ANALYSIS: The NCUA Board recently approved a final rule that allows people with convictions for certain minor or older offenses to work and volunteer for federally insured credit unions (FICUs) without applying for NCUA approval.
The rule says that all credit unions must “make a reasonable, documented, inquiry” into an applicant’s criminal history to ensure that a person who has a “covered offense” is not hired or permitted to participate in a FICU’s affairs without the written consent of the NCUA.
Because the rule largely follows existing policy guidance that the NCUA issued in 2019, many of the requirements are not exactly “new.” However, the rule relaxes some of the NCUA standards that had been in place.
The rule applies to all Wisconsin credit unions, state-chartered or federally chartered, regardless of asset size. It takes effect on Oct. 30, 2024.
Background
Section 205(d) of the Federal Credit Union Act (FCU Act) generally prohibits, except with the prior written consent of the NCUA, a person from participating in the affairs of a FICU if that person has been convicted of (or has entered into a pretrial diversion or similar program for) certain criminal offenses involving dishonesty or breach of trust.
In 2022, Congress passed the federal Fair Hiring in Banking Act. That act made changes to Section 205(d) of the FCU Act (and to similar federal laws that apply to banks). The changes were intended to expand employment opportunities for those with a previous minor or older criminal offense.
The NCUA’s new rule codifies Section 205(d) and incorporates the NCUA’s 2019 Second Chance Interpretive Ruling and Policy Statement (IRPS 19-1) into the agency’s regulations. With the issuance of this final rule, IRPS 19-1 has been rescinded.
The rule addresses the individuals and types of offenses covered by Section 205(d) and the NCUA’s procedures for reviewing a consent application. It excludes certain minor offenses from the scope of Section 205(d), and it excludes most drug-possession offenses and older misdemeanors from the “dishonesty or breach of trust” category of covered crimes.
The NCUA coordinated with the FDIC so that the two agencies’ regulations on this topic are consistent.
ii Release No. 0166 reflects state & federal legal issues
The League’s ii Release No. 0166 summarizes state and federal laws related to criminal background checks.
For example, it points out that Wisconsin law generally prohibits employers from discriminating against job applicants and employees on the basis of an arrest or conviction record. Wis. Stats. §111.335. The law has some exceptions, including if the employee has a conviction record and the employee is legally required to be bonded for the job. All credit union employees and directors must be bonded. So, the issue that emerges is whether a particular crime is one that will prevent the employee from being bonded. Not all criminal convictions will result in not being bondable.
We will update the ii Release soon to reflect the NCUA’s new rule.
What the new NCUA rule says
The rule can be found in the newly created Part 752 of the NCUA’s Rules & Regulations. The following material is meant to summarize key points of the rule. For details, please refer to the rule itself.
“Reasonable inquiry” required (§752.1(b))
Credit unions must “make a reasonable, documented, inquiry” into an applicant’s criminal history to ensure that a person who has a “covered offense” is not hired or permitted to participate in a FICU’s affairs without the written consent of the NCUA.
Credit unions can make conditional offers of employment that are contingent on the person completing a satisfactory background check.
The rule does not spell out the procedures that FICUs should follow to conduct a “reasonable, documented inquiry.” The rule leaves it to the business judgment of each institution, but it appears to require criminal background checks. The credit union must document whatever process it uses.
Background checks are not just needed for paid staff (§752.2)
Under §741.3, “no person shall serve as a director, officer, committee member, or employee of an insured credit union who has been convicted of a crime covered under section 205(d) … except with the written consent of the [NCUA] Board.” Similarly, under §752.1(b), a person “may not work for, be employed by, or otherwise participate in the affairs of the insured credit union until the credit union has determined that the applicant is not prohibited under section 205(d) ….”
These provisions do not just apply when credit unions are hiring paid employees. They also apply to volunteers – anyone who “participates in the affairs” of the credit union. Section 752.2 says that this includes “all directors, officers, and employees.”
Coverage could extend even further. The rule says:
Whether other persons are covered by section 205(d) depends upon their degree of influence or control over the management or affairs of an insured credit union. For example, section 205(d) would apply to directors and officers of affiliates, subsidiaries, or joint ventures of an insured credit union if they participate in the affairs of the insured credit union or are able to influence or control the management or affairs of the insured credit union. Typically, an independent contractor does not have a relationship with the insured credit union other than the activity for which the credit union has contracted. However, an independent contractor who also influences or controls the management or affairs of the insured credit union would be covered by section 205(d).
