FDIC Issues Final Rule Allowing Individuals with Minor Criminal Offenses Greater Employment Opportunities in the Banking Industry
On July 24, 2020, the Federal Deposit Insurance Corporation (FDIC) issued a final rule1 that will amend and codify the FDIC's long-held Statement of Policy (SOP) regarding individuals with minor criminal records who seek employment in the banking industry. The final rule aims to reduce the scope of offenses subject to the application process mandated by Section 19 of the Federal Deposit Insurance Act (FDI Act)2 (Section 19) and, thereby, make it easier for individuals with minor criminal records to obtain employment at FDIC-insured depository institutions.
Section 19 prohibits any person who has been convicted of—or entered a pretrial diversion or similar program for—a crime related to dishonesty, breach of trust, or money laundering (a "covered offense") from working at an insured depository institution without the written consent of the FDIC.
Until the issuance of this final rule, the only guidance regarding obtaining FDIC consent to participate in the affairs of an insured depository institution was the agency's long-standing SOP.3 The SOP describes the FDIC's Section 19 approval process in detail, and it authorizes an individual with a conviction for certain "de minimis" offenses to participate in the affairs of an insured depository institution without the need to submit an application to the FDIC.
Under the current iteration of the SOP—which will be amended and replaced by the final rule—the de minimis offenses subject to automatic approval under Section 19 include those offenses where: (1) an individual has only one conviction or program entry of record for a covered offense; (2) the offense was punishable by imprisonment for a term of one year or less and/or a fine of $2,500 or less, and the individual served three or fewer days of jail time; (3) the conviction or program was entered into at least five years prior to the date an application would otherwise be required; and (4) the offense did not involve an insured depository institution or credit union. The SOP also provides additional conditions for convictions or program entries for (a) insufficient funds checks, (b) small-dollar, simple theft, and (c) the use of a fake, false, or altered identification card.
The Final Rule
The new rule aims to reduce the scope of offenses subject to Section 19 and its application process without increasing the risk to the Deposit Insurance Fund. To that end, the final rule will make the following notable changes:
- Persons who committed a covered offense that was later expunged or sealed by a court of competent jurisdiction or by operation of law do not need to submit an application;
- The threshold for small-dollar, simple thefts will be increased from $500 to $1,000, meaning that persons who committed crimes such as shoplifting where the total value of the goods taken was less than $1,000 (and who meet the other requirements of the de minimis exception) do not need to submit an application;
- The de minimis exception for the use of fake, false, or altered IDs by persons under 21 years of age will now cover the use of those IDs to circumvent all age-based restrictions, not merely alcohol-related restrictions. For example, a person who used a fake ID to obtain access to a nightclub or concert venue (and who met the other requirements of the de minimis exception) would no longer need to submit an application;
- The waiting period for de minimis offenses, which was formerly five years, will now be waived entirely for persons who have only one covered de minimis offense on their record; and
- A person with two de minimis offenses on his or her record may still quality for the de minimis exception whereas previously two offenses would have disqualified a candidate from the use of the exception entirely. There will, however, be waiting period of three years for persons with a second de minimis conviction (though the waiting period will only be 18 months if the individual was under 21 at the time of the misconduct).
Importantly, the more relaxed final rule continues to exclude any offense committed against a bank or credit union from the definition of de minimis.
While the FDIC has been approving the applications of persons who met the amended standards of the final rule since 2017,4 the codification of the SOP into a regulation pursuant to the Administrative Procedures Act both enhances certainty for the banking industry and shields the FDIC from criticism that it is conducting supervision through unenforceable guidance.
Moreover, as a practical matter, the new rule will likely help to increase the pool of eligible applicants and reduce the regulatory burden for smaller financial institutions that have trouble finding a sufficient number of applicants. Banks should also be aware of the complexities created by Section 19 and state and federal equal employment opportunity laws as applied to applicants with prior convictions.
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The final rule will go into effect 30 days after it is published in the Federal Register. The FDIC will rescind its existing SOP at that time.
© Arnold & Porter Kaye Scholer LLP 2020 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.
Incorporation of Existing Statement of Policy Regarding Requests for Participation in the Affairs of an Insured Depository Institution by Convicted Individuals, 12 C.F.R. Parts 303 & 308, RIN 3064-AF19.
FDIC Statement of Policy for Section 19 of the FDI Act (amended Aug. 3, 2018).
Statement by FDIC Chairman Jelena McWilliams on Final Rule: Section 19 of the FDI Act (July 24, 2020) ("Since the beginning of 2017, the FDIC has approved every Section 19 application that would qualify for relief under the final rule without controversy.").