Oct. 25 (Bloomberg) -- First Franklin Financial Corp., the subprime lender acquired by Merrill Lynch & Co. last year, won permission to pay $3.4 million to settle a lawsuit filed by employees who said the company failed to compensate them for overtime.

Loan processors who did clerical work on mortgage loan applications were forced to work more than 40 hours a week without extra pay, according to the lawsuit filed in February 2006. The approval covers the second half of a $7.7 million settlement to reimburse 795 loan processors who worked at the company between Feb. 23, 2003, and April 1, 2007.

``The settlement amount is substantial and the settlement includes meaningful compensation payments to class members,'' U.S. District Judge Kathryn H. Vratil in Kansas City wrote in an order issued yesterday.

First Franklin, which was acquired by Merrill Lynch in December for $1.3 billion, was first sued by loan processors in Kansas under the Fair Labor Standards Act. Claims filed by California employees under that state's labor code were later added. First Franklin agreed to settle the claims in two separate parts, covering employees in California and those outside the state.

In July, Vratil approved the company's $4.3 million settlement with 599 loan processors outside of California. Yesterday's approval covers 196 loan processors in California. Under the terms of the agreement, California workers will get an average of $12,181 depending on their tenure with the company. Some workers could receive as much as $40,000, George Hanson, lead attorney for the plaintiffs, said in a phone interview today.

Attorneys were awarded about $1 million, or 30 percent of the settlement, in fees and expenses.

Merrill Lynch spokesman Mark Herr declined to comment.

Subprime lenders make loans to borrowers with below-average credit ratings. Merrill Lynch is a passive, minority investor in Bloomberg LP, the parent company of Bloomberg News.

The case is Tamara West v. First Franklin Financial Corp., 06-2064, U.S. District Court District of Kansas (Kansas City).

To contact the reporter on this story: Sophia Pearson in Wilmington, Delaware Spearson3@bloomberg.net

Last Updated: October 25, 2007 11:31 EDT