Who Says Loan Underwriting is Boring and Mechanical? Sixth Circuit Rules Loan Underwriters Exempt from FLSA Regs
In the eyes of at least one Federal court, loan underwriting is not mechanical; it requires discretion and independent judgment. That point was a key factor in the Sixth Circuit Court of Appeals’ recent affirmance in Lutz v. Huntington Bancshares, Inc. of the dismissal of a class-action lawsuit filed on behalf of loan originators. The plaintiffs alleged that Huntington Bank had misclassified the loan originators as exempt employees and cheated them out of overtime pay.
In a 2-1 decision, the Sixth Circuit found that Huntington’s residential loan underwriters qualify as administrative employees under the Fair Labor Standards Act’s (FLSA) white collar exemptions as they perform duties similar to claims adjusters and financial services advisors. The decision is noteworthy for everyone in the financial services and loan origination sectors.
The FLSA mandates overtime pay for employees who work more than 40 hours per week unless the employee falls under an exemption. Employees in a “bona fide administrative capacity” are exempt. To qualify for the administrative exemption, the employee must:
- be paid at least $455 per week (and meet the salary basis test),
- have a primary duty related to the management or general business operations of the employer, and
- have a primary duty that includes the exercise of discretion and independent judgment with respect to matters of significance.
At the heart of the case was whether these loan underwriters’ duties require discretion and judgment (so they are exempt) or were mechanical or clerical (so they are nonexempt and eligible for overtime). The opinion chronicles how underwriters review a completed loan application for accuracy and decide whether the customer qualifies for the loan by applying the bank’s guidelines. As part of applying the guidelines, underwriters are “expected to exercise their judgment regarding credit decisions objectively,” rely on personal experience or judgment when making decisions, and may, at his or her discretion, approve the loan as an “exception.” Further, an underwriter may make a counteroffer that alters the application or “flag” an application that appears suspicious.
The underwriters contended that they are nonexempt because the bank could not establish the second and third elements for the exemption. The district court granted the bank’s motion to dismiss and analogized the work of underwriters to the work of insurance claims adjusters, financial analysts, quality control officers, and regulatory compliance officers – all of which the Department of Labor cites as examples of employees qualifying for the administrative exemption.
The Sixth Circuit agreed with the district court that the loan underwriters qualify for the administrative exemption. Key factors to the Sixth Circuit’s assessment were that the underwriters advise the bank as to what credit risk to accept, and that the duties of underwriters resemble the duties of administratively exempt employees in the financial services industry, for example when they “analyz[e] information regarding the customer’s income, assets, investments or debts and determin[e] which financial products best meet the customer’s needs.”
Finally, and critically, the Court determined that loan underwriters exercise discretion and independent judgment in the exercise of their duties because their decisions went beyond mere mechanical calculations, and they had the authority to waive or deviate from the bank guidelines. The Court emphasized that even where an employer had guidelines and manuals for the employees, those employees can still exercise discretion and independent judgment and such discretion concerned matters of significance to the employer.
The dissenting judge believed fact questions existed and was persuaded that underwriters made no independent discretionary decisions and had to follow the guidelines. Additionally, the dissent emphasized that other departments dictate the particular loan product to be offered to a customer such that an underwriter is really not weighing the credit risk. Finally, the dissent found it compelling that the underwriters are not held accountable for the performance of the loans they approve.
While this is a positive decision for employers in the Sixth Circuit, not all courts agree on this issue. Notably, the Second Circuit reached a different conclusion when it held loan underwriters to be non-exempt production employees. See Davis v. J.P. Morgan Chase & Co., 587 F.3d 529 (2d Cir. 2009). Lower courts have reached contrary decisions as well. Compare McKeen-Chaplin v. Provident Savings Bank, FSB, 2015 WL 4873160 (E.D. Cal. Aug. 12, 2015) (loan underwriters qualified for FLSA exemption) with Bollinger v. Residential Capital, LLC, 863 F.Supp.2d 1041 (W.D. Wash. 2012) (underwriters do not qualify for exemption).
The decision is significant as banks and other lending institutions employ legions of loan underwriters, and properly classifying them is critical. The Sixth Circuit’s decision concludes that these individuals (at least those at Huntington Bank) are exempt employees and not eligible for overtime. Whether any particular employee is exempt is determined on a case by case basis so lenders should review their guidelines and practices relating to their underwriters’ duties in light of Lutz as a precautionary measure.