Outdated labor laws: a 65-year-old law enacted to protect low-wage workers from being exploited is a focus of concern in today's mortgage business.

IN THE MIDST OF A RECORD YEAR FOR ORIGINATIONS, worrying about whether originators are getting paid sufficiently for their overtime strikes one as hopelessly arcane. These same originators are pulling down annual incomes easily in the six figures, as record numbers of loans close month after month. If they are working long hours--and many of them are--they are getting paid handsomely in commissions for doing so. The income potential is so good, that huge numbers of new brokers and loan officers have been attracted to these lucrative positions in the past few years. Does this sound like a prescription for employee abuse? Some have been looking at outdated federal labor laws and trying to make that case. Meanwhile, back in Washington, D.C., the U.S. Department of Labor (DOL) has decided to update the nation's antiquated overtime regulations (29 C.F.R. Part 541), first devised in 1938--in the heart of the Depression. These overtime provisions were created with the good intention of protecting low-wage workers from being exploited--working too many hours without a guarantee of overtime pay. Now, 65 years later, some of the rules are clearly outdated and job categories that no longer exist are still on the books. Meanwhile, decades of new jobs have been created that didn't exist in 1938 that now must be fit somehow into existing categories.

"The rules contain jobs like 'straw boss' and 'key-punch operator,' which don't apply in the 21st-century working environment," explains Craig Shearman, vice president of public relations for Washington, D.C.-based National Retail Foundation (NRF), which supports the DOL changes. "As a result, we have employers trying to shoehorn jobs like 'computer programmer' into 'key-punch operator.'"

The NRF is part of a large group of business organizations that support the changes. Others include the Mortgage Bankers Association (MBA), Washington, D.C.; the U.S. Chamber of Commerce, Washington, D.C.; the National Association of Manufacturers (NAM), Washington, D.C.; the National Restaurant Association, Washington, D.C; the National Retail Federation; the National Council of Chain Restaurants (NCCR), Washington, D.C.; the National Federation of Independent Business (NFIB), Washington, D.C.; the National Association of Convenience Stores (NACS), Alexandria, Virginia; the Food Marketing Institute (FMI), Washington, D.C.; and dozens more.

But nothing is ever as simple as it seems--especially when politics is involved. A number of organizations, particularly labor-related groups such as the American Federation of Labor-Congress of Industrial Organizations (AFL-CIO), Washington, D.C.; Communications Workers of America (CWA), Washington, D.C.; and 9 to 5 National Association of Working Women, Atlanta, strongly oppose the rule changes because they would allow employers to work more employees in an overtime capacity without, as these groups claim, "just" compensation allowed by law.

"The basic argument that we have with the proposed regs the DOL wants to implement is that it would disqualify millions of workers from overtime protection--many of the workers [being] middle-income as well as even some low-income," says Suzanne Ffolkes, a spokesperson for the AFL-CIO.

A matter of importance for mortgage bankers

Overtime pay--who gets it and who doesn't--may become an expensive and contentious issue for the mortgage banking industry. Since the mid-1990s, when low interest rates fueled a massive consumer movement to refinance home loans or buy starter or move-up homes, mortgage bankers and lending officers have worked at a breakneck pace to keep up with the volume of loans. This has meant more work and longer hours, but it has also meant a sharp increase in annual compensation--at a time when many other industries were suffering layoffs, frozen salaries or limited work hours.

"Certainly loan officers for the past 10 to 15 months have been originating a record number of loans, and that has meant longer hours, but they have also been earning more money," says Rod Alba, director of government affairs for MBA.

"To a large extent I don't think loan officers would complain that they are working longer hours, because they are earning much more than they used to," says Alba.

While that's very likely true, some trial lawyers have found the imprecise and antiquated federal overtime regulations a treasure-trove for class-action lawsuits.

According to The Wall Street Journal, by 2001 the number of class-action suits over overtime pay surpassed "even that other tort standby--workplace discrimination lawsuits."

Like fishermen casting large nets in the ocean to catch anything swimming by, the Journal reports these legal opportunists "trawl through companies, looking for categories of workers they say were miscategorized and unfairly deprived of overtime pay."