What are “covered offenses”? (§752.3)
Those with a record of “covered offenses” (whether in the U.S. or foreign countries) may not participate in a FICU’s affairs without prior NCUA approval.
The term “covered offense” means a conviction or entry into a pretrial diversion or similar program for a criminal offense involving either 1) “dishonesty” or 2) “breach of trust.” The rule defines those two terms:
Dishonesty means a crime where someone, directly or indirectly cheats or defrauds or “wrongfully takes property belonging to another.” It includes any offense that federal, state, or local law defines as dishonest or where dishonesty is an element of the crime.
The definition of “dishonesty” does not include certain misdemeanors or drug possession:
- “A misdemeanor criminal offense committed more than 1 year before the date on which an individual files a consent application, excluding any period of incarceration.” (§752.3(a)(1)(iii)(A).)
The NCUA says that the one-year cutoff refers to the “last date of the underlying misconduct” (or if there were multiple offenses, the last date of any of the underlying offenses or misconduct).
Presumably, the quoted language refers to the date someone might apply to the NCUA for consent to work in an FICU. At least one law firm commenting on the related FDIC rule wrote that based on regulators’ comments, “it appears that all misdemeanor crimes are automatically exempt from the rule’s prohibition after one year has passed since the criminal offense was committed, excluding any period of incarceration” [i.e., not counting any time the person was jailed].
- “An offense involving the possession of controlled substances.” (§752.3(a)(1)(iii)(B).)
This means that, at a minimum, simple possession of controlled substances and possession with intent to distribute are not crimes of “dishonesty.”
The NCUA says that the exclusion may also apply to other drug-related offenses depending on the statutory elements of the crime or on court determinations that the crimes do not involve dishonesty, breach of trust, or money laundering.
Those with questions about whether the rule covers certain offenses may contact their appropriate NCUA field office.
Breach of trust means “a wrongful act, use, misappropriation, or omission with respect to any property or fund that has been committed to a person in a fiduciary or official capacity, or the misuse of one’s official or fiduciary position to engage in a wrongful act, use, misappropriation, or omission.”
Exception for certain older offenses (§752.3(c))
Certain older offenses are not considered “covered offenses” that would prevent someone from participating in the affairs of a FICU.
The rule’s restrictions do not apply to any offense:
- If it has been seven years or more since the offense occurred; or
- If the individual was incarcerated for the offense and it has been five years or more since the individual was released; or
- For individuals who committed an offense when they were 21 or younger, if it has been more than 30 months since the sentencing occurred.
The NCUA rule says that sentencing occurs on the date indicated on a court’s sentencing order, not when the order was entered on the court’s docket or when all the conditions of sentencing were completed.
And, under the rule, an offense “occurred” or was “committed” on the “last date of the underlying misconduct” (or, for multiple offenses, the last date of any of the underlying misconduct or offenses).
How can a credit union know the date that someone last committed an offense? A criminal background check may include the date of arrest but not date(s) of the crime. In some cases, it may be clear that an offense was committed more than seven years ago if the conviction was entered more than seven years ago. But if the determination cannot be made based upon the conviction record, the credit union might need further research to determine the last date of the underlying misconduct.
Note that these exceptions do not apply to a federal offense described under 12 U.S.C. 1785(d)(2). Convictions for those crimes carry an automatic prohibition that bars the person for involvement with a FICU for 10 years.
Convictions (§752.4) and “pretrial diversion” programs (§752.5)
The rule only applies if there is a “conviction of record” for a “covered offense.”
The rule does not apply and does not prohibit someone from participating in the affairs of a FICU when:
- The person has been arrested for a covered offense and charges are pending but have not yet been brought to trial;
- The person has been acquitted;
- The person’s conviction has been reversed on appeal (unless the reversal was just for re-sentencing purposes);
- The person was charged with a covered offense, but only convicted of some lesser crime that is not a covered offense;
- If the conviction has been expunged, sealed, or dismissed (since that is not considered a “conviction of record”) – provided that a two-part test in the rule is satisfied; or
- The person was convicted as a “youthful offender” (or similar term), or there was a judgment as a “juvenile delinquent” (or similar term).
However, if someone was convicted of a covered offense and an appeal is pending, or if the person received a pardon, then the rule does apply, and that person would be barred from participating in the affairs of a FICU without NCUA consent.
