On December 30, 2010, a former underwriter for Stearns Lending, Inc, filed an action in the Northern District of California, alleging that the Company, a mortgage loan lender, had misclassified her as an exempt employee.

The plaintiff, Jennifer Gordon, claims that her duties as an underwriter consisted of reviewing loan applications and determining whether the loan met the criteria identified by the Company’s standardized underwriting software. While the exempt status of underwriters has been addressed on several occasions, there remains a split in authority among the federal circuits on this issue.

Gordon v. Stearns, Lending, Inc. is the second overtime claim filed by underwriters within the past month, and more can be expected in view of the March 26, 2010 “administrative interpretation” issued by the Department of Labor (“DOL”). As we have previously written, in this “administrative interpretation,” the DOL reversed its previous position and found that mortgage loan officers do not qualify for the administrative exemption of the Fair Labor Standards Act. The DOL stated that the typical mortgage loan officer’s primary duty is not “the performance of office or non-manual work related to the management or general business operations of the employer or employer’s customers,” as required under the federal regulations.

Rather, mortgage loan officers are responsible for selling loan products produced by the company, but their duties do not relate to servicing the business itself. This “production versus administrative” dichotomy is used to distinguish “between work related to the goods and services which constitutes the business marketplace offerings and which contribute to running the business itself.”

The Gordon v. Stearns Lending, Inc. case is significant on two fronts. First, the DOL’s “administrative interpretation” is specifically directed at mortgage loan officers. Gordon will test whether the Courts will apply the same “production versus administrative” dichotomy to underwriters, or other employees in the lending industry, who perform a similar function as mortgage loan officers. Second, Gordon may shed light as to whether the courts will give deference to the DOL’s March 26, 2010 “administrative interpretation.” To date, this question has still not been answered.

The bottom line is that lending companies whose underwriters are mainly responsible for the production and/or sale of loans, as opposed to the management and operation of the business, face significant risk, and should engage in an internal examination of these types of classifications.