Part of the attraction for trial lawyers is millions of dollars in damages awarded to plaintiffs. Companies looking for a quick way out of these lengthy legal slogs often pay settlements to avoid a lengthy court battle.

The financial services industry, including mortgage banking, has not gone unnoticed by the class-action bar. This is one reason why MBA in July decided to establish a clearing house of information for litigation involving loan officers and mortgage banking entities.

"In recent years, plaintiff lawyers have begun to focus on the financial services industry," says Robert Davis, partner with the law firm Mayer, Brown, Rowe & Maw LLP, Washington, D.C.

Davis has been working with MBA as an outside counsel. Davis is a former solicitor at DOL.

"For a long time, people assumed the folks in the financial services profession were being paid more than the average pay in the United States, and somehow were de facto exempt [from overtime pay]," Davis says, "but a number of trial lawyers have come in to say, in essence, 'We don't care how much they are paid--let's look at what they actually do and whether they qualify for exempt status.'"

Few of the cases involving loan officers, says Davis, have been tried to conclusion. At this point there is not an exact tabulation as to how many loan officer overtime lawsuits have entered the courts, but attorneys familiar with cases in this area say several lawsuits have been filed in recent years.

When an employee is "exempt," it means that worker does not have to be paid for overtime work (i.e., he or she is exempt from the overtime regulations). Thus, by definition, nonexempt employees must be paid for overtime work.

Under the statute, there are four tests for overtime exemptions:

* Executive: Anyone who supervises two or more full-time employees

* Professional: People who have a specific "professional" skill and training, such as for law, medicine or education

* Outside sales: Individuals who spend time calling on customers

* Administrative: This group includes people who advise or counsel customers

In general, these tests are referred to as the "white-collar" exemptions under the Fair Labor Standards Act. MBA is particularly interested in changes being proposed to the administrative test.

MBA supports the new language defining "administrative" in the changes proposed by the DOL on March 31, 2003. The wording being proposed is "employees acting as advisers or consultants to their employer's clients or customers." MBA also recommends specifically including the words "loan officers" in the terminology.

In a comment letter submitted by MBA, Jonathan Kempner, MBA's president and chief executive officer, wrote, "We believe ... that loan officers satisfy the discretion and independent judgment test in the current regulations."

This is an important issue for MBA because, as Davis says, "About three years ago we started seeing lenders and brokers experiencing investigations and at least one court opinion stating that the loan officers need to be compensated for overtime."

Ellen Kearns, a partner in the Washington, D.C., office of New York-based Epstein Becker & Green PC and editor-in-chief of a Bureau of National Affairs publication on federal labor laws, is familiar with DOL's past findings on loan officers' status.

Kearns cites two examples. In a wage-and-hour opinion letter of May 17, 1999, the DOL concluded that loan officer employees are not qualified for an exemption because they are engaged in carrying out the employer's day-today activities as opposed to participating in the formulation of or execution of overall policy of that business.

Then on Feb. 16, 2001, there was a request to reconsider the May 1999 letter--but DOL reached the same conclusion.

"In the first case of May 1999, the DOL said you [lending officers] are not involved in the management policies and general business operations, you are just producing loans," says Kearns. "In 2001, the DOL modified that and said, 'All right, the loans are big and you might be involved in management policy, but you do that in a way that uses skills and knowledge but doesn't involve 'discretion and independent judgment.'"

Kearns adds, "For mortgage brokers to be exempt from overtime requirements, they would need to be 'administrative' employees, and there are two requirements for that: customarily and regularly exercise discretion and independent judgment, and do work that is directly related to management qualities or general business operations." Kearns adds, "Under the old regs, loan officers have been found by the DOL to be nonexempt because they did not exercise discretion and independent judgment. Under the new regs, loan officers may be exempt because the discretion and independent judgment factors have been changed to 'positions of responsibility,' and loan officers appear to meet that criteria."

Regulations and politics

In March, the DOL finally made its move and issued a proposed rule. There was a comment period that ended June 30. The department received roughly 80,000 comments on the proposed changes.

"Our job under the Administrative Procedures Act is to consider all comments we receive and determine which changes need to be made in the proposals, and to respond to public comments," says Tammy McCutchen, an attorney who is now an administrator in the DOL's Wage and Hour Division (WHD).

"We did ask specifically for comments on loan originators, mortgage brokers and other financial industry workers," she adds.

In its comments, MBA noted the following about the proposed rule:

* Salary requirement: DOL proposes to raise the minimum weekly salary that employees may earn to qualify for the whitecollar exemption to $425, or $22,100 annually. (Under current rules, it's $13,000 annually.) The last time the minimum salary level received an upgrade was back in 1975.

* Duties test for administrative employees exemption: The discretion and independent judgment test is removed entirely, while the regulation retains the requirement that the employee's primary duty is to perform office or nonmanual work directly related to the management or general business operations of the employer or the employer's customers. The new test requires that the employee hold a position of responsibility with the employer, performing work of substantial importance or requiring a high level of skill or training.

* Executive employees: To qualify for the exemption, the employee must have the primary duty of management of the enterprise or a recognized department or subdivision; customarily and regularly direct the work of two or more employees; and have authority to hire or fire, or make recommendations for that.

"We are trying to clarify the rules, not push people from one category to the next, and we are particularly trying to clarify the gray areas like mortgage banking, where there were no specific rules or regulations because the industry didn't exist then," says McCutchen.

Commenting on the lawsuits involving the financial services industry, including mortgage banking, McCutchen adds, "The court cases are sometimes helpful, but not when you have some courts going one way and others going the next. We want to give, in particular, some guidance here to the financial services industry. It was so difficult to apply these [outdated] rules that were written for manufacturing and apply them to service, high-tech and financial industries."

All this seems sensible and straightforward, yet it wouldn't be Washington without plenty of opposition ready to pounce on the changes--especially from labor groups (the Washington, D.C.-based American Nurses Association and Washington, D.C. based United Food and Commercial Workers, among others).

"There has been a lot of unfortunate rhetoric out there," acknowledges McCutchen. "If you read some of the newspapers, you would think we're going to take away your overtime. The changes we make are going to be protecting 1.3 million low-wage workers."

That's not how the AFL-CIO sees it. "The DOL could easily promote change if they clarify the regs and guarantee protection for more workers, but we feet the changes would disqualify too many workers who are eligible for overtime," says Ffolkes.

"Those of us who advise mortgage banking companies have always felt that loan officers were exempt and that the proposed changes will only clarify that point," says Davis.

While the DOL has the discretion to propose and implement the rule changes, those in opposition have decided to play serious politics to try to derail the changes. The first test came July 10, 2003, in the U.S. House of Representatives, and the DOL barely survived it.

An amendment by Reps. David Obey (D-Wisconsin) and George Miller (D-California) was offered to the fiscal year 2004 Labor, Health and Human Services and Education appropriations bill; it basically said the DOL could not issue any regulation that takes away overtime rights.

In July, the House voted to kill the amendment by a narrow margin of 213 to 210. The Senate will eventually get to vote on a similar amendment. "We understand a similar amendment might be offered after the August recess," says Davis. Says AFL-CIO's Ffolkes, "We are hoping Sen. Tom Harkin (D-Iowa) will offer an amendment for the appropriations bill."

"We regret the House narrowly defeated this amendment," AFL-CIO President John Sweeney said at the time. "Many Democrats and Republicans have expressed outrage over the administration's attempt to deny workers overtime pay to help support their family." Obviously the DOL doesn't agree, saying it is protecting more than 1 million workers in regard to overtime.

The reason why the House vote was so close and the vote is likely to be close again in the Senate is this issue has become a key lobbying priority for labor groups. Politicians who represent districts with a large percentage of unionized workers have been pressured to toe the line on amendments like the one introduced by Obey and Miller.

For example, Rep. Jack Quinn (R-New York) represents Buffalo, New York, which boasts a 31 percent unionized work force, the highest of any city in the country. Quinn is entirely behind the AFL-CIO position on this bill.

"This is one of those things where the rules need to be looked at," says Mike Tetuan, Quinn's press secretary. "But this goes too far. A lot of people in Buffalo depend on overtime. We got a lot of calls on this from people who said the change would hurt them. We decided this was something where labor knew its position, where labor did its homework, and we voted with them."

For backers of the DOL proposed changes, Quinn's position is unfortunate because he's the leader of an informal working group comprised of about 30 Republicans who have districts with heavy ties to labor.

