Banking and Financial Services Update, Vol. 9, Summer 2011


Banking and Financial Services Update

Vol. 9, Summer 2011

In this issue:

Register Now: Seventh Annual Southeastern Banking Seminar

On Friday, August 19, 2011, Waller Lansden will host the Seventh Annual Southeastern Banking Seminar. This complimentary program will once again feature insightful presentations on timely topics and emerging issues for banks and financial institutions.

Faculty includes:

  • Cecelia Calaby, Executive Director & General Counsel
    American Bankers Association Securities Association

  • Commissioner Greg Gonzales,
    Tennessee Department of Financial Institutions

  • Robert B. Albertson, Principal & Chief Strategist,
    Investment Strategy, Sandler O’Neill & Partners

  • Tim Amos, Senior Vice President and General Counsel
    Tennessee Bankers Association

  • Larry Childs, Partner
    Waller Lansden Dortch & Davis, LLP

 For program details and to register, click here.


Are Mortgage Loan Officers “Exempt” under the FLSA?  Maybe!

By: John Park

For several years, there has been a question about whether mortgage loan officers are exempt from the overtime requirements of the Fair Labor Standards Act. At the core of the debate is whether mortgage loan officers are primarily salespeople, or whether they exercise “discretion and independent judgment with respect to matters of significance.”

The Department of Labor has added to the confusion by reaching different conclusions under the Bush and Obama administrations. In 2006, the DOL opined that mortgage loan officers are exempt because they engaged in activities such as “[s]ervicing existing customers, promoting the employer’s financial products, and advising customers on the appropriate financial product to fit their financial needs.”  Many financial institutions relied on this ruling and categorized their mortgage loan officers as exempt under the FLSA.

The DOL changed course in a March 20, 2010 “administrator interpretation,” reasoning that the typical mortgage loan officer’s primary duty is selling loan products, which would not relate to “the management or general business operations of the employer or employer’s customers.”  The validity of this interpretation is currently being challenged by the Mortgage Bankers Association.

Plaintiffs’ lawyers have looked to capitalize on the uncertainty by filing collective and class action lawsuits against some of the largest names in the industry, including Bank of America, JP Morgan Chase and others. In the first of these cases that has reached trial, a Michigan jury recently struck an important, although somewhat unexpected, victory for at least one employer.  In Henry v. Quicken Loans Inc., Case No. 2:04-cv-40346, Eastern District of Michigan, 400 mortgage loan officers at Quicken sued for over $25 million in unpaid overtime, alleging that their primary duty was the sale of Quicken’s mortgage products. Quicken responded by arguing that their mortgage loan officers were not merely salespeople, but conducted “sophisticated financial analysis” that required them to exercise discretion and independent judgment regarding business related matters, and therefore were exempt from the overtime requirements for the FLSA.

The parties conducted a five week trial with over fifty witnesses and thousands of exhibits. The jury ultimately found that Quicken’s mortgage loan officers did, in fact, engage in duties that went beyond sales, and therefore Quicken had not violated the FLSA by categorizing them as exempt.

Below are some lessons credit unions and banks take away from the Quicken Loans verdict:

  • The Department of Labor’s current view remains that mortgage loan officers generally do not qualify under the administrative exemption because their duties are primarily focused on sales and customer support.
  • The question of “exempt” status is fact-specific, and does not rest on an employee’s title and job description. Instead, judges and juries will closely examine the actual job duties of individual mortgage loan officers to determine whether they are exercising discretion and independent judgment.
  • The Quicken Loan case and Department of Labor interpretation involved residential, and not commercial loan officers. There is likely a stronger argument that commercial loan officers are exempt, as they are typically less sales oriented than residential loan officers. As cautioned above, however, this is a fact specific question that may vary between, and even within, companies.

The Quicken Loan case is a welcome and instructive example for financial services employers. Employers should closely examine the duties actually being performed by their mortgage loan officers as a proactive way to identify potential issues that may affect their exempt or non-exempt status.


Supreme Court Upholds Validity of Class Action Waivers in Arbitration Agreements

By: Heath Fite

The potential for conducting arbitration proceedings on a class-wide basis has become an area of increasing concern for parties to arbitration agreements. Ten years ago, it was likely assumed that class action procedures were incompatible with the arbitration of disputes. In fact, class actions were often defeated by compelling the named plaintiffs to arbitrate their claims under pre-dispute arbitration agreements.

Then things started to change, and it appeared that class actions would be allowed in arbitration proceedings.  It began when certain arbitration organizations promulgated rules governing class arbitration, and parties began pursuing class-wide claims in arbitration. In response, contracting parties began to include class arbitration waivers in their arbitration agreements. Litigants contested these waivers, and courts in many states deemed arbitration provisions containing a class action waiver to be unconscionable and unenforceable. For instance, in Discover Bank v. Superior Ct., 113 P. 3d 1100 (Cal. 2005), the California Supreme Court, based on general state-law principles disfavoring exculpatory contracts and demanding that unconscionable contract clauses be limited so as to avoid an “unconscionable result,” ruled that class action waivers in some consumer contracts are unconscionable, and, thus, unenforceable (the “Discover Bank rule”).  

However, on April 27, 2011, the United States Supreme Court, in AT&T Mobility v. Concepcion, 563 U.S. 1740 (2011), held that the Federal Arbitration Act (“FAA”), 9 U.S.C. § 2, preempts state laws such as California’s “Discover Bank rule” that condition the enforceability of arbitration agreements on the availability of class-wide arbitration. The Court reiterated that not all arbitration provisions governed by the FAA are “valid irrevocable, and enforceable.”  9 U.S.C. § 2. Some are not enforceable based upon “generally applicable contract defenses, such as fraud, duress, or unconscionability,” but not upon defenses that apply only to arbitration agreements in particular rather than contracts generally.

Because California’s “Discover Bank rule” applies to class action waivers in consumer contracts whether or not they contain arbitration provisions, it is facially  a “generally applicable” doctrine that the FAA might countenance. Nevertheless, the Court reasoned that even a “generally applicable” doctrine merits scrutiny if it has been “applied in a fashion that disfavors arbitration.”  The Court ultimately concluded that the FAA preempted California’s “Discover Bank rule” because it was an “an obstacle to the accomplishment of the FAA’s objectives.”  Since the FAA promotes arbitration as an informal and “streamlined proceeding” whereas class-action arbitration would require much more “procedural formality,” refusal to enforce arbitration agreements with class action waivers would contravene the purposes of the FAA.

Concepcion is important for two reasons. First, the Supreme Court has explicitly recognized that contracting parties may avoid class actions and class arbitrations by using arbitration agreements that limit arbitration to the resolution of claims on an individual basis. Second, “generally applicable contract defenses” may not suffice to defeat the enforcement of arbitration provisions if those defenses frustrate the FAA’s objectives or are applied in a fashion that disfavors arbitration.   


Corporate and Commercial Transactions:

  • Marlee Mitchell (615-850-8943), David Wilson (615-850-8586)

Finance and Restructuring:

  • Rob Harris (615-850-8467), David E. Lemke (615-850-8655)

Financial Services Litigation:

  • Joseph A. Woodruff (615-850-8485), Larry B. Childs (205-214-6380)

Regulatory Issues:

  • Marlee Mitchell (615-850-8943), Chris Siderys (615-850-8176)


Please provide suggestions for future topics or feedback to:

  • Miranda K. Kelley, Editor
  • Phone: 615-850-8674
  • Email: