Banking & Finance Law Report

The U.S. Department of Labor Opines That Mortgage Loan Officers And Similar Employees Are Non-Exempt Under the Fair Labor Standards Act

Due to recent guidance from the U.S. Department of Labor, financial institutions should examine their classification of mortgage loan officers and similar employees. Last month, the DOL’s Wage and Hour Division released its first Administrator Interpretation (Interpretation No. 2010-1). In the Interpretation, the Division concluded that mortgage loan officers – and employees performing the typical duties of a mortgage loan officer – do not qualify as administrative employees exempt from the provisions of the Fair Labor Standards Act.

The Interpretation states that the typical job titles given to such employees include “mortgage loan representative,” “mortgage loan consultant,” and “mortgage loan originator.”  It also lists the job duties of such individuals as:  receiving internal leads, contacting potential customers, collecting required financial information from loan applicants, entering collected financial information into a computer program that identifies which loan products may be offered to customers, assessing the loan products identified, discussing with the customers the terms and conditions of particular loans, compiling customer documents for forwarding to an underwriter or loan processor, and/or finalizing loan documents for closings.

Administrative employees are exempt from the minimum wage and overtime requirements of the FLSA. In a 2006 opinion letter, the DOL had previously opined that mortgage loan officers were administrative employees, and therefore exempt under the FLSA. See FLSA2006-31. However, the agency specifically withdrew that opinion letter in its recent Interpretation, finding that such employees are “production, rather than administrative employees” because they have a primary duty of sales, rather than of performing administrative functions for the financial institution.

While its recent Interpretation represents a shift in the DOL’s opinion on the issue, there have been many court opinions, including Chao v. First National Lending Corp., 516 F.Supp.2d 895 (N.D. 2006), holding that mortgage loan officers are non-exempt. Nevertheless, due to DOL’s recent Interpretation, it is now more clear than ever that mortgage officers – and any other employees performing the job duties listed above – must be paid overtime for any hours worked over 40 in a week. Of course, the job title given to an employee will not control whether they are exempt or not. If the employee’s primary duty is the performance of one or more of the tasks listed above, they are likely covered by this Interpretation. Therefore, all financial institutions employing such employees should examine their current classification and determine whether changes need to be made as a result of this guidance.

Is Your Term Sheet Binding?

That is the question addressed in Amcan Holdings, Inc. v. Canadian Imperial Bank of Commerce, 894 N.Y.S.2d 47 (N.Y. App. Div. 1st Dep’t Feb. 4, 2010).

Amcan Holdings, Inc. (“Amcan”), certain of Amcan’s affiliates (together with Amcan, collectively, “Borrower”), and Canadian Imperial Bank of Commerce (“Lender”) negotiated, executed and delivered a certain “Summary of Terms and Conditions” (the “Term Sheet”). The Term Sheet contained a variety of agreed upon terms and conditions, including the principal amounts of the revolving and term facilities, interest and amortization schedules, maturity dates, fees, the collateral to secure the debt, and a proposed closing date. 

After discovering that Borrower was subject to a preliminary injunction that prohibited Borrower from pledging to Lender certain equity interests, Lender lost interest in the proposed financing arrangement. Six years later, Borrower initiated a breach of contract action against Lender. Borrower’s position was that the Term Sheet was a binding commitment to lend.

The New York appellate court disagreed. The court stated that the fundamental issue to be determined in these cases is whether the parties intended to be bound by the agreed upon terms and conditions set forth in the preliminary agreement (i.e., the Term Sheet). To support its conclusion that the Term Sheet was not binding, the court noted that the Term Sheet clearly states “the credit facilities will only be established upon completion of definitive loan documentation, which would contain not only the terms and conditions in those documents but also such other terms and conditions as [Lender] may reasonably require. Although the [Term Sheet] was detailed in its terms, it was clearly dependent on a future definitive agreement, including a credit agreement. At no point did the parties explicitly state that they intended to be bound by the [Term Sheet] pending the final Credit Agreement, nor did they waive the finalization of such agreement.”    

Based upon this case, a prudent lender should make it clear within the term sheet which provisions, if any, are binding upon the parties. Additionally, the term sheet should indicate that the proposed credit facilities shall not be established, and lender shall not be committed to lend, unless and until the parties execute and deliver definitive loan documentation.

