FDIC Section 19 Rules Update

October 1st, 2024 | Chris Christian, Director of Compliance   

The Federal Deposit Insurance Corporation (FDIC) Board of Directors recently announced an approved final rule that revises Section 19 the FDIC’s regulations to conform with the Fair Hiring in Banking Act (FHBA). In the final rule, the FDIC made key changes related to certain older offenses, de minimis offenses, dishonesty offenses, expunged/sealed/dismissed records, and applications procedures. The final rule also provides interpretive guidance on other topics. The final rule takes effect October 1, 2024.  

Background   

Historically Section 19 of the Federal Deposit Insurance Act (FDIA) prohibits an FDIC-insured institution from hiring an individual that has been convicted of an offense involving dishonesty, breach of trust, or money laundering, or has entered into a pretrial diversion or similar program in connection with a prosecution for such an offense, without the prior written consent of the FDIC, among other provisions. Individuals with disqualifying covered offenses must apply to the FDIC for a waiver.  

On December 23, 2023, The Fair Hiring in Banking Act (FHBA) was enacted and became immediately effective. The FHBA was designed to ease the restrictions Section 19 placed on FDIC regulated institutions on hiring candidates with disqualifying criminal histories.   

The FDIC final rule aligns the current Section 19 regulations with the FHBA’s amendments.  

Notable Changes to Section 19  

The final rules made some notable revisions, among other things, to Section 19 that have significant impact employers and individuals with criminal records as it relates to the background screening and hiring by FDIC-insured institutions. Below are some, but not all, of the notable changes to Section 19 as they related to criminal records.  

Certain Older Offenders  

  Section 19 does not apply to an offense if:  

  • It has been 7 years or more since the offense occurred  
  • The individual was incarcerated with respect to the offense and it has been 5 years or more since the individual was released from incarceration.  
  • For individuals who committed an offense when they were 21 years of age or younger, section 19 does not apply to the offense if it has been more than 30 months since the sentencing occurred.  

Expunged, Sealed, and Dismissed Criminal Records   

A conviction is not considered a conviction of record and does not require an application if:  

  • There is an order of expungement, sealing, or dismissal that has been issued in regard to the conviction in connection with such offense, or if a conviction has been otherwise expunged, sealed, or dismissed by operation of law; and  
  • It is intended by the language in the order itself, or in the legislative provisions under which the order was issued, or in other legislative provisions, that the conviction shall be destroyed or sealed from the individual’s State, Tribal, or Federal record, even if exceptions allow the conviction to be considered for certain character and fitness evaluation purposes.  

De Minimis Offenses Exemption   

The final rule revised how de minimis (minor) offenses are now handled. These offenses do not require a waiver application due to being exempt. These included for example shoplifting, fare evasion, fake identification, or expired tag if 1 year or more has passed since the conviction. The final rule does not define or list de minimis offenses however it does establish various criteria for determining if an offense may be considered a de minimis offense and be exempted. The new rule also increased the “bad check” amount threshold from $1,000 to $2,000.  

Expansion of Excluded Covered Offenses  

The final rule revised the definition of which offense qualify as “covered offenses” under Section 19. Specifically, the term “criminal offense involving dishonestly” does not include:  

  • 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; or  
  • An offense involving the possession of controlled substances. At a minimum, this exclusion applies to criminal offenses involving the simple possession of a controlled substance and possession with intent to distribute a controlled substance. This exclusion may also apply to other drug-related offenses depending on the statutory elements of the offenses or from court determinations that the statutory provisions of the offenses do not involve dishonesty, breach of trust, or money laundering.  

Documented Inquiry  

The final rule also clarified that financial institutions must make a “reasonable, documented inquiry” to verify an applicant’s history to ensure that a person who has a covered offense on the person’s record is not hired or permitted to participate in its affairs without the written consent of the FDIC.”  The rule does not define “reasonable documented inquiry” and indicates that the financial institution’s procedures that constitutes a “reasonable inquire” will vary bank to bank.   

Take Aways  

While the new rules are designed to ease some of the background screening requirements on FDIC regulated employers, changes to policies and procedures are likely required. It is recommended to review the new final rules in their entirety and make necessary changes to their Section 19 background screening programs as applicable. As always, employers should consult with their legal counsel when reviewing and making any changes to their background screening policies and procedures.  

The Information contained herein is for informational purposes only. Sterling is not a law firm, and none of the information contained in this notice is intended as legal advice. Clients are encouraged to consult with their legal counsel about the impacts of any requirements. This and other important legislative updates can be found on the Sterling website:  https://www.sterlingcheck.com/resources/compliance-updates/  

Sterling is not a law firm. This publication is for informational purposes only and nothing contained in it should be construed as legal advice. We expressly disclaim any warranty or responsibility for damages arising out this information. We encourage you to consult with legal counsel regarding your specific needs. We do not undertake any duty to update previously posted materials.