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Home | Commentary | Are Mortgage Underwriters Exempt Employees?
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Are Mortgage Underwriters Exempt Employees?

Are Mortgage Underwriters Exempt?In order to qualify as an exempt employee under the Fair Labor Standards Act, an employer must show, among other factors, that the employee’s 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 customer.” Many courts have used a short hand “administrative/production dichotomy” as a rule of thumb to determine whether work meets this requirement.

According to some courts, administrative work consists of work that any employer needs performed, such as human resources, accounting and regulatory compliance, while production work consists of work that is particular to an employer’s industry, such as selling mortgages in the mortgage industry.

In Davis v. J.P. Morgan Chase & Co., the federal court of appeal in New York, reversing the decision of the district court, held that J.P. Morgan Chase’s mortgage underwriters were not exempt employees under the Fair Labor Standards Act. The court of appeal, based on the evidence before it, found that the mortgage underwriters’ primary duty was to sell loan products under the detailed directions of a credit guide provided to them by the bank.

Based on this record, the court found that the work of the underwriters at J.P. Morgan was not related to the bank’s general business operations, but rather to the production of loans, which was the fundamental service provided by the bank.

The court of appeal’s decision in J.P. Morgan resulted in a flurry of cases challenging the exempt status of mortgage underwriters across the country. These cases have settled for millions and sometimes tens of millions of dollars and many employers have changed their practices by converting mortgage underwriters from exempt employees to non-exempt employees and paying them for overtime work.

Like many issues confronting businesses today, it made more sense to settle, pay, and change company practices, than to engage in expensive litigation with the risk of losing. As a result, there is a dearth of decisions addressing the issue of whether mortgage underwriters are properly exempt or non-exempt employees.

Since the court of appeal’s decision in J.P. Morgan, many courts addressing the status of employees in a variety of industries have backed away from the administrative/production dichotomy, finding that it is not an effective tool to use in interpreting the Fair Labor Standards Act. Rather, courts are now more closely analyzing the detailed job duties of employees to determine their status. Most significantly, a number of cases have found that insurance claims adjusters are exempt employees, even though they clearly perform services related to the fundamental service provided by insurance companies.

For example, one function of an insurance adjuster is to negotiate the payment of claims under insurance policies, which is at the core of their business. The decisions finding that insurance claims adjusters are exempt invariably rely on a Department of Labor interpretation that provides that claims adjusters are exempt if their duties include activities such as interviewing insureds, inspecting property damage, reviewing factual information to prepare damage estimates, and determining the total value of a claim. Significantly, these functions are all functions relating to work that is particular to the insurance industry.

The Department of Labor also has promulgated regulations with respect to employees in the financial services industry. These regulations provide that such employees are exempt if their duties include work “such as collecting and analyzing information regarding the customer’s income, assets, investments or debts,” the very work performed by mortgage underwriters.

Most importantly, however, and overlooked by the courts, is that mortgage underwriters perform work directly related to the general business operations of the employer by advising companies on the financial risks of providing loans. The impact on a company’s general business operations is readily apparent from the mortgage crisis in 2007 to 2010, which was caused in some part by the failure of mortgage underwriters to properly underwrite loans.

It is time for courts to recognize that the factual scenario presented in J.P. Morgan, where underwriters were given a loan application and followed procedures specified in a credit guide in order to produce a yes or no decision, is not the norm in the industry.

Rather, mortgage underwriters collect and analyze information regarding a customer’s income, assets, investments and debts to determine whether their companies ought to make loans. Whether mortgage underwriters perform their job well or not has deep consequences for the continued viability of a company.

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About Author: Colin Robins

Colin Robins
Colin Robins is the online editor for DSNews.com. He holds a Bachelor of Arts from Texas A&M University and a Master of Arts from the University of Texas, Dallas. Additionally, he contributes to the MReport, DS News' sister site.

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