The rule also bars someone from participating in the affairs of a FICU if that person entered into a “pretrial diversion” or similar program for a covered offense. Sec. 752.5 explains that this “means a program characterized by a suspension or eventual dismissal or reversal of charges or criminal prosecution upon agreement by the accused to restitution, drug or alcohol rehabilitation, anger management, or community service.”
Under §752.5, a crime is still a “covered offense” even if the charge is reduced or dismissed upon completion of a pretrial diversion program. That means the individual would still need NCUA approval to participate in the affairs of a FICU (unless the crime was de minimis, as explained next). However, if the individual’s record was expunged, sealed, or dismissed after a pretrial diversion program is completed, the rule treats that just as it would an expungement, dismissal, or sealing of a conviction – meaning that if a two-part test in the rule is satisfied, then the rule will not prohibit the person from participating in the affairs of a FICU.
Exception for certain de minimis offenses (§752.8)
People who have committed relatively minor (which the rule calls de minimis) offenses are not subject to the rule. In publishing the rule, the NCUA wrote that if a FICU learns about such offenses, then it “should document in its files that an application [for an NCUA waiver] is not required because the covered offense is considered de minimis and meets the criteria for the exception.”
For example, the rule does not apply to the following offenses if one year or more has passed since the person was convicted or entered into a pretrial diversion program: using fake identification; shoplifting; trespassing; fare evasion; and driving with an expired license or tag.
Other offenses are considered de minimis and not subject to the rule if all the following conditions are met:
- The person has been convicted of (or entered a pretrial diversion program) for no more than two covered offenses, and for each of the offenses, the person completed all the requirements of their sentence or their pretrial diversion program.
- For each covered offense, the person could have been sentenced to 3 years or less of jail time and/or a fine of $2,500 or less, and the person actually served 3 days or less of jail time for each offense. Jail time does not include pretrial detention or time spent on probation or parole.
- If there are two convictions (or entries into pretrial diversion programs) for covered offenses, each must have been entered at least three years before the person would have needed to apply to the NCUA for approval to participate in the affairs of a FICU. The three-year period is shortened to 18 months if the person was 21 or younger at the time of their convictions or entries into pretrial diversion programs.
- Each covered offense must not have been committed against an insured depository institution or insured credit union.
The rule has two special exceptions for offenses involving insufficient checks or small thefts:
- Insufficient funds checks. The rule treats convictions (or entries into pretrial diversion programs) as de minimis (and thus exempt from the rule) if three conditions are met: 1) the total face value of all “bad” check(s) is $2,000 or less; 2) no insured depository institution or insured credit union was a payee on any of the checks; and 3) the person has no more than one other de minimis offense.
- “Small dollar, simple theft.” This exemption does not apply to burglary, forgery, robbery, identity theft, and fraud. The rule treats convictions (or entries into pretrial diversion programs) as de minimis (and thus exempt from the rule) if they involve the simple theft of goods, services, or currency (or other monetary instrument) and if four conditions are met: 1) the value of the currency, goods, or services taken was $1,000 or less; 2) the theft was not committed against an insured depository institution or insured credit union; 3) the person has no more than one other offense that is exempt because it is de minimis; and 4) if there are two offenses, and each of them by itself is considered exempt because it is de minimis, then each conviction or entry into a pretrial diversion program was entered at least three years before the person would have needed to apply to the NCUA for approval to participate in the affairs of a FICU. The three-year period is shortened to 18 months if the person was 21 or younger at the time of their convictions or entries into pretrial diversion programs.
Note that the de minimis exceptions do not apply to a federal offense described under 12 U.S.C. 1785(d)(2). Convictions for those crimes carry an automatic prohibition that bars the person for involvement with a FICU for 10 years.
Rule addresses process for applications to NCUA
If the rule prohibits someone from participating in the affairs of a FICU, the credit union or the individual can apply to the NCUA for consent to let the person work or volunteer with the credit union. Sections 752.9, 752.10, and 752.11 explain how this is done, what criteria the NCUA will use to evaluate applications, and what the NCUA will do if an application is denied.
Notification rule also amended
The NCUA has also amended regulations about newly chartered or troubled FICUs being required to notify the agency of any proposed changes to its board of directors, committee members, or senior executive staff. See §701.14 of the NCUA Rules & Regulations.