Mortgage Industry Concerned About Supreme Court Decision

Mortgage Industry Concerned About Supreme Court Decision
By David Robinson

When the U.S. Supreme Court recently ruled that mortgage loan officers could be reclassified as non-exempt employees, there was an immediate (negative) reaction, which was followed by a “wait and see” attitude that continues as the industry anticipates new developments.

In their March 9 decision, Supreme Court justices agreed that the Department of Labor was within its rights when it chose to reclassify loan officers as non-exempt employees who are eligible for a 40-hour work week and overtime compensation.

Background
The Court decision stems from a 2010 decision by the Department of Labor (DOL) to reclassify loan officers. That decision itself was a reversal of a 2006 decision by the DOL that changed loan officers to exempt status.

When the Department of Labor made the change in 2010, it prompted the Mortgage Bankers Association to sue, claiming that the 2010 interpretation of the rule violated the Administrative Procedures Act by failing to follow procedures already laid out for changing significant rules, including not providing notice and time for public comment on the rule change.

The MBA won in the Court of Appeals for the D.C. Circuit in 2013, but the suit was appealed all the way to the Supreme Court.

In the ruling on the suit, Perez v. Mortgage Bankers Association, the Supreme Court said that the Department of Labor did not violate the Administrative Procedures Act when it made the change to the loan officer rule.

“Because an agency is not required to use notice-and-comment procedures to issue an initial interpretive rule, it is also not required to use those procedures to amend or repeal that rule,” Justice Sonia Sotomayor wrote in the consensus opinion.

Industry Response
As expected, initial industry reaction to the decision was not positive.  “We obviously don’t agree with the result but understand they had little choice based on current laws that govern federal agencies,” said John Councilman, president of the National Association of Mortgage Professionals.

The association’s official position is that “NAMB believes doubling the exception for managers, administrative positions and sales employees is both unnecessary and counterproductive.  True sales people, such as mortgage loan originators, work best under commission.  This prevents them from being laid off when business is slow while allowing them to make high wages when business activity is high.  The proposal would push employers to artificially manipulate employees’ hours by such things as making them part-time or by preventing them from providing services to consumers when they neared the overtime threshold.  We believe the greatly increased proposed overtime threshold will push employee compensation down rather than raise it and harm consumers.”

The Mortgage Bankers Association was similarly disappointed by the Court’s decision but said it is ready to move forward and help members work within the confines of the rule. “MBA hoped that the court would uphold the lower court decision in our favor, so obviously we are disappointed with the final outcome,” MBA noted in a recent statement. “We will now work with our members to develop approaches to this issue that hopefully do not unduly increase borrower costs or compromise customer service.”

Additional Feedback
Of course, you’re likely to hear a variety of different opinions from mortgage company owners and managers. One of the common responses is a concern that the ruling will have a pronounced affect on the entrepreneurial spirit of loan originators, and the relationship between them and their companies, with consumers ultimately suffering. “The ruling doesn’t allow for the natural entrepreneurial spirit on which our industry is based,” said Fred Kreger, CMC, American Family Funding, Santa Clarita, Calif. “This (40 hour work week) could detract from loan originations doing what they need to do to close a loan.” As he noted, loan officers may be unwilling or unable (because of limitations on overtime hours) to devote the time necessary to ensure optimum customer relationships.

Another critical issue will be the sales manager/company’s role in overseeing loan officer activity.  “It could put company owners in a tricky position of having to more micro manage their loan officers’ time,” said Kreger.  One of the results could be a more uniform approach to marketing and related functions, with less flexibility for individual strategies.

In addition, there could be a reduction in the services that companies have been providing their previously independent loan originators—such as computers, desks, marketing materials and other support. “Owners will have to determine if by paying overtime, they’ll need to reduce their resources,” said Kreger. “When you limit resources and the loan officer’s availability to serve clients, you’re actually harming the individuals (consumers) we’re trying to help.”

Next Steps
At this point it’s not clear just when mortgage companies will need to begin making the transition to non-exempt status. As Kreger explained, state employment agencies will most likely be responsible for ensuring that mortgage companies comply with the new rules. Meanwhile, company owners and managers are planning ahead to determine how they will implement the significant changes. “We haven’t been formally notified yet,” he said. “Right now it’s a wait and see situation.”

(Broker Banker will continue to monitor the non-exempt rule issue and provide appropriate updates.)

David Robinson is Associate Editor of Broker Banker.

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