You can hardly throw a textbook today without hitting a media story about student loans. From the debt burden that graduates face to the actual loans that students have access to and how they’re structured, our country is taking a hard look at college costs and financing. Now the landscape is shifting.

Students, who used to hold little power in the loan process, are gaining a voice. Financial institutions should take note and adjust their loan-making processes or face more regulation and potential losses down the road.

This article shares information about recent federal announcements and their implications to the banking industry.

Recent Federal “Guidance”

There are, essentially, two types of student loans: 1) standard payment plans with established payment amounts and timelines from the moment a student graduates, and 2) graduated repayment plans under which the student’s initial payments are lower and then increase approximately every two years. Most graduated repayment plans require monthly payments over ten years.

The problem with graduated payment plans (and, let’s face it, many other student loans) is that some students don’t end up making as much money as they expected upon graduation and they struggle to pay their debt. A deeper look into some of the loan structures themselves led federal regulators to make a recent announcement to financial institutions that originate private student loans.

On January 29, 2015, federal financial regulatory agencies issued guidance for financial institutions that originate private student loans with graduated repayment terms. Some of the guidance may seem common sense, but clearly the regulators saw practices in the private banking industry that made them take note.

Financial institutions should see these guidelines as a warning shot: you’ve got to study your private student loan-making process and even your student loan culture or face more federal attention down the road.

The federal agencies issued the following principles for financial institutions that make private student loans with graduated repayment terms to ensure that they “prudently underwrite the loans in a manner consistent with safe and sound lending practices”:

• Ensure orderly repayment by calibrating repayment terms to reasonable standards based on debt;
• Avoid payment shock by including repayment terms that a borrower can meet over the life of the loan;
• Align payment terms with income and do not structure repayment terms to mask delinquencies or defer losses;
• Provide clear disclosures to the borrower as required by applicable laws and regulations, including the Truth in Lending Act;
• Comply with all consumer laws, regulations, and reporting standards; and
• Contact borrowers before reset dates to help establish student debt as a priority and aid borrowers in responding to any challenges.

More Power to the Students Coming

Further proof of a shifting landscape: The White House is studying whether it should be easier to wipe out student loans in the bankruptcy process. Currently, federal law prohibits student loans from being discharged in bankruptcy, except in rare cases. In a nutshell, banks need to work with students to arrive at fair repayment plans, or they may risk losing their assets in that student’s bankruptcy process.

The takeaway from this recent “guidance”? Students are gaining power in the loan process and banks need to be much more careful about how they structure loans and how they communicate with students throughout the life of a loan.

What Should You Do?

Financial institutions need to take a hard look at their private student loan-making process, their relationships with students throughout the life of a loan, and their very culture around student loans. You have received a warning: “Do this right, and do it fairly, or face consequences.”

If you have any questions, please contact Attorney Melissa S. Blair at O’Neil, Cannon, Hollman, DeJong and Laing S.C. at 414-276-5000.

O’Neil, Cannon, Hollman, DeJong and Laing S.C. attorneys Christa Wittenberg and Grant Killoran recently contributed articles to the Spring 2015 Edition of the Health Law Litigation Newsletter published by the American Bar Association Section of Litigation.

Attorney Wittenberg, an associate in the firm’s Litigation Practice Group, authored an article entitled “The Constitutional Framework for Public Health Responses to Disease Outbreaks,” analyzing the role of federal and state government in responding to contagious disease outbreaks, such as the recent Ebola virus crisis.

Attorney Killoran, the Chair of the firm’s Litigation Practice Group and one of the State Bar of Wisconsin’s Delegates to the ABA House of Delegates, authored an article entitled “American Bar Association House of Delegates Update” discussing a number of resolutions passed by the ABA House of Delegates at the ABA Mid-Year Meeting in Houston in February.

A complete copy of the Spring 2015 Edition of the ABA Section of Litigation Health Law Litigation Newsletter can be found at americanbar.org.

Attorneys Joseph Gumina and Erica Reib authored a Labor and Employment Law article series entitled, “Anticipating and Managing Wage and Hour Pitfalls” on InsideCounsel.com. This monthly magazine serves general counsel and other top in-house legal professionals and provides strategic tools to help them better manage their legal departments.

To learn more about the wage and hour topics below, click on the article links. Attorneys Joseph Gumina and Erica Reib can be reached at 414-276-5000 if you would like further information.

