- The FDIC has approved a final rule, effective October 1, 2024, to update its Section 19 regulations to conform to the Fair Hiring in Banking Act.
- While the FDIC made certain clarifying changes based on public comments received, as predicted, the final rule largely aligns with the proposed rule.
- Insured banks and credit unions must undertake a "reasonable, documented inquiry" to verify that a person with a covered offense on their record is not hired.
- The penalties for knowingly violating Section 19 include a fine of $1,000,000 per day.
On July 30, 2024, the Federal Deposit Insurance Corporation ("FDIC") Board of Directors approved a final rule that updates the FDIC's regulations concerning Section 19 of the Federal Deposit Insurance Act, 12 U.S.C.§ 1829 ("Section 19") to conform to the Fair Hiring in Banking Act ("FHBA" or "the Act"), which became effective on December 23, 2022 and made significant changes to Section 19. The final rule is effective October 1, 2024.
Section 19 prohibits 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 in connection with a prosecution for such an offense, from directly or indirectly participating in the affairs of an FDIC-insured depository institution without prior written consent from the FDIC. Insured depository institutions may not permit any such person to engage in any conduct or continue any relationship prohibited by Section 19.1
The FDIC published a Notice of Proposed Rulemaking in the Federal Register on November 14, 2023, for which the public comment period closed on January 16, 2024. The FDIC made certain clarifying changes based on public comments received. However, as predicted, the final rule largely aligns with the proposed rule, as the FDIC viewed most of the amendments to be required by the FHBA.
The most significant revisions to the Section 19 regulations include the following:
1. Reasonable documented inquiry required
The FDIC revised 12 CFR § 303.220 to clarify that insured depository institutions must make a "reasonable, documented inquiry" to verify an applicant's criminal history to ensure that a person with a covered offense on their record is not hired or permitted to participate in its affairs without the written consent of the FDIC. Notably, the FDIC does not prescribe the exact procedures that insured depository institutions should follow in conducting a "reasonable, documented inquiry," leaving that to the business judgment of each institution. Regardless, the process must now be documented.
2. Certain older offenses are no longer "Covered Offenses" under Section 19
Section 19's restrictions will not apply to an offense: (i) if it has been seven years or more since the offense occurred; or (ii) if the individual was incarcerated with respect to the offense and it has been five years or more since the individual was released from incarceration; or (iii) for individuals who committed an offense when they were 21 years of age or younger, if it has been more than 30 months since the sentencing occurred.
The FDIC interprets the phrases "offense occurred" and "offense committed" to mean the "last date of the underlying misconduct" (or, in instances with multiple offenses, the last date of any of the underlying misconduct or offenses). The FDIC defines "sentencing occurred" as the date on which a court imposed the sentence as indicated by the date on the court's sentencing order, not the date the sentencing order was entered on the docket or the date on which all conditions of sentencing were completed.
Notably, while criminal history records provided by the Federal Bureau of Investigation and certain (but not all) commercially available background check reports do include the date of arrest, they may not include the date of the underlying misconduct. In many cases, an insured depository institution will be able to determine whether an offense is covered by Section 19 based entirely on the date of conviction or program entry. For example, if a state felony conviction occurred eight years ago, it would be clear that the conviction is not subject to Section 19 based on the time elapsed, since the underlying misconduct would have occurred earlier than the conviction. If that determination cannot be made based upon the conviction record, the institution may need to conduct further research and inquiries to determine the last date of the underlying misconduct.
Section 19's 10-year minimum automatic prohibition of a person convicted of certain crimes enumerated in Title 18 of the United States Code remains unchanged.
3. De minimis offenses
The FHBA excludes "de minimis" offenses from the scope of Section 19, and this category includes relatively minor offenses that are specified either by the FHBA or by the FDIC through regulations. In the Act, a subcategory of de minimis offenses is called "designated lesser offenses," which offenses include the use of fake identification, shoplifting, trespass, fare evasion, driving with an expired license or tag (and such other low-risk offenses as the FDIC may designate), if one year or more has passed since the applicable conviction or program entry.
The final rule now treats de minimis offenses as offenses that are exempted from the prohibitions of Section 19 and do not require a consent application. This marks a substantive change to the FDIC's longstanding treatment of de minimis offenses, and the FDIC's proposed rule, which considered such offenses as covered under Section 19 but provided that no application for consent was required because the application was deemed to be automatically approved.
Consistent with this change, the FDIC removed its requirement that individuals with a de minimis offense must be covered by a fidelity bond to the same extent as others in similar positions, and must disclose the presence of the conviction(s) or program entry(ies) to all insured depository institutions. Since the FHBA has excluded de minimis offenses from the scope of Section 19, the FDIC believes that these requirements should no longer attach to individuals who have committed such offenses.
Additionally, the FDIC revised the de minimis requirement related to the aggregate total face value of all "bad" or insufficient funds checks from $1,000 to $2,000. This change means that convictions for passing bad checks in the amount of $2,000 in the aggregate (across all convictions or program entries) are exempt from Section 19 so long as no insured depository institution or insured credit union was the payee on the checks.
Finally, in response to comments received regarding the relationship between de minimis offenses and "designated lesser offenses," the final rule explains that designated lesser offenses are a sub-category of de minimis offenses, and in harmony with the FHBA, the FDIC excludes said "designated lesser offenses" from the scope of covered offenses if at least one year has passed since the applicable conviction or program entry.
4. Definition of criminal offenses involving dishonesty
The FDIC revised 12 CFR § 303.222 to reflect the FHBA's definition of "criminal offenses involving dishonesty," which expressly excludes from the scope of such offenses: (1) "a misdemeanor criminal offense committed more than one year before the date on which an individual files a consent application, excluding any period of incarceration"; and (2) "an offense involving the possession of controlled substances."
With respect to the "misdemeanor criminal offense" exclusion, the FDIC construes the phrases "offense committed" and "offense occurred" to mean the "last date of the underlying misconduct" (or, in instances with multiple offenses, the last date of any of the underlying offenses or misconduct). In our Insight dated February 6, 2023, we noted that it remains unclear what the phrase "...before the date on which an individual files an application" in the FHBA means, if anything. Unfortunately, the final rule does not provide any further guidance on this question. In any event, based upon the FDIC's comments in the final rule, it appears that all misdemeanor crimes are automatically exempt from Section 19's prohibition after one year has passed since the criminal offense was committed, excluding any period of incarceration.
With respect to the "possession of controlled substances" exclusion, the FDIC interprets the phrase "involving the possession of controlled substances" to exclude, at a minimum, criminal offenses involving the simple possession of controlled substances and possession with intent to distribute a controlled substance. The FDIC notes that the exclusion may also apply to other drug-related offenses depending on the statutory elements of the offenses or from court determinations that the statutory provisions of the offenses do not involve dishonesty, breach of trust, or money laundering (and also that potential applicants may contact their appropriate FDIC Regional Office if they have questions about whether their offenses are covered under Section 19).
5. Expunged, dismissed, and sealed offenses
The FDIC final rule reflects the statutory language in the FHBA related to the treatment of orders of expungement, sealing, or dismissal of criminal records. The FHBA provides a two-pronged test to determine whether a covered offense should be considered expunged, dismissed, or sealed and therefore excluded from the scope of Section 19. First, there must be an "order of expungement, sealing, or dismissal that has been issued in regard to the conviction in connection with such offense." Second, it must be "intended by the language in the order itself, or in the legislative provisions under which the order was issued, that the conviction shall be destroyed or sealed from the individual's record, even if exceptions allow the record to be considered for certain character and fitness evaluation purposes." In the final rule, the FDIC has added language to the second (intent) prong of the expungement framework to encompass the language in the expungement order itself, the legislative provisions under which the order was issued, and other legislative provisions. This revision was made to harmonize the FDIC's current regulations concerning expungements with the FHBA's provisions. Further, the FDIC has reaffirmed that pardoned offenses not otherwise excluded from the scope of Section 19 are not considered expunged, dismissed, or sealed offenses (and thus still require a consent application).
6. Convictions and program entries in foreign jurisdictions
The final rule confirms that individuals who are convicted of, or enter into a pretrial diversion program for, a criminal offense involving dishonesty, breach of trust, or money laundering in a foreign jurisdiction are subject to the Section 19 prohibitions unless the offense is otherwise excluded under the regulations. The FDIC states that it retained its proposed language as to foreign offenses due to the importance of ensuring that individuals with covered offenses do not participate in the affairs of insured depository institutions without the FDIC's consent. The FDIC acknowledges (i) that institutions may be unaware of an applicant's foreign offenses without conducting their own inquiry, and (ii) that many countries have laws restricting criminal background checks, but reiterates several non-exhaustive ways in which banks could comply with this requirement. For example, the FDIC states that an institution could inquire about potential covered offenses that may have occurred in the United States and in that foreign country, and, if a foreign jurisdiction forbade background investigations, the institution could note this restriction as part of its reasonable, documented inquiry.
Takeaways
Insured depository institutions should review their applicant screening, onboarding and adjudication policies, practices, and forms to ensure they are compliant with the final rule, which, as noted, takes effect October 1, 2024. The penalties for knowingly violating Section 19 include a fine of $1,000,000 per day.
Footnote
1. Section 205(d) of the Federal Credit Union Act, 12 USC § 1785(d) ("Section 205(d)"), contains a similar bar restricting participation in the affairs of credit unions insured by the National Credit Union Administration (NCUA).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.