Loan Officer Overtime Case Has Much Broader Reg Implications

Mortgage & Real Estate




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WASHINGTON — A long-running battle between the Mortgage Bankers Association and the Labor Department is headed for the Supreme Court in December and the outcome could have a significant impact on banks and other mortgage lenders.

Although the case ostensibly turns on whether loan officers should be paid overtime, the high court is more focused on whether government agencies have the right to substantially change a regulation without first seeking public comment.

“This case is really about what is a regulation and what is an interpretation of a regulation,” Richard Faulk, a senior director at the Law Economics Center at George Mason University’s law school, said in a briefing on the case earlier this month.

He said it has important ramifications for all government agencies whenever a new president is elected and seeks to reverse or significantly alter the policies of the previous administration.

Ironically, the high court is not expected to directly deal with the original issue that started the case — whether loan officers are entitled to overtime pay.

“This case is about process, not whether the interpretation is right or wrong,” said Ken Markison, the regulatory counsel for MBA.

The case, Perez vs. Mortgage Bankers Association, involves two instances where the Labor Department abruptly changed its interpretation on overtime pay without going through a formal rulemaking process. (Thomas Perez is the Labor secretary.)

Until 2006, loan officers were entitled to minimum wage and overtime under the Fair Labor Standards Act, unless they worked outside their employer’s office.

But the Labor Department suddenly changed that position during the Bush administration. With MBA’s support, the agency issued an interpretative letter that concluded loan officers qualify for an “administrative exemption” and are not entitled to overtime.

The Bush interpretation contends loan officers act as professionals or administrators in gathering information about borrowers and use discretion and judgment in originating loans.

The 2006 interpretation was reversed three and half years later during President Obama’s first term. In 2010, the Labor Department issued an interpretation restoring the agency’s original position that mortgage loan officers “do not” qualify for an administrative exemption. The new interpretation found that loan officers are generally engaged in sales and the rote application of lending guidelines.

Under the Obama administration’s overtime interpretation, lenders must track overtime, something that lenders claim invites litigation. If an employee files a claim that they are entitled to overtime, it sparks a Labor Department investigation of the company’s practices.

“Lots of employees and plaintiff counsels know it really is an easy way to target a company by suggesting they haven’t followed wage and hour requirements,” said Robert Lotstein, the managing partner of Lotstein Legal.

The MBA, which supported the Bush administration’s initial change of position eight years ago, filed a lawsuit challenging the 2010 interpretation. The U.S. Court of Appeals for the District of Columbia, which is known to target administrative flip-flops, took the case.

It struck down the 2010 interpretation, invoking the so-called “Paralyzed Veterans doctrine,” a reference to a 2007 ruling that said government agencies must follow notice and comment requirements of the Administrative Procedures Act when making significant changes to rules.

The appeals court said the Labor Department didn’t provide notice or seek comment when it changed its interpretation in 2010.

The decision effectively reinstated the 2006 policy that loan officers were exempt from overtime pay. MBA is hoping the Supreme Court will back up that decision.

“MBA believes that the Court of Appeals got it right and is hopeful its decision will be sustained by the Supreme Court,” said the MBA’s Markison.

But some find it ironic that MBA is challenging the most recent interpretative letter after they had supported the Bush administration’s initial interpretative letter. That was noted by three former Quicken Loans loan officers, Jerome Nickols, Ryan Henry and Beverly Buck, who petitioned the Supreme Court to review the D.C. Circuit’s ruling.

“The Paralyzed Veterans doctrine, assuming it exists, must be applied fairly. The doctrine should not permit a regulated party to attack selectively the agency’s most recent interpretive change,” they said in their brief.

The MBA’s Markison, however, contends the Bush administration’s loan officer interpretation was consistent with the Labor Department’s 2004 regulations on overtime and did not represent a flip flop.

Other industry groups agree. Rod Alba, a vice president and senior regulatory counsel for the American Bankers Association, said the first interpretative letter was a clearer description of the 2004 regulation as opposed to the Obama administration’s take on the issue.

Alba said forcing lenders to follow the Fair Labor Standards Act with regard to loan officers carries liability and leaves them open to litigation and enforcement risk.

“To continue to operate under current conditions, we need to have assurance that banks and other lenders are exempt from these overtime rules that don’t make any sense in terms of loan originator activities,” Alba said in an interview.

How much liability banks would face is unclear.

Quicken Loans, the nation’s fourth largest mortgage lender, was subject to overtime litigation and prevailed in a 2011 case called Henry v. Quicken Loans. A federal jury ignored the Labor Department’s 2010 interpretation and found that Quicken’s loan officers exercised discretion and judgment with respect to originating loans.

“We encourage companies of all shapes and sizes to resist settling groundless cases brought by ‘professional’ plaintiff law firms looking to extort settlements,” said Quicken Loans spokesman Aaron Emerson in a statement. “As we have demonstrated by already winning one baseless overtime case, we are confident in our position regardless of how the Supreme Court rules in the Perez case.”

But during his preview of the case earlier this month, Faulk also said a positive ruling for the industry would help keep other government agencies in check.

It “gives employers some peace of mind so that they don’t face unexpected regulatory changes that can be expensive and disruptive,” Faulk said Oct. 3.

The appeals court ruling leaves the door open for the Labor Department to re-adopt its 2010 interpretation, provided it first conducts a rulemaking with notice and comment.

But Secretary Perez has instead sought Supreme Court review of the case and the Paralyzed Veterans doctrine.

The high court has scheduled oral arguments in the Perez v. MBA case for Dec. 1. A decision is not expected until spring or mid-summer.

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