"When he votes, usually about 20 to 30 people follow him," says Tetuan.

Taking sides

While labor organizations have dominated the opposition to the DOL overtime rule changes, a hodgepodge of other groups have joined them. A big player in the "anti" camp has been the National Organization for Women (NOW), Washington, D.C.

In a June 2 broadside, NOW issued an "action alert" declaring:

* "This shame would erode labor standards like overtime pay, the 40-hour work week and the minimum wage law, making it easier for employers to cut costs by squeezing workers dry."

* "The Bogus Comp Time bills get rid of overtime protection for low-income workers and forces them to work longer hours for less pay."

* "Under the Bogus Comp Time bills, the employers, not the employees, choose when they want their workers to labor extra, unpaid hours--at night, in the early morning or on weekends. Workers who refuse could risk their jobs."

On the less hyperbolic level, the AFL-CIO and other labor groups have turned to a Washington, D.C.--based think tank called the Economic Policy Institute (EPI) to supply the intellectual muscle to support their position. EPI issued a briefing paper on the subject entitled, Eliminating the Right to Overtime Pay.

One of the authors of the study, Ross Eisenbrey, states the case this way: "Business organizations support the changes because their interest is to exempt as many people as they can so they do not have to pay time-and-a-half for overtime hours. These rules accomplish that purpose, and that is why they are in favor of them." Eisenbrey adds, "The basic notion that people should be paid overtime hasn't changed just because people are doing computer jobs they didn't do before."

By EPI's calculation, after examining 78 occupations among more than 250 identified by the DOL as being white-collar, the changes in the duties test will cause an estimated 2.5 million salaried workers to lose their right to overtime pay. Moreover, an estimated 5-5 million hourly workers could meet the new exemption tests and lose the right to be paid for overtime hours.

The Wall Street Journal doesn't buy EPI's arguments. According to the Journal, the unions are up in arms over the rules, largely for recruitment purposes. "The Labor Department's modernization won't have any real effect on the rank-and-file, since many are already guaranteed overtime via collectively bargained contracts. But the unions have been trying for years (largely unsuccessfully) to recruit white-collar workers into the cause," according to the Journal.

The National Retail Federation is blunt in its characterization of the unions' opposition. "The unions are lobbying very hard on the other side," says NRF's Shearman. "They are trying to claim people would lose overtime, which is completely backward. A lot of fuzzy math has been issued and paid for by the unions. Their concern is, the better the working conditions are in the nonunion environment, the less reason anyone has to join a union."

The DOL's overtime rule changes are balanced, Shearman adds. "Under the DOL proposals, the number of people receiving overtime would increase significantly, but the regs would also clarify the job categories as to who would receive overtime. We think the increased salary cost is a fair trade-off for the increased clarity in the job duties."

"The U.S. Chamber of Commerce doesn't endorse 100 percent of the DOL's proposals," says Michael Eastman, the chamber's director of labor law policy. "But in general, we support changes to the regulations. We look for a simple test to determine whether an employee is eligible for overtime, and today that is a decision that is very difficult to make. Even a well intentioned employer cannot be sure whether their employees qualify for an exemption."

Updating the white-collar exemptions is a top priority for employers, Eastman says, because the existing confusion has become expensive. "First, companies are spending tremendous resources in trying to comply with antiquated regulations; and secondly, the legal liability for improperly classifying employees is quite high. Companies need to have certainty they are doing it correctly."

The National Federation of Independent Business backs the DOL changes for very similar reasons.

"We represent a broad base of economic sectors through small businesses, and they have been subject to class action lawsuits on overtime disputes," notes Patrick Lyden, NFIB's manager of legislative affairs.

"People are in the gray area that has been created by the current regs, so employers are not sure whether they qualify for overtime or not. Employers make judgments one way or another, and this has led to litigation."

Lyden adds, "The proposed rules will clarify things so that employers and employees will get a better sense of who is and who is not eligible for overtime."

"The rules governing exempt status of loan officers are both arcane and archaic," says Davis. "We look forward to clarification from the DOL so that mortgage banking companies will be able to continue to classify their employees properly."

Steve Bergsman is a freelance writer based in Mesa, Arizona.