What Border Officials Can Do With Your Laptop And Cellular Phone

Having your laptop or smartphone searched or detained by Customs on your way back from a business trip would be a nightmare for most travelers, including bankers and other finance professionals. However, this scenario is quite possible under new governmental policies. In 2009, Customs and Border Protection (“CBP”) and Immigration and Customs Enforcement (“ICE”) both issued their respective new policies on border searches of electronic devices. It was a coordinated effort of CBP and ICE to update and harmonize their border policies to detect an array of illegal activities, including terrorism, cash smuggling, contraband, child pornography, copyright, and export control violations.

With all the technology innovations that allow business travelers to carry massive amounts of information in small electronic devices, CBP and ICE are facing an enormous challenge. On the one hand, travelers have a legitimate right to carry information on electronic devices. In that respect, there are serious concerns regarding the traveler’s expectation of privacy. On the other hand, the government has a duty to combat illegal activities and to enforce U.S. law at the border. The difficulty is finding the right balance between the government’s duty to enforce the law and the rights of travelers.

The legal basis for ICE and CBP policies is the border search exception to the Fourth Amendment requirement that officers obtain a warrant before searching someone’s property. But, assuming that they have this power, another key issue is exactly what CBP and ICE are allowed to do with one’s laptop. In short, they have authority to search and share information on laptops, disks, drives, tapes, mobile phones, Blackberries, cameras, music players, and any other electronic or digital devices — with or without “reasonable suspicion1” of illegality. Detention of the devices and/or information requires probable cause that an illegal activity is underway or is about to occur.

Searches
CBP searches may be conducted with or without suspicion of an unlawful activity. To the extent practicable, CBP searches should be conducted in the presence of a supervisor. ICE searches should be conducted by an ICE Special Agent, CBP Officer, or Border Patrol Agent. The searches should be conducted in the presence of, or with the knowledge of, the traveler. Naturally, the guidelines provide for exceptions to the traveler’s presence under certain circumstances where national security or operational considerations are an issue. ICE guidelines specifically state that the traveler’s consent for the search is not needed.

Detention
CBP detention of a device should not exceed five days, but that period can be extended. ICE detention periods may be longer — up to 30 calendar days or longer — if circumstances warrant. CBP is required to issue a Custody Receipt to the owner of the device (CBP Form 6051D) at the time of detention. ICE will also give the owner of the device documentation regarding its custody. Detention of electronic devices requires probable cause to believe that the device, or its contents, contains evidence of illegality that CBP and ICE are authorized to enforce.

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Obama Proposes No Proprietary Trading for Financial Institutions

January 21, 2010, President Obama proposed reforms to the financial system designed to ensure no bank, or financial institution that contains a bank, will own, invest in, or sponsor a hedge fund, private equity fund, or proprietary trading operation for the bank’s own profit. The new reforms, known as the Volcker Rule after former chair of the Federal Reserve Board, Paul Volcker, are intended to prevent banks from engaging in what are now perceived as risky investments.

How the Volcker Rule will be drafted and applied is unclear. At a minimum it seems that banks may have to halt investments that use solely the bank’s capital. Banks may therefore have to divest their proprietary trading desks, although most banks have significantly smaller proprietary trading desks than they did prior to the economic crisis.

What constitutes proprietary trading operations under the Volcker Rule is unknown. For example, do such activities include the practice of facilitating trading for clients and investing alongside clients? Additionally, it is unclear whether only wholly-owned bank funds would be prohibited or any bank involvement in a hedge fund or private equity fund above a certain threshold. One approach, which would be a broad interpretation of the Volcker Rule, would be to prohibit any trading activity that could affect a bank’s balance sheet.

President Obama has pledged to work with Congress to implement the Volcker Rule as part of a comprehensive financial reform bill. The dynamics of the bill should have a direct effect on whether some banks will be willing to cease being a bank holding company in order to keep their trading and investment business.

Mayer v. Medancic: Is Interest in Ohio as Simple (or Compound) as it Seems?

