Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.
On December 23, 2022, President Biden signed into law H.R. 7776, the “James M. Inhofe National Defense Authorization Act for Fiscal Year 2023” (the “NDAA 2023”). What many may not yet realize is that Section 5705 of the NDAA 2023 (starting at page 1017), entitled “Fair Hiring in Banking,” relaxes statutory restrictions on the hiring of individuals with criminal records by insured depository institutions. The enactment amends both (i) Section 19 of the Federal Deposit Insurance Act, 12 U.S.C. § 1829 (“Section 19”), which restricts hiring at depository institutions insured by the Federal Deposit Insurance Corporation (FDIC), such as FDIC-member banks, and (ii) Section 205(d) of the Federal Credit Union Act, 12 USC § 1785(d) (“Section 205(d)”), which restricts hiring at credit unions insured by the National Credit Union Administration (NCUA).
Without 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, is prohibited by Section 19 from directly or indirectly owning, controlling, or otherwise participating in the affairs of an FDIC-insured depository institution. Section 19 also prohibits any 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 FDIC-insured depository institution to make a “reasonable inquiry” regarding an applicant’s criminal record history; that is, it must take steps appropriate under the circumstances, and 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. Prior to the passage of NDAA 2023, the practical effect of Section 19 was a lifetime statutory bar, by operation of law, to employment with an FDIC-insured depository institution, absent the written consent of the FDIC.
In July 2020, the FDIC published a Final Rule (12 CFR Part 303 Subpart L) that codified in federal regulations its previously issued guidance regarding the application of Section 19 to persons with criminal histories. This narrowed the scope of crimes subject to Section 19 and the circumstances under which the FDIC’s written consent is required to hire individuals with minor criminal offenses, thereby enabling more individuals to work for insured depository institutions without having to go through the lengthy Section 19 application process. The 2020 changes included: (1) excluding from the scope of Section 19 all offenses that have been expunged or sealed (rather than only certain types of expungements); (2) allowing a person with two, rather than one, minor/low-risk “de minimis” crimes on the person’s criminal record to qualify for the de minimis exception to the Section 19 employment ban; (3) eliminating the five-year waiting period following a first de minimis conviction and establishing a three-year waiting period following a second de minimis conviction (or an 18-month waiting period for individuals whose misconduct occurred when they were age 21 or younger); (4) increasing the de minimis threshold for small-dollar, simple theft crimes from $500 to $1,000; and (5) expanding the de minimis exception for crimes involving the use of fake IDs.
Like Section 19, Section 205(d) prohibits, without the prior written consent of the NCUA, a person convicted of any criminal offense involving dishonesty or breach of trust, or who has agreed to a program entry in connection with a prosecution for such an offense, from directly or indirectly participating in the affairs of an NCUA-insured credit union, and it further prohibits any NCUA-insured credit union from permitting such a person to engage in any conduct or to continue any relationship prohibited by Section 205(d). Like Section 19, prior to the passage of NDAA 2023, the practical effect of Section 205(d) for many individuals was a lifetime statutory ban on employment with an NCUA-insured credit union, absent the written consent of the NCUA.1
The Fair Hiring in Banking Provisions in the NDAA 2023
The Fair Hiring in Banking provisions further narrow the scope of crimes subject to Section 19 and Section 205(d), and the circumstances under which the FDIC’s or the NCUA’s written consent is required, by providing that an individual no longer needs the consent of the FDIC or the NCUA to become employed with an insured bank or credit union for “Certain Older Offenses,” under these circumstances:
- if it has been seven years or more since the individual committed the offense; or
- 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
- if the individual committed the offense when they were 21 years of age or younger, if more than 30 months have passed since the sentencing for the offense occurred.2
The Fair Hiring in Banking provisions also allow the FDIC and NCUA to exempt other de minimis (lesser/low risk) offenses by rulemaking, which must satisfy the following requirements:
- Any such de minimis offense “was punishable by a term of three years or less confined in a correctional facility”;3
- Any de minimis exceptions with respect to offenses for writing insufficient-fund checks must require that the aggregate total face value of all insufficient funds checks (regardless of the number of convictions and/or program entries at issue) is $2,000 or less; and
- The FDIC and NCUA may designate exemptions for other lesser offenses (including the use of a fake ID, shoplifting, trespass, fare evasion, driving with an expired license or tag) if at least one year has passed since the conviction or program entry for such offense.
These requirements will significantly expand the scope of the existing de minimis offense exceptions by tripling the permitted period of imprisonment that qualifies for a de minimis offense exception from one year or less to three years or less, doubling the permitted aggregate total face value of insufficient funds check(s) across all convictions or program entries for insufficient fund checks from $1,000 to $2,000, and reducing the required time period that has passed since the applicable conviction or program entry for certain “lesser offenses” to only one year or more.4
The provisions also amend Sections 19 and 205(d) to codify and expand prior guidance that prohibitions on employment do not apply when a covered offense has been expunged or sealed. Specifically, the new Fair Hiring in Banking provisions provide that the prohibitions of Sections 19 and 205(d) do not apply to an offense if there is “an order of expungement, sealing, or dismissal” that has been issued in regard to the conviction for such offense, and the language of either the order or the legislative provisions under which the order was issued indicates an intent that the conviction must be destroyed or sealed from the individual’s federal, state or other record, even if there are exceptions that allow the record to be considered for certain character and fitness evaluation purposes. Notably, the inclusion of an order of “dismissal” in this amended language will likely broaden the scope of the existing rules (in the FDIC Final Rule and NCUA Second Chance Interpretive Ruling and Policy Statement), which address only “sealed” and “expunged” convictions and program entries, but not dismissals.5
Additionally, the Fair Hiring in Banking provisions define the term “criminal offense involving dishonesty” consistently with the existing definition in the FDIC’s Final Rule (including a carve out of offenses involving the possession of controlled substances), but explicitly exclude from the definition 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.” It is not clear what this provision means and how it will be interpreted by the FDIC and NCUA. For example, does this exclusion mean that, once an individual files an application for a waiver with the FDIC or NCUA, all misdemeanor crimes committed by the individual more than a year before the date of the application (excluding any period of incarceration) are automatically considered to be de minimis and not covered by Section 19 and Section 205(d)?6 Employers will need further guidance from the FDIC and NCUA on this issue.
Finally, the provisions codify the process for applying for consent (i.e., a waiver) from the FDIC and NCUA and the standards the agencies must apply in considering such an application. Specifically, the FDIC and NCUA are required to conduct an “individualized assessment” (consistent with Title VII of the Civil Rights Act of 1964) when reviewing consent applications that take “into account evidence of rehabilitation, the applicant’s age at the time of the conviction or program entry, the time that has elapsed since conviction or program entry and the relationship of individual's offense to the responsibilities of the applicable position.” The agencies are also required to consider factors such as the individual’s employment history, letters of recommendation, completion of substance abuse, job preparation or educational programs, and other relevant mitigating evidence.
In today’s difficult labor market, FDIC-member banks and NCUA-insured credit unions may see some advantages in these loosened restrictions on hiring individuals with criminal records. Insured depository institutions should keep in mind, however, that the amendments in the Fair Hiring in Banking provisions significantly narrow the “regulatory safe harbor” provided by Sections 19 and 205(d), which previously allowed such institutions to disqualify from employment, with minimal legal risk, applicants and employees who have been convicted of a covered offense. With the loosening of restrictions, Sections 19 and 205(d) can no longer be relied upon as a basis to automatically disqualify applicants convicted of certain offenses that are now exempted or excluded from coverage under these laws.
Insured depository institutions should review their policies, practices, and forms to ensure that, when scrutinizing applicants and employees, they consider the exclusion of certain older offenses and records of expungement, sealing, or dismissal, and the expanded exemptions for de minimis offenses, to be defined by the FDIC and NCUA.
1 On December 2, 2019, the NCUA published its Second Chance Interpretive Ruling and Policy Statement (IRPS), which like the FDIC’s Final Rule, narrowed the scope of crimes covered by, and expanded certain exceptions to, the restrictions set forth in Section 205(d).
2 Notably, these exceptions do not apply to individuals who have been convicted of, or who have entered into a pretrial diversion program for, any of the specifically enumerated offenses subject to a “minimum 10-year prohibition” under Section 19 and Section 205(d), including: receipt of commissions or gifts for procuring loans; theft, embezzlement or misapplication by bank officer or employee; filing or making false/misleading bank entries, reports and transactions; filing or making false/misleading federal credit institution entries, reports and transactions; concealment of assets from conservator, receiver or liquidating agent of financial institution; bank fraud; obstructing examination of financial institution; laundering of monetary instruments; engaging in monetary transactions in property derived from specified unlawful activity; frauds and swindles; and fraud by wire, radio or television.
3 With confinement calculated based solely on the time an individual spent incarcerated as punishment and not in pretrial detention, and excluding any period of probation or parole where an individual was merely restricted to a particular jurisdiction or was required to report occasionally to an individual (such as a parole officer or the like) or to a specific location.
4 The entire scope of the de minimis exemptions is not yet known as the NDAA 2023 leaves it to the FDIC and NCUA to issue rules regarding same.
5 Since this new “Expungement and Sealing” language specifically mentions only “conviction,” which is not defined, and Congress expressly distinguishes between being “convictions” and “pretrial diversion program” entries elsewhere in these laws (i.e., Sections 19 and 205(d)), further guidance will be necessary from the FDIC and NCUA to clarify whether this new language applies equally to “convictions” and “pretrial diversion or similar program” entries (which is separately defined), or only to “convictions.”
6 Curiously, the Fair Hiring in Banking provisions do not include a definition of “breach of trust” or any mention of youthful offender convictions, which were previously addressed in the FDIC Final Rule and NCUA Second Chance IRPS.