• “A primer for inside counsel on donning and doffing under the FLSA,” published 3/20/2015
• “Paying employees correctly under the FLSA with preliminary and postliminary activities,” published 4/3/2015
• “Education on unpaid internships for the in-house counsel,” published 4/17/2015
• “Unpacking the surprisingly tricky ‘regular rate’ in overtime calculation,” published 5/1/2015
• A primer for inside counsel on meeting FLSA overtime exemption tests,” published 5/15/2015
• “Independent contractors—Avoiding misclassification under the FLSA,” published 5/29/2015

Does a Lender’s title insurance policy cover construction liens filed by unpaid contractors where the lender has discontinued disbursing its construction loan mid-stream due to insufficient funds to complete the project? In BB-Syndication Services, Inc. v. First American Title Insurance Co., 780 F.3d 825 (7^th Cir. 2015), the United States Court of Appeals for the Seventh Circuit has emphatically answered “No.”

The BB-Syndication Services, Inc. v. First American Title Insurance Co. litigation arose from the financial collapse of a major Kansas City mixed-use construction project. At the inception of construction, a dispute arose between the general contractor and the owner-borrower regarding the cost of construction. The contractor claimed that design changes made by the owner and its architect entitled the contractor to a price increase of over $22M. If the contractor’s allegations were true, then the construction project would be underfunded by over $22M. The borrower disputed the price increase, and construction continued while the dispute between the contractor and the borrower progressed through arbitration.

With knowledge of the potential funding shortfall, the construction lender chose to proceed with financing the costs of construction as it progressed. The lender continued to fund the monthly construction draws for over one and one-half years, before it finally elected to cease all further construction loan disbursements, citing the huge loan imbalance and other defaults by the borrower. By then, the lender had disbursed about $61M of its $86M construction loan. Construction stopped, unpaid contractors filed construction liens totaling millions of dollars against the property, and the borrower filed bankruptcy.

In response to the liens, which had priority under Missouri law, the lender made a claim against the title insurance policy that insured the priority of its mortgage. The lender demanded that First American pay off all of the liens under the loan policy’s construction lien coverage. First American ultimately denied coverage on grounds that the lender’s own conduct—ceasing all funding of construction and refusing to release undisbursed loan proceeds to pay the contractors—had caused the liens to be filed, triggering policy exclusion 3(a). Exclusion 3(a) bars coverage for liens and encumbrances that are “created, suffered, assumed, or agreed” to by the insured.

BB-Syndication ultimately filed suit against First American. The District Court granted summary judgment in favor of First American, holding that exclusion 3(a) barred all coverage for all of the construction liens. BB-Syndication appealed. In a pivotal opinion, the Seventh Circuit affirmed the District Court’s decision, holding that the lender had “created” the liens.

Perhaps the most significant aspect of the Seventh Circuit’s opinion is its reasoning. In the few court decisions in other prior cases facing this issue, the outcome has turned upon the following two factors: 1) the existence or nonexistence of a disbursement agreement between the construction lender and the title company; and 2) whether or not the lender had disbursed the entire loan amount. The Seventh Circuit expressly criticized the reasoning of those prior decisions, and charted its own course. The Court recognized that construction lenders typically possess the power to exercise significant control over the loan transaction and over the construction project, particularly with regard to the project’s finances. The Seventh Circuit concluded that construction lenders have both the ability and the duty to investigate, monitor, and to ensure the construction project’s economic viability, both at inception and throughout construction. The Court held that “[w]hen liens arise from insufficient funds, the insured lender has ’created’ them by failing to discover and prevent cost overruns—either at the beginning of the project or later.” Consequently, the Seventh Circuit adopted a simple rule that “exclusion 3(a) excludes coverage for liens that arise as a result of insufficient funds.”

The lesson for construction lenders is clear. They can no longer rely upon title insurance as a safety net against construction liens that arise due to insufficient construction funding. Instead, they must rely upon their own due diligence and other financial instruments, such as third-party guarantees or performance bonds. On the other hand, title insurers can take comfort that they will not be left holding the bag when a construction lender decides to quit disbursing a construction loan due to insufficient funding.

Mr. Slawinski represented the First American Title Insurance Co. in the BB-Syndication Services, Inc. litigation. He may be contacted by telephone at 414-276-5000 or via e-mail at steve.slawinski@wilaw.com.