On December 3, 2009, the Supreme Court of Ohio decided the case of Mayer et al. v. Medancic et al., in an effort to clarify the calculation of interest on an obligation upon the occurrence of a default. As stated by the Court, “compound interest is not available upon a default on a written instrument absent agreement of the parties or another statutory provision expressly authorizing it.” Accordingly, lenders should ensure that their loan documents clearly state that interest will be compounded not only during the term of the loan, but also after default.

The case involved the calculation of default interest on three promissory notes executed and delivered by the Medancics to the Mayers. All principal and accrued interest on each note was due and payable at maturity and the Medancics failed to make those payments in each case. Although the maturity dates fell in 1995 and 1997, the Mayers did not receive judgment on the notes until May of 2006. The Mayers contended that they were entitled to post-judgment interest at the rates set forth in the notes, compounded annually, but the trial court held that the Mayers were entitled to post-judgment simple interest at the rates set forth in the notes. The Eleventh District Court of Appeals reversed, on the basis of the Supreme Court of Ohio case, State ex rel Bruml v. Brooklyn, which the Eleventh District held provided for “interest upon interest” and, therefore, provided for compound default interest. In doing so, the Eleventh District acknowledged the general rule that compound interest is not available absent a statutory provision or agreement of the parties, but found that the rule applied only to cases decided under Ohio Revised Code 1343.03.

The Supreme Court of Ohio disagreed. The Court evaluated both statutes: Ohio Revised Code 1343.02 and 1343.03. 1343.02 provides that “upon all judgments, decrees, or orders, rendered on any bond, bill, note, or other instrument of writing containing stipulations for the payment of interest in accordance with section 1343.01 of the Revised Code, interest shall be computed until payment is made at the rate specified in such instrument.” 1343.03 sets forth the applicable statutory rate of interest when the instrument does not specify the interest rate. The Court made two crucial findings: (1) it saw no reason to withhold application of the general rule to cases decided under 1343.02, despite its historic application to cases decided under 1343.03, and (2) Bruml v. Brooklyn allowed for only “interest upon interest,” which it distinguished from compound interest. “Bruml merely permits the collection of interest on an amount that is due and payable, but not paid, even if that amount includes previously earned interest.” According to the Court, this meant that Bruml provides for the collection of simple interest on the judgment, whether that judgment amount included unpaid interest or solely principal was irrelevant.

Ultimately, this decision takes a middle position between that urged by the Mayers and that urged by the Medancics. Because the payment at maturity on each note included both principal and accrued interest, the default interest would be on that entire missed payment amount, but would be simple interest instead of compounded annually. Still, the decision is a costly one for the Mayers who lost compound interest over a nearly ten year period. This case should serve as a warning to all lenders in Ohio. Even if the instrument fully describes the accrual and calculation of interest during the term of the obligation, it must also do so for the period following a default.

Porter Wright Recognized Among 30 Elite Law Firms Nationally For Superior Client Service in BTI Survey

Porter Wright is deeply honored to be ranked among the 30 elite firms in the country when it comes to client service.  In a national survey of in-house counsel at Fortune 1000 companies conducted byThe BTI Consulting Group (BTI), Porter Wright ranked 22 out of 505 core firms named by in-house counsel.

Porter Wright was honored as a “Leader of the Best” when it comes to advising clients on business issues. According to the report, “Porter Wright differentiates itself with clients by translating legalese into business speak — a key method to prove your commitment to help clients.” The report also cites specific comments from corporate counsel about Porter Wright’s commitment to client service, specifically, “They know our business and us. They have skilled people in a number of areas critical to our business.”

Based out of Boston, BTI is the leading provider of strategic market research to law firms and professional services firms. BTI’s analysis draws on candid feedback from 240 corporate counsel at Fortune 1000 companies to determine which law firms among 505 core firms nationally top the charts in client service. Corporate counsel ranked Porter Wright among the best in the country in 14 areas:

  1. Anticipates the Client’s Needs
  2. Breadth of Services
  3. Brings Together National Resources
  4. Commitment to Help
  5. Deals with Unexpected Changes
  6. Helps Advise on Business Issues
  7. International Capability
  8. Keeps Clients Informed
  9. Legal Skills
  10. Meets Scope and Budget
  11. Provides Value for the Dollar
  12. Quality Products
  13. Understands the Client’s Business
  14. Unprompted Communication

For more information about this survey, visit www.bticlientservicesateam.com.

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