Compliance Blog

Employing Previously Convicted Individuals: New NCUA Guidance

Written by Alma Calcano, Regulatory Compliance Specialist

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In its July meeting, the NCUA Board voted to issue among other things, a proposed Interpretive Ruling and Policy Statement (IRPS 19-01) on exceptions to employment restrictions under Section 205(d) of the Federal Credit Union Act (FCU Act). The Board unanimously approved the proposed IRPS, 3-0.

Section 205(d)(1) of the FCU Act, codified at 12 U.S.C. § 1785, contains prohibitions on employing a person who has been convicted of any criminal offense involving dishonesty or breach of trust, or who has entered into a pretrial diversion or similar program in connection with a prosecution for such offense from participating directly or indirectly in the conduct of affairs of any insured credit union, except with prior written consent of the NCUA Board. This was implemented by 12 C.F.R. § 741.3(c) which applies the following criteria in determining the insurability of a credit union applying for insurance and in continuing the insurability of its accounts pursuant to title II of the Act:

"(c) Fitness of management. The officers, directors, and committee members of the credit union must have conducted its operations in accordance with provisions of applicable law, regulations, its charter and bylaws. No person shall serve as a director, officer, committee member, or employee of an insured credit union who has been convicted of any criminal offense involving dishonesty or breach of trust, except with the written consent of the Board."

In August 2008, the NCUA Board issued final Interpretive Ruling and Policy Statement 08-1 (IRPS 08-01), to provide direction and guidance to federally insured credit unions and those persons who may be affected by Section 205(d) because of a prior criminal conviction or pretrial diversion program participation by describing the actions that are prohibited under the statute, and establishing the procedures for applying for Board consent on a case-by-case basis. Section 206 of the FCU Act allows the NCUA to issue prohibition orders against individuals, including employees, who are found to have been convicted of a criminal offense.

Currently, the NCUA does not define what constitutes participation in the conduct of the affairs of an insured credit union. Proposed IRPS 19-1 reiterates the NCUA's current position that agency and court decisions will inform its determination and that, generally, participation will depend upon the degree of influence or control over the management or affairs of the insured credit union.

Neither the statute nor the regulation contains a definition of a crime or criminal offense involving dishonesty or breach of trust. This was defined by NCUA in IRPS 08-01. IRPS 19-01 does not propose any changes to these definitions.

The view from 30,000 feet

The proposed rule would expand the current de minimis exception to include additional offenses to qualify as de minimis offenses, to reduce the number of offenses that would require an application to the Board (i.e. low-risk, isolated offenses, etc.), and to expand the pool of applicants credit unions can consider for employment. Proposed IRPS 19-1 would clarify that all of the sentencing requirements associated with a conviction or conditions imposed by the pretrial diversion or similar program, including, but not limited to, imprisonment, fines, condition of rehabilitation, and probation requirements, must be completed before the Board will deliberate a consent application.

Under the NCUA's current policy, a covered offense is considered de minimis if it meets five criteria. Only one criteria (criterion (2)) has changed: “the offense was punishable by imprisonment for a term of less than one year and/or a fine of less than $1,000, and the punishment imposed by the court did not include incarceration.” See, Interpretive Ruling and Policy Statement 08-1, P. 21.

The potential punishment and/or fine provision would be updated to allow those offenses punishable by imprisonment for a term of one year or less and/or a fine of $2,500 or less, and those punishable by three days or less of jail time, to meet that de minimis criterion. It would also add a definition of “jail time” to clarify the circumstances under which a lesser crime would qualify as de minimis .

IRPS 19-1 proposes a new age-based exception to the filing requirement. Under the proposal, a person with a covered conviction or program entry that occurred when the individual was 21 years of age or younger, and who otherwise meets the general de minimis criteria, will qualify for this de minimis exception if:

  • the conviction or program entry was entered at least 30 months prior to the date an application would otherwise be required; and
  • all sentencing or program requirements have been met prior to the date an application would otherwise be required.

In addition, IRPS 19-1 proposes to expand the exception to include convictions or program entries for insufficient funds checks of aggregate moderate value, small dollar simple theft, false identification, and simple misdemeanor drug possession. It also seeks comment on whether the Board should delegate responsibility of reviