The FDIC Again Loosens Restrictions on Hiring Bank Personnel with Criminal Histories
By Jonathan Shapiro on August 6, 2020
On July 24, 2020, the Federal Deposit Insurance Corporation (FDIC) published a Final Rule regarding Section 19 of the Federal Deposit Insurance Act, 12 U.S.C. § 1829 ("Section 19"), which restricts hiring at FDIC-insured depository institutions, such as FDIC member banks. The Final Rule codifies the FDIC's prior guidance regarding Section 19 and allows a greater number of persons with criminal histories to work in the banking industry.
Section 19 prohibits, without the prior written consent of the FDIC, a person convicted of any criminal offense involving dishonesty, breach of trust, or money laundering, or who has agreed to enter into a pretrial diversion or similar program ("program entry") in connection with a prosecution for such an offense, from directly or indirectly, owning, controlling, or otherwise participating in the affairs of, an FDIC-insured depository institution. Further, Section 19 forbids an insured depository institution from permitting such a person to engage in any conduct or to continue any relationship prohibited by Section 19.
Section 19 imposes an affirmative duty upon an insured depository institution to make a "reasonable inquiry" regarding an applicant's criminal record history, which consists of taking steps appropriate under the circumstances, consistent with applicable law, to avoid hiring or permitting participation in its affairs by a person who has a conviction or program entry for a covered offense. The FDIC believes that, at a minimum, each insured institution should establish a screening process that provides the insured institution with information concerning any convictions or program entry pertaining to a job applicant. This would include, for example, the completion of a written employment application that requires a listing of all convictions and program entries.
Section 19 applies, by operation of law, as a statutory bar to employment1 with or other participation in the affairs of an FDIC-insured depository institution absent the written consent of the FDIC. Upon notice of a conviction or program entry, an application must be filed seeking the FDIC's consent prior to the person's employment or other participation. The FDIC's consent is automatically granted and an application will not be required where the covered offense is considered de minimis, because it meets certain mandated criteria.
Final Rule Changes
The FDIC's Final Rule, which will become effective 30 days after publication in the Federal Register, makes the following changes:
First, the Final Rule codifies into the FDIC's regulations the FDIC's existing "Statement of Policy for Section 19 of the Federal Deposit Insurance Act" (SOP), until now the FDIC's only published guidance with respect to Section 19. Despite the fact that Section 19 has had a significant impact on hiring and background checking practices at FDIC member banks for many years, the FDIC's guidance with respect to Section 19 has been set forth only in the SOP and not in its published regulations, which is unusual. The FDIC states that incorporating the SOP into the FDIC's regulations will make application of the SOP more transparent and readily accessible, increase certainty concerning the FDIC's application process, and help both insured depository institutions and affected individuals to understand the scope and impact of Section 19 (and to potentially seek relief from it).2
Second, the FDIC has made several changes that narrow the scope of crimes subject to Section 19 and the circumstances under which the FDIC's written consent is required for a financial institution to hire individuals with minor criminal offenses, thereby enabling more individuals to work for FDIC member banks without having to go through the Section 19 application process. For example, the Final Rule:
- Excludes from the scope of Section 19 all offenses that have been expunged or sealed - rather than only certain types of expungements. Under the Final Rule, all individuals whose covered offenses have been expunged will be exempt from obtaining written consent from the FDIC. This change will be very beneficial to FDIC member banks since, until now, it has been unclear whether certain expungements under state law qualify for the exemption from the Section 19 prohibition. Notably, covered offenses that have been pardoned are still subject to Section 19's prohibitions and still require an application to the FDIC.
- Allows a person with two, rather than one, minor "de minimis" crimes on their criminal record to qualify for the de minimis exception to Section 19. This change will benefit FDIC member banks since it will render employable certain applicants who were disqualified previously because they were convicted of two minor crimes or related offenses for the same event (or series of events). It is not uncommon for a person to be charged with two counts of the same crime or two related crimes, and being convicted of two crimes, for the same event (or series of events), which, until now, has resulted in their ineligibility for the de minimis exception and rendered them unemployable in the banking industry without an application to the FDIC. This change should address that situation.
- Eliminates the five year waiting period following a first de minimis conviction and establishes a three year waiting period following a second de minimis conviction (or an eighteen month waiting period for individuals whose misconduct occurred when they were age 21 or younger). This change will grant automatic Section 19 approval, without an application requirement, for certain covered crimes/convictions that may have occurred very recently. Until now, banks could rely upon the minimum time period set forth in the SOP (e.g., five years) as establishing a "regulatory safe harbor" within which a bank could disqualify an applicant with a covered offense with minimal legal risk. With this change, certain very recent convictions for minor crimes will automatically be considered de minimis, and not disqualifying, and therefore outside a bank's regulatory safe harbor. If a bank desires to disqualify an applicant because of such a de minimis covered offense, it will need to ensure it does so in compliance with any applicable state laws.
- Increases the de minimis threshold for small-dollar, simple theft crimes from $500 to $1,000.
- Expands the de minimis exception for crimes involving the use of fake identification to circumvent age-based restrictions from only alcohol-related crimes to any crimes related to purchases, activities, or premises entry. FDIC member banks are likely to regard this change favorably since it will render employable certain applicants who were previously disqualified because of very low risk offenses that technically were Section 19 covered offenses.
- Clarifies when and how an application to the FDIC must be filed, the application types available, and how the FDIC will evaluate an application. This change is not likely to have much of an impact on most banks since few banks are willing to file an application for FDIC consent on behalf of an employee or candidate who is ineligible for employment under Section 19.
Notably, despite a request from several commenters, the FDIC declined to clarify what constitutes a "reasonable inquiry" when it comes to bank criminal background checks, preferring to leave it to "the business judgment" of each institution. Therefore, we did not get hoped-for clarification from the FDIC on certain questions, such as whether an FBI fingerprint check is required to satisfy the "reasonable inquiry" standard, or whether a broad database search suffices.
Overall, many FDIC member banks are likely to be pleased with the FDIC's further loosening of Section 19 restrictions on hiring employees with criminal records. The other side of that equation, of course, is the narrowing of the "Section 19 regulatory safe harbor" which, to date, has allowed member banks to easily disqualify, with minimal legal risk, applicants and employees who have been convicted of a Section 19 covered offense. Member banks will no longer be able to rely upon Section 19 to automatically disqualify applicants convicted of certain offenses that are now exempted or excluded from the regulations.
FDIC member banks should review their policies, practices and forms to ensure that they consider the expanded de minimis exceptions and clarified definitions when scrutinizing applicants and employees under Section 19.
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Posted: August 10, 2020
1 All employees of an insured depository institution fall within the scope of Section 19, including de facto employees, as determined by the FDIC based upon generally applicable standards of employment law.
2 Once the Final Rule becomes effective, the FDIC's SOP will be rescinded.
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