regulations.     


On appeal, the Sixth Circuit affirmed the ruling of the district court.


The Court noted that its opinion was limited strictly to those working with residential loans.  The Court explained that in the residential loan process, in general and with the bank in this case, the underwriter's duties are to: (1) confirm that the information provided by the borrower in the application is correct; and (2) determine whether the borrower qualifies for the desired loan. 


The Sixth Circuit found that this second duty means the underwriter is essentially reviewing the recommendation of the underwriter software.  In performing this review, the Court held that the underwriter exercises considerable discretion.  The underwriter applies the guidelines of the bank, the lending criteria of the bank, and any pertinent bank regulations to determine whether the level of risk associated with the bank making the loan is acceptable.  The Court noted that the bank's guidelines spans thousands of pages and catalogue several factors that the underwriter must consider in reaching a decision.  Thus, the underwriter exercises considerable discretion in determining whether the borrower should receive the loan.


The Court noted that the text of the FLSA supports its finding that the underwriters are administrative employees and not entitled to overtime pay.  The FLSA requires employers to pay workers overtime for work performed in excess of forty hours per week.  The statute, however, exempts those workers "employed in a bona fide . . . administrative . . . capacity."  29 U.S.C. § 213(a)(1). 


The Sixth Circuit identified the three elements that determine whether an employee is working in a "bona fide administrative capacity":


(1) Compensated on a salary or fee basis at a rate of not less than $455 per week . . . ;

(2) Whose primary duty is 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) Whose primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.     


See 29 C.F.R. § 541.200(a).  A worker who satisfies all three elements is not entitled to receive overtime pay under the FLSA.


The plaintiffs asserted that they did not satisfy the second and third elements above. 


As to the second element, the Sixth Circuit looked to DOL regulations that define administrative employees as those performing "work directly related to assisting with the running or servicing of the business."  29 C.F.R. § 541.201(a).  Thus, the Court found that administrative employees perform work that is "ancillary to an employer's principal production activity."


In this case, the Sixth Circuit found that the work of the underwriter is ancillary to the principal production activity of the bank, which is to sell loans.  The underwriter assists in the running and servicing of the bank by deciding whether the bank should extend a loan to a borrower.  But the underwriter does not actually create these loans or sell them.  Therefore, the underwriter performs work that is ancillary in nature.


The Court compared the work of the underwriter to the work of an insurance adjuster, in that both jobs "provide a service that does not generate business for their employers, but is necessary for their employers to do business."


Accordingly, the Sixth Circuit ruled that the bank's underwriting employees fall within the administrative exemption.


As to the third element, whether underwriters exercise discretion and independent judgment with respect to matters of significance, the Court cited to DOL regulations asserting that both factors involve "authority to make an independent choice, free from immediate direction or supervision."  29 C.F.R. § 541.202(c).


The Sixth Circuit agreed with the district court that the bank's need for human underwriters suggests that they perform more than just mechanical calculations.  The Court also agreed with the district court that underwriters exercise discretion and independent judgment because they have authority to waive or deviate from the bank's guidelines.


The Court further held that the discretion and independent judgment involved matters of significance.  The Sixth Circuit noted that the standard is whether the work itself is substantially important. 


The plaintiffs argued that their work is not substantially important because they do not bear responsibility for financial loss and do not determine the risk that the bank is willing to take for any given loan. 


The Sixth Circuit disagreed, however, finding that although the plaintiffs do not determine the bank's overall risk guidelines, the decisions they make significantly impact the business.  Moreover, the Court found that the underwriters do determine the level of risk the bank is willing to accept for any particular loan, especially because the underwriter's decision can, in certain cases, bind the bank to the risk associated with that loan.


Accordingly, the Sixth Circuit ruled that the residential mortgage loan underwriters exercise discretion and independent judgment with respect to matters of significance.




Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874


Admitted to practice law in Illinois




Alabama   |   California   |   Florida   |   Illinois   |   Indiana   |   Maryland   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC



NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates and webinar presentations are available on the internet, in searchable format, at:


Financial Services Law Updates




The Consumer Financial Services Blog








California Finance Law Developments




Insurance Recovery Services