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Federal agencies now have the authority to interpret their own rules.

On March 9, 2015, in Perez v. Mortgage Bankers Ass’n, No. 13-1041, slip op. (U.S. Mar. 9, 2015), the United States Supreme Court effectively gave federal agencies carte blanche to interpret the regulations promulgated by those agencies without using a notice-and-comment procedure - even when a new interpretive rule is an about-face from a prior rule. In doing so, the Court reversed nearly two decades of precedent which required an agency to use the notice-and-comment procedures set forth in the Administrative Procedure Act (APA) when issuing a new definition or interpretation of a regulation that deviates significantly from one previously adopted by the agency.

In Mortgage Bankers, the Court examined the Department of Labor’s (DOL) reversal of a prior determination relating to mortgage loan officers. In a 2006 interpretive rule, the DOL said loan officers were exempt from the Fair Labor Standards Act’s (FLSA) wage and hour requirements under the Administrative Exemption. In a 2010 interpretive rule, the DOL said the same mortgage loan officers were not exempt. Litigation followed challenging the DOL’s ability to significantly revise an interpretive rule without using the notice-and-comment process.

Agreeing with the DOL that the APA did not require a notice-and-comment process for interpretive rules, the Court vacated Paralyzed Veterans of America v. D.C. Arena L.P., 117 F. 3d 579 (1997), which required an agency to use the notice-and-comment procedure when significant changes were being made to a prior interpretive rule.

Loan Officers do not Qualify for Exemption

In light of this decision, banks and lending institutions, especially those that focus on consumer transactions, will need to re-evaluate whether certain employees qualify for the Administrative exemption thereby allowing them to be salaried rather than hourly workers. Simply speaking, the Administrative exemption to the FLSA applies where an employee is performing an administrative role for the employer as opposed to a production role (i.e., sales). The DOL now takes the position that a mortgage loan officer’s duties (such as collecting information from customers, entering it into the computer program to determine what loan products might be available, etc.) are “production work” of the employer engaged in selling mortgage loan products. In other words, the officers perform work that relates to the services the bank or lending institution offers rather than work relating to the running of the business itself. Thus, according to the DOL and the Supreme Court, these loan officers do not qualify for the Administrative exemption.

Significance of Ruling: Banking and Other Industries

This ruling is significant to all employers, not just lending institutions, because “interpretive rules” can be based on the objectives of the administration in power (which appoints, for example, the Secretary of Labor) or on the opinion of the authoring bureaucrat. In fact, the two conflicting interpretive rules at issue in Mortgage Bankers were promulgated under two different administrations - the 2006 rule under the Bush administration and the 2010 rule under the Obama administration. Through these “interpretative rules,” agency decisions can result in substantive policy change. By allowing such ease of change, coupled with judicial deference given to interpretive rules, Mortgage Bankers calls into question the constitutional balance of power and can result in courts deferring to bureaucratic interpretation rather than considered rules, a concern raised by several Justices in the decision.

The Takeaway

The DOL’s stark departure from its 2006 interpretation of mortgage loan officers highlights the critical need of banks, lending institutions, and other employers to insure they are informed of interpretative rulings, especially now that the DOL is free from any notice-and-comment restrictions even when a new rule constitutes a complete reversal of a prior rule. Banks, lending institutions and employers should reconsider the primary functions of all employees, review employee job descriptions, and consult with their attorney to ensure compliance with FLSA and the DOL’s interpretative rules.