FDIC Proposes Substantially Relaxed Section 19 Rule
Introduction:
The Federal Deposit Insurance Corporation, on November 14, 2023, issued a proposed rule revising the regulations under Section 19 of the Federal Deposit Insurance Act. The changes would incorporate statutory amendments to Section 19 by the Fair Hiring in Banking Act, which was signed into law in December 2022.
Overview of Section 19:
Section 19 generally prohibits individuals with certain criminal histories from participating in the affairs of FDIC-insured depository institutions without prior written consent from the FDIC. Generally, the prohibition applies to persons convicted of certain offenses involving dishonesty, breach of trust, or money laundering, and those participating in pretrial diversion programs related to such offenses.
In our experience, Section 19 has long been viewed by mortgage divisions of banks as giving independent mortgage banking companies an unfair advantage in hiring certain highly successful individuals who had often decades-old “youthful indiscretions.” Banks often were viewed as simply unable to even consider such individuals. There are similar restrictions for credit unions insured by the National Credit Union Administration’s National Credit Union Share Insurance Fund. The underlying historical policy generally was to prevent the risk to insured institutions of hiring individuals who previously engaged in certain criminal behavior.
Proposed Amendments:
The proposed amendments would include:
Enhanced Inquiry Requirements:
FDIC-insured depository institutions would be mandated to conduct a reasonably documented inquiry into an applicant's criminal record history under the new standards while continuing to ensure that individuals with covered convictions or program entries do not participate without FDIC consent. This would include the requirement that the FDIC primarily rely on the criminal history record of the Federal Bureau of Investigation in the FDIC's review and provide such record to the applicant to review for accuracy
Temporal Exceptions:
There would be new exceptions for offenses committed seven years or more ago, five years or more post-incarceration, and offenses committed by individuals aged 21 or younger more than 30 months after sentencing.
Exclusions from "Dishonesty" Offenses:
Exclusion of certain misdemeanor offenses and offenses related to the possession of controlled substances from the definition of "criminal offenses involving dishonesty."
Treatment of Expunged Convictions:
Expunged, sealed, or dismissed convictions would be excluded, provided such intent was clearly stated in the court order or legislative provisions.
Designated Lesser Offenses:
Exemptions for designated lesser offenses, such as using fake identification, shoplifting, trespassing, fare evasion, driving with an expired license or tag, and other so called “low-risk” offenses.
De Minimis Threshold Adjustment:
The aggregate face value threshold for bad or insufficient funds checks exempted from Section 19 would be raised to $2,000.
Individualized Assessment Requirement:
FDIC would continue to conduct an individualized assessment of consent applications, considering various factors such as the nature of the offense, evidence of rehabilitation, employment history, and the potential impact on the institution's safety and soundness.
Consent Application Scope:
Approved consent applications would allow unrestricted work for the same employer, with prior FDIC consent required for significant changes in security-related duties.
Conclusion:
The proposed revisions would recalibrate the barring of individuals from insured banks who have past criminal activities, apparently allowing such individuals more acceptance to work at FDIC-insured institutions in light of the statutory amendments to Section 19. If you would like to submit a comment letter to the FDIC, the deadline is January 16, 2024.
Please contact troy@garrishorn.com if you would like more information, or to discuss any of the issues in this post.
