Even after doing all the right things, Prospect ended up with a potentially expensive legal fight on its hands, says Robert Lotstein.
Even after doing all the right things, Prospect ended up with a potentially expensive legal fight on its hands, says Robert Lotstein.

Prospect Mortgage's victory in a series of minimum wage and overtime cases brought by loan officers provides, at a minimum, a blueprint for other lenders to fight such claims.

The lender claims to have scored a big win for the industry by showing the value of fighting these claims, rather than entering into settlements that have cost mortgage companies millions of dollars in recent years.

"These rulings show it is possible to effectively defend a commission-only arrangement based on the outside sales exemption if your loan officers do in fact have outside duties," says Barry Miller, one of the attorneys from Seyfarth Shaw who represented Prospect Mortgage during the trial.

However, industry lawyers caution the rulings may have limited applicability.

These cases hinge on the interpretation of the duties of outside salespeople. The Department of Labor's rules for the Fair Labor Standards Act exempt such salespeople from minimum wage and overtime requirements. Past settlements of similar cases have resulted in employees being converted to hourly compensation plus overtime.

On Feb. 5, a jury ruled that Prospect, based in Sherman Oaks, Calif., had properly classified a former mortgage loan officer, Alison Cougill, as an outside salesperson. Besides the trial, Prospect Mortgage prevailed in summary judgment rulings in three other cases; two were decided before Cougill v. Prospect came to trial and the third came out the same day as the verdict. All four cases were before the same judge, James Cacheris, who sits in federal court for the Eastern District of Virginia.

Everyone agrees that in the Cougill case, Prospect Mortgage did everything right. The company had an employment agreement with Cougill, as well as a company handbook which clearly defines the position's scope of responsibility, notes Robert Lotstein, an attorney with LotsteinLegal who specializes in mortgage industry compliance issues.

In July 2013, the Mortgage Bankers Association won a favorable ruling from the U.S. Court of Appeals for the D.C. Circuit which struck down a Labor Department opinion that loan officers are administrative personnel and eligible for overtime. But that ruling was based on procedural grounds and it left the door open for the department to reinstate its position, attorneys said at the time.

Some firms might not be able to stomach this fight, but Prospect decided to dig in. Ron Bergum, the lender's CEO, sounds like a triumphant heavyweight boxer when discussing the case.

"It is a heroic story," Bergum says, adding that his company "took one for the industry.

"I have been waiting for this lawsuit for years. We have done a great job in this protocol of outside sales, we have meetings on it every month, and the people have to sign a stipulation quarterly. We are all over this because I always expected to be sued on this," Bergum says.

There is now a fairly clear statement of how much time a loan officer has to spend outside the office to meet the exemption created by the Department of Labor for outside salespeople (in any industry).

The regulation says outside salespeople "customarily and regularly" spend time outside of the office but until now what that phrase meant had not been defined in a court, says Miller. The threshold is one or two hours a week of outside work. That is easily attainable and until this case, it was uncertain that courts would accept this standard, Milller says.

A 2007 opinion letter from the Labor Department in another industry introduced the one- to two-hour standard. The Prospect case brings it to the mortgage industry, Miller says, and the Virginia decisions create clarity regarding this standard.

In the summary judgment ruling that came out the same day the Cougill case was decided, Judge Cacheris determined that Prospect's acts were not willful. If the judge had decided Prospect acted willfully in not paying minimum wage or overtime, the statute of limitations would have been extended to three years from two, making the company liable for any lost salary for that extra year. Instead, the summary judgment validates Prospect’s "perfectly reasonable" efforts to comply with the parameters of the outside sales exemption set forth in the Labor Department's opinion letters, Miller explains.

Bergum predicts that other mortgage companies will adopt this protocol for outside salespeople 100% because it came from a federal case and not a state one. But Lotstein points out that even after doing all the right things Prospect still ended up with a fight on its hands ending in a jury trial, which can be expensive.

And that is one of the reasons why the verdict might not be as far-reaching as Bergum and Miller suggest.

Bergum decided to spend the money and fight rather than do what a number of companies have done, which is to enter into settlements that call for employees to receive minimum wage and overtime.

RBS Citizens Bank entered into a $3 million settlement on a similar claim; TopDot Mortgage made a $9 million settlement while PNC Bank recently settled a $7 million loan officer comp claim.

Then there is the one-to-two hour a week interpretation for an outside salesperson. Most states, notwithstanding the Labor Department letter, define an outside salesperson as someone who spends more than half the time performing functions outside the office. While an appellate court might uphold the Virginia interpretation, it does not help companies who do business in multiple states, Lotstein says.

The jury result was based on the specific facts in a particular situation, especially because of the contract, Ari Karen writes in a blog post on NationalMortgageNews.com. Prospect took a risk by going to trial. Juries are known for their unpredictability and could have decided against the company, says Karen, an attorney with Offit Kurman whose expertise includes compensation issues.

The trial was most likely the first step in the process, Lotstein adds. This verdict is subject to an appeal by Cougill and a higher court could overturn it. Right now this case is only applicable in the Eastern District of Virginia. Other trial-level courts might come up with different opinions, Lotstein points out.

Prospect Mortgage is fighting 37 lawsuits in as many U.S. District Courts brought on behalf of about 243 individuals, in addition to roughly 188 arbitration proceedings, according to Miller. (Those cases are a result of a mutually agreed upon January 2013 decertification of a class action lawsuit.) Heroic though the story may be, it's only just begun.

Amilda Dymi and Kate Berry contributed reporting.

Subscribe Now

Authoritative analysis and perspective for every segment of the mortgage industry

30-Day Free Trial

Authoritative analysis and perspective for every segment of the mortgage industry