Congress Enacts “Fair Hiring in Banking” to Remove Certain Barriers to Employment in the Financial Services Industry

On December 23, 2022, President Biden signed the “James M. Inhofe National Defense Authorization Act for Fiscal Year 2023” which, among many other things, amends Section 19 of the Federal Deposit Insurance Act, 12 U.S.C. Section 1829 (“FDIA”), to reduce hiring barriers across the financial services sector.^[i] Some bank associations supported the effort, stating:

The statute’s goal of ensuring a trustworthy, reliable banking workforce is important, particularly for an industry built on trust. However, safeguarding that trustworthiness should not come at the expense of offering hardworking people the chance to achieve meaningful employment opportunities in our nation’s banks. The participation of rehabilitated individuals with prior offenses in the banking industry would drive socioeconomic mobility and excluding those individuals would harm them while doing little to nothing to protect banks or their customers.

As a result of the amendments, the category of crimes for which a financial institution can outright reject a job applicant or terminate an employee has been significantly narrowed.

Section 19 in a Nutshell

Section 19 prohibits, absent prior written consent of the Federal Deposit Insurance Corporation (“FDIC”), a person convicted of a crime involving dishonesty, breach of trust, or money laundering from (broadly speaking) working for or otherwise participating, directly or indirectly, in the conduct of the affairs of a FDIC-covered financial institution. Section 19’s prohibition also covers anyone who has agreed to enter a pretrial diversion or similar program in connection with the prosecution of a crime involving dishonesty, breach of trust, or money laundering. 

FDIC’s Statements of Policy and Final Rule

In 1998, the FDIC issued a Statement of Policy (“SOP”) (which was modified significantly in both 2012 and 2018), that provided guidance to the public regarding the application of Section 19.  The SOP set forth criteria for providing relief from Section 19 for individuals with convictions for certain low-risk crimes that constituted de minimis crimes, eliminating the need for an application for a waiver of Section 19. 

On July 24, 2020, the FDIC issued a Final Rule to incorporate the SOP into the FDIC’s existing Procedure and Rules of Practice. The Final Rule:

• Excluded all offenses that have been expunged or sealed from the scope of Section 19;
• Increased the number of minor "de minimis" crimes on a criminal record to qualify for the de minimis exception from one to two;
• Eliminated the five-year waiting period following a first de minimis conviction and established a three-year waiting period following a second de minimis conviction (or 18 months if the offense occurred when the person was 21 years of age or younger);
• Increased the threshold for small-dollar, simple thefts from $500 to $1,000 (the same dollar threshold for bad or insufficient funds check offenses); and
• Expanded the de minimis exception for crimes involving the use of fake identification to circumvent age-based restrictions from only alcohol-related crimes to any such crimes related to purchases, activities, or premises entry.

The “Fair Hiring in Banking” Amendments to Section 19

While the changes in the Final Rule were not major, the “Fair Hiring in Banking” significantly narrows the scope of crimes for which an application is required from the FDIC. Some provisions also codify language from the Final Rule (e.g., excluding all offenses that have been expunged or sealed if the intent of the criminal law is to render the record destroyed or sealed) and the process for waiver applications.

First, the amendment to Section 19 provides guidance to institutions in determining whether an offense is one of “dishonesty” by including a helpful definition of the term (although the amendment does not include a definition of “breach of trust”). Specifically, the term “criminal offense involving dishonesty” means an offense where the person, directly or indirectly, cheats or defrauds, or wrongfully takes property belonging to another in violation of a criminal statute. It also includes an offense that federal, state, or local law defines as “dishonest,” or for which dishonesty is an element of the offense. The term does not, however, include a misdemeanor criminal offense committed more than one year before the date on which a person files a waiver application, excluding any period of incarceration, or an offense involving the possession of controlled substances. (Note that Section 19 and the Final Rule address certain drug offenses. The takeaway here is that crimes of “dishonesty” do not cover drug possession offenses.)

Next, unless the conviction or program entry relates to an offense subject to the “minimum 10-year prohibition period” for certain offenses in 12 U.S.C. 1829(a)(2), an applicant or employee no longer needs a waiver application if:

• It has been seven (7) years or more since the offense occurred or the person was incarcerated, and it has been five (5) years or more since the person was released from incarceration.
• The person committed the offense before age 21 and it has been more than 30 months since the sentencing occurred.

Third, the provisions permit the FDIC to engage in rulemaking to expand the types of offenses that qualify as de minimis. Any such rule must:

• Include a requirement that the offense was punishable by a term of three years or less (excluding periods of pre-trial detention and restrictions on location during probation and parole). Currently, under the Final Rule, it is one year.
• For “bad check criteria,” require that the aggregate total face value of all insufficient funds checks across all convictions or program entries related to insufficient funds checks be $2,000 or less. Currently, under the Final Rule, it is $1,000.
• Exclude certain lesser offenses (including the use of a 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.

Next Steps for Financial Institutions

FDIC-insured institutions should review their policies and practices to ensure consideration of Section 19 when assessing candidates’ conviction and program entry history. Convictions and program entries that are no longer automatically disqualifying under Section 19 should be evaluated under other state and local so-called “fair chance” or “ban the box” laws, along with the Equal Employment Opportunity Commission’s “Enforcement Guidance on the Consideration of Arrest and Conviction Records in Employment Decisions under Title VII of the Civil Rights Act.” Seyfarth Shaw will monitor the FDIC’s rulemaking and report on additional offenses qualifying as de minimis and any other issue the FDIC addresses in light of enactment of the Fair Hiring in Banking’s amendments.

[i] H.R. 7776 also includes similar amendments to Section 205(d) of the Federal Credit Union Act, 12 U.S.C. Section 1785(d), which contains hiring and employment restrictions similar to those in Section 19.