• “Attack of the Zombie Property”
• “Electronic Signatures—The Law is Catching Up”
• Employment LawScene™ Alert: “How FMLA Leave Should—and Should Not—Affect Your Employees’ Performance Evaluations”
• Dean Laing Elected as President and Managing Shareholder
• Featured Tax and Wealth Advisor™ Alert: “The Second Sin—”Mistaking Fairly With Equally”
• Publication Watch: Inside Counsel, “Anticipating and Managing Wage and Hour Pitfalls”
• Pleased to Announce:
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  • Hot Topics for Small Firms and Solo Practitioners

On February 10, 2015, the Wall Street Journal published an article entitled “Everything Is Awesome! Why You Can’t Tell Employees They’re Doing a Bad Job” extolling the virtues of praising employees’ strengths and scaling back on criticism.  Although this may be good for employees’ confidence levels, it is bad for companies when they have to defend a discrimination lawsuit or oppose a bid for unemployment benefits.For example, in September 2011, a New York woman sued in federal court claiming that her employer “mommy-tracked” her by attempting to demote her, refusing to promote her, and cutting her bonus after she took maternity leave, despite repeatedly earning positive performance ratings during her career with the company.  The company argued that she was lawfully terminated because her reviews were done by an “easy grader” and she was not meeting the company’s other metrics.  In January 2015, the federal judge overseeing the case stated that the case looked strong enough to go to trial due in part to the questions of fact presented by the positive performance reviews.

Performance reviews are valuable tools for employers.  While they may be used to boost an employee’s self-esteem and confidence, employers should carefully train their supervisors and manager to give honest feedback and critiques when necessary.  Problems should not be sugar-coated; the issue, the steps to correct the issue, and the consequences for failing to correct the issue need to be included in evaluations and reviews.  These honest assessments on an employee’s performance are essential to being able to discipline and terminate an employee if that becomes necessary, as well as defending the company from a lawsuit or claim for unemployment compensation.

On March 18, 2015, the NLRB General Counsel issued a report concerning recent cases that raise significant legal and policy issues regarding employee handbook rules.  Recently, the NLRB has been focusing on non-union employer’s handbooks and whether they violate Section 7 of the NLRA, which permits employees to discuss wages, hours, and other terms and conditions of employment and to otherwise engage in protected concerted activity.  The most clear violation of Section 7 would be a ban on union activity; however, if an employee could reasonably construe a rule or policy to prohibit activities protected by Section 7, the NRLB will find that it is in violation of the law.  The report gives specific examples of handbook policies that were found lawful and unlawful and why.  The report specifically states that even well-intentioned rules that would inhibit employees from engaging in activities protected by the Act are not allowed under the law.  The rules and policies that are most frequently called into question are those covering confidentiality, professionalism, anti-harassment, trademark, photography/recording, and media contact.

Confidentiality policies cannot specifically prohibit employees from discussing the terms and conditions of their employment (e.g., wages, hours, workplace complaints), nor can the policies be reasonably understood to prohibit such discussions.  Policies cannot broadly define “employee” or “personnel” information as confidential.  However, the NLRB does recognize that employers have a substantial and legitimate interest in maintaining the privacy of certain business information.

Employee conduct policies will run afoul of the NLRA if they prohibit employees from engaging in disrespectful, negative, inappropriate, or rude conduct toward the employer or management absent sufficient clarification or context.  Even false or defamatory statements can find protection under Section 7 unless they are “maliciously false.”  Employers can promulgate blanket rules that require employees to be respectful and professional to clients and competitors because there is a sufficient business interest in that behavior.  Employers are also permitted to ban insubordinate behavior.  However, employers cannot ban employees from negative or  inappropriate discussions with their fellow employees because employees have the right to argue and debate with each other about unions, management, and the terms and conditions of employment, which can sometimes be contentious.  Therefore, anti-harassment rules cannot be overly broad either.  Employers cannot ban employees from discussing terms and conditions of employment with third parties, including news media.  Although employers may designate who can make official statements to the media on behalf of the company, they cannot ban employees from speaking to third parties on their own behalf or on behalf of other employees.

Although employers have an interest in protecting their intellectual property, the NLRB has taken the stance that rules prohibiting employees’ fair use of that property are unlawful.  This “fair use” includes using things such as company names and logos on picket signs, leaflets, and other protest material because these are non-commercial uses.  According to the report, employees have a Section 7 right to photograph and make recordings in furtherance of their protected concerted activity, including the right to use personal devices to take such pictures and recordings.  Therefore, a total ban on photography, recordings, or use of personal devices is overbroad if it can be read to prohibit use during breaks and other non-work time.

Employer rules regulating when employees can leave work are unlawful if employees could reasonably read them as forbidding protected strikes and walkouts, as the right to go on strike is a fundamental Section 7 right.  Policies should reflect that leaving their posts for reasons unrelated to protected activity will subject employees to discipline.

Because Section 7 allows employees to engage in activity to improve their terms and conditions of employment, which may be in conflict with the interests of an employer, broad conflict-of-interest policies are unlawful.  Employer policies should be limited to legitimate business interests.

The differences between what is lawful and what is not are incredibly nuanced, and the General Counsel’s report did not present what could be considered “bright line” rules.  The NLRB has stated that it will read rules in context with other rules and not in isolation, which could lead potentially unlawful policies to be held lawful in context.  Overall, the emphasis is that rules need to be narrowly tailored and include context and examples in order to steer clear of violating the NLRA.

It should be noted that the General Counsel’s report is not law but, instead, represents the current enforcement policy of the NLRB.  However, given the NLRB’s recent aggressive position relative to enforcing Section 7 rights in non-union workplaces, employers should review their handbooks to determine if any of their rules or policies may run afoul of the NLRB’s current set of enforcement policies concerning employee handbooks.

On March 25, 2015, Joseph E. Gumina, who leads the firm’s labor and employment practice, spoke to the Greater Milwaukee Chapter of the Hospitality Financial and Technology Professionals. Attorney Gumina spoke about the latest developments in labor and employment law affecting the hospitality industry, including the latest developments before the NLRB and the EEOC. Attorney Gumina also spoke about wage and hour compliance and workplace harassment issues in the hospitality industry.

On Wednesday, March 25, 2015, a divided U.S. Supreme Court issued a ruling in Young v. UPS.  The Supreme Court was asked to decide whether the Pregnancy Discrimination Act (“PDA”), which amended Title VII of the Civil Rights Act of 1964, allows an employer to have a policy that accommodates some, but not all, workers with non-pregnancy related disabilities but does not accommodate pregnancy-related conditions. We covered the background of the case here.  The majority opinion from the Supreme Court overturned the Fourth Circuit’s decision to affirm summary judgment for the employer and returned the case to the Fourth Circuit.

The employer argued that the PDA Act doesn’t require accommodations or special treatment for pregnant employees and that it was, therefore, entitled to treat pregnant employees the same as it treated employees with restrictions stemming from off-the-job injuries.  The employee argued that  employers who provide work accommodations to non-pregnant employees must do the same for pregnant employees who are similarly restricted in their ability to work.  The majority opinion did not find either the employee or the employer’s interpretation of the PDA persuasive.

The majority opinion rejected the employee’s interpretation of the PDA because it essentially gave pregnant employees an unconditional “most-favored-nations” status because pregnant employees would have to receive the same accommodations that any other employee received for any reason.  The majority agreed with lower courts that this was not Congress’ intent in passing the PDA.  Although the EEOC had supported the employee’s position and published guidelines in line with her arguments, the majority stated that the guidelines were promulgated after certiorari was granted, took a position on which previous EEOC guidance had been silent, were inconsistent with positions long advocated by the government, and the EEOC did not explain the basis for the guidance; therefore, they found such guidance unpersuasive.

The Supreme Court’s majority opinion disagreed with the employer’s interpretation as well, holding that it would cause the first clause of the PDA to be superfluous and would fail to carry out a key objective in passing the PDA.

The majority laid out that a pregnant employee can still use the McDonnel Douglas framework to prove a case of disparate treatment under the PDA by showing that she belongs to a protected class, that she sought an accommodation, that the employer did not accommodate her, and that the employer did accommodate others similar in their ability or inability to work.  The employer may then justify its refusal to accommodate by relying on legitimate, nondiscriminatory reasons, although claims that it is more expensive or less convenient will generally not suffice.  The employee may then show that the alleged legitimate, nondiscriminatory reason is pretextual.  The Supreme Court sent the case back to the Fourth Circuit to determine whether there were genuine issues of material fact as to whether the employer’s reasons for not accommodating her were pretextual.

The majority did make an interesting note that their holding may be of limited significance because of the change in the Americans with Disabilities Act expansion in 2008 and the EEOC’s guidance that employers are required to accommodate employees whose temporary lifting restrictions originate off the job.  Although the Court expressed no view on the statutory or regulatory changes and although pregnancy is generally not considered a disability but conditions related to pregnancy can be, this could cause employees to raise ADA claims when denied accommodations related to their pregnancies and pregnancy-related conditions.

Employers should carefully consider their policies on how to handle employee requests for accommodations.  Although the ruling did not fully side with either party, it is likely to lead to additional litigation on accommodation requests by pregnant employees.

Attorney Peter J. Walsh will be presenting at the SFSP Milwaukee Chapter Membership Meeting and Networking event on Tuesday, March 24, 2015.

Mr. Walsh is a member of the Tax and Succession Planning Practice Group and will be presenting on how insurance products, such as life insurance and long term care insurance, can be used in asset protection planning for long term care.  He first presented this topic to the Elder Law Section of the Wisconsin Bar in September 2013 and his upcoming presentation will be updated to reflect recent changes in the law.