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Image: Thinkstock

A Small Victory for Lenders on Loan Officer Pay

FEB 18, 2014 11:28am ET
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Many of you have already heard about the decision in Virginia Federal Court where Prospect Mortgage won a jury trial by applying the outside sales exemption to a loan officer suing Prospect for minimum wage and overtime. Before everyone scrambles to read their contracts, a couple things need to be kept in mind.

First, this was a jury trial. This means Prospect lost on summary judgment—where the court can dismiss claims if it finds the plaintiff cannot prevail as a matter of law. It follows that Prospect thus paid a substantial amount in legal fees (easily exceeding $100,000) and had to incur the risk that an unpredictable jury could have found against it, exposing it to all of the plaintiff's legal costs.

Another important thing to keep in mind is that the case turned on the specific facts at issue. In particular, the plaintiff in the Prospect case had admitted in deposition that she spent up to 50% of her time out of the office and her business was completely referral-based—she did not get leads of any sort. Also, her employment contract was well written—providing significant evidence that her employment was in fact outside the office.

Lastly, the claim in Prospect was based upon an employee who worked in a state where the outside sales exemption did not require a majority of time spent out of the office, as many states require. As such, notwithstanding the victory for Prospect, when one considers the cost, risk, and specific facts and applicable law of the case, it does not stand for the broad notion that the outside sales exemption automatically applies to all loan officers.

Rather, Prospect does illustrate the fact that a loan officer, whose employment is referral-based and who has executed an appropriate employment agreement, may be properly classified as outside sales exempt. This, of course, is not a ground-breaking or new standard. At all times, this exemption has been available, when appropriate, taking into account the way an employee gets their business, their location of work, and the applicable law.

Of course, there are other options, including recoverable minimum wages, which achieve the same results but may in a particular case, be more appropriate and involve less risk.

The bottom line is the decision on how to classify an employer's loan officers should be made on a case-by-case basis, taking into account the applicable law, the manner in which loans are originated, and the particular duties of the loan officers, as well as their volume and the lender's willingness to take some risk.

This is a decision that should be made after consultation with legal counsel and consideration of the unique circumstances of the particular employment. Once determined, the classification should be backed up by the execution of a proper employment agreement supporting the basis for the classification decision.

Comments (7)
I have always found this area to be so discriminatory, at best. When such a person as this is taking all of the expenses and advertising, whether it be referral based or otherwise, they are most defnitely considered self-employed. I am still amazed that such treatment of LO's is delved into with such tenacity, when in fact, it is no different than that of a Realtor. LO's have different clients, work in several different areas and sometimes in different states. If paid on a 1099 then you absorb all the related costs, just like an appraiser. This is more of a win for those of us who contend we are a small business owner.
Posted by | Tuesday, February 18 2014 at 1:45PM ET
My question is what part of 100% commission this loan officer did not understand.
Posted by | Tuesday, February 18 2014 at 2:18PM ET
Because LO's are no longer paid on a 1099 basis but rather on a W-2, he/she is considered an employee of the company and no longer an independent contractor. I believe it is this "employee status" that drives the originator to request a minimum hourly pay as any non-exempt employee
Yes, the LO can still file the federal schedule 2106 form to write-off unreimbursed business related expenses but he/she can no longer use a schedule C for self-employed or independent status being that now they have an employee status
Posted by | Tuesday, February 18 2014 at 2:29PM ET
In re to Ed: your first statement is not true. I am considered exempt from such an 'employee status (W-2). Not all LO's would be classified under the W-2 status so there are still LO's that are paid 1099. Your company may require it but that does not necessarily mean they are following all the rules. In cases just like this, look how much it cost the broker just to get out of the legal ramifications. My point was made in the earlier post....LO's for the most part, are considered small business just like Realtors. How many Realtors you know are paid on W-2?
Posted by | Tuesday, February 18 2014 at 3:15PM ET
Very interesting. I just started working for Prospect Mortgage. I with agree with the other followers comments. Loan officers should be treated pay wise as independent contractors.
Posted by | Sunday, February 23 2014 at 1:33PM ET
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