FDIC Section 19 Update: New Hiring Rules and Expanded Employment Opportunities

The Federal Deposit Insurance Corporation (FDIC) Board of Directors recently approved a final rule updating its Section 19 regulations to conform with the Fair Hiring in Banking Act (FHBA), enacted on December 23, 2022. The changes aim to expand employment opportunities within FDIC-insured institutions, benefiting communities disproportionately impacted by the criminal justice system. The new regulations will take effect on October 1, 2024, and provide key clarifications on covered offenses, the FDIC consent application process, and carve-outs that remove certain minor or older offenses from the scope of Section 19.

Understanding these changes and how they affect background screening policies is essential for employers to ensure compliance while supporting fair hiring practices.

Section 19 of the Federal Deposit Insurance Act

Section 19 of the Federal Deposit Insurance Act (FDIA), enacted in 1950, restricts employment in FDIC-insured institutions for individuals convicted of crimes involving dishonesty, breach of trust, or money laundering. Additionally, individuals who have entered into a pretrial diversion program for such offenses are also subject to Section 19's prohibitions. These individuals could not participate in the affairs of an insured depository institution without first obtaining the FDIC's written consent, creating a barrier to employment for many individuals, even for minor or dated offenses.

The FHBA marks a shift in approach, offering pathways to employment for individuals with certain criminal records while maintaining the protections Section 19 was designed to enforce. These revisions reflect growing acknowledgment of the disproportionate impact of the criminal justice system on marginalized communities and the importance of offering second chances in employment.

FDIC Chairman Martin J. Gruenberg noted, "I strongly support these changes, which would expand employment opportunities in the banking industry, particularly for people of color who are disproportionately affected by the criminal justice system." His statement underscores the significant societal impact these changes are expected to have, offering relief to those who have been systemically excluded from employment opportunities in the banking sector.

Key Changes in the Revised Section 19 Regulations

Exclusions for Older Offenses

One of the most significant changes under the FHBA is the exclusion of certain older offenses from Section 19's restrictions. Under the final rule, an offense is no longer covered if:

• At least seven years have passed since the offense occurred.

• At least five years have passed since the individual's release from incarceration.

• For individuals who committed the offense when they were 21 years old or younger, at least 30 months have passed since sentencing.

These exclusions mean that FDIC-regulated employers may hire individuals with older offenses without FDIC consent, provided they meet the criteria. Employers should update their background screening processes to reflect this shift, ensuring they do not automatically disqualify applicants based on outdated offenses. However, keep in mind that certain federal offenses under 12 U.S.C. § 1829(a)(2) still require a 10-year prohibition period and remain subject to FDIC consent.

Expunged, Sealed, and Dismissed Criminal Records

Under the revised regulations, individuals with expunged, sealed, or dismissed offenses will be exempt from Section 19's prohibitions. The FHBA specifies that an offense is excluded from Section 19 if:

• An order of expungement, sealing, or dismissal regarding the conviction is issued.

• It is intended that the conviction will be destroyed or sealed from the individual's state, tribal, or federal record, even if exceptions allow the record to be considered for certain character and fitness evaluations.

FDIC-regulated employers must ensure that background checks consider expunged or sealed records, as these no longer require FDIC consent. Employers should establish protocols for managing candidates whose records may have been dismissed or sealed.

De Minimis Offenses

Another notable revision involves the treatment of "de minimis" offenses-relatively minor offenses that are now exempt from the prohibitions of Section 19. These offenses, specified either by the FHBA or FDIC regulations, include:

• Use of fake identification.

• Shoplifting.

• Trespassing.

• Fare evasion.

• Driving with an expired license or tag.

The final rule specifies that at least one year must pass since the applicable conviction or entry into a pretrial diversion program for these offenses to be excluded from Section 19's restrictions. Additionally, the FHBA mandates that the FDIC include specific criteria regarding confinement periods and offenses involving insufficient funds checks in its de minimis offense designation. The revised rules also raised the threshold for bad check offenses exempt from Section 19 from $1,000 to $2,000, as long as the checks did not involve an FDIC-insured institution.

Employers should update their policies to recognize de minimis offenses that do not trigger Section 19's prohibitions. This means candidates are not automatically excluded for minor infractions. Additionally, employers should ensure their background screening adjudication processes reflect the increased threshold for bad check offenses.

Criminal Offenses Involving Dishonesty

The FDIC's final rule also redefines which offenses are considered to involve "dishonesty." Under the revised regulations, certain misdemeanor criminal offenses and offenses involving the possession of controlled substances are excluded from this category. Specifically:

• A misdemeanor criminal offense committed more than one year prior to an individual's FDIC consent application is excluded.

• Offenses involving the possession of controlled substances, including simple possession or possession with intent to distribute, are no longer automatically considered offenses involving dishonesty.

This exclusion may extend to other drug-related offenses depending on their statutory elements, allowing more individuals with drug-related convictions to participate in the banking industry without FDIC consent.

Employers should assess whether their screening processes consider the revised definition of "dishonesty." These changes offer more flexibility in hiring candidates with drug-related or minor misdemeanor offenses. Employers must ensure that their decision-making processes align with the updated rules, especially for candidates with offenses related to controlled substances.

FDIC Review of Section 19 Applications

The final rule also clarifies how the FDIC reviews Section 19 applications. The FDIC has streamlined its review process for consent applications, allowing individuals with covered offenses to apply for permission to work in FDIC-insured institutions. The FHBA prescribes the standards for this review, and prospective applicants are encouraged to contact the appropriate FDIC regional office for further guidance.

Employers should be prepared to assist candidates with navigating the FDIC consent application process when necessary. H.R. teams should be informed about these procedures and maintain open communication with regional FDIC offices for any clarification.

Reasonable Documented Inquiry

In addition to assisting candidates with consent applications, insured depository institutions must ensure their hiring practices comply with the updated Section 19 regulations. One key requirement is conducting a "reasonable, documented inquiry" into an applicant's criminal history to determine whether an individual has a covered offense requiring FDIC consent.

The FDIC leaves the specific procedures for these inquiries to the business judgment of the institution but stresses that the process must be documented to demonstrate due diligence. Institutions should review their background check processes to ensure compliance with the revised regulations and confirm that older or de minimis offenses are appropriately excluded.

Employers should review their hiring and background screening practices to ensure they meet this standard. This includes clearly documenting each step of the inquiry, especially when determining whether offenses are covered or excluded under the updated Section 19 regulations. Employers are encouraged to work closely with legal counsel or compliance professionals to ensure their processes are airtight.

Foreign Crimes

For offenses committed in foreign jurisdictions, the FDIC has confirmed that individuals with covered offenses from foreign countries are still subject to Section 19 unless the offense is otherwise excluded. While foreign background checks may present challenges due to local laws, institutions must still make reasonable efforts to comply.

When hiring individuals with backgrounds outside of the United States, employers should ensure that their background checks cover both domestic and foreign jurisdictions where applicable. If certain countries restrict access to criminal records, employers should document their efforts to comply with Section 19 requirements in good faith.

Opportunities for Second Chances in Banking

The revised Section 19 regulations represent a significant step forward in expanding access to employment in the banking sector, especially for individuals historically barred due to criminal convictions. The changes offer a more nuanced approach, balancing the need to maintain trust in financial institutions with the importance of providing second chances.

With these revisions set to take effect on October 1, 2024, insured institutions are encouraged to review their hiring and background check practices to ensure compliance. For individuals with criminal records, particularly those with older or minor offenses, the updated regulations offer a new path to pursue careers in banking-contributing to a more inclusive and equitable financial sector.

Release Date: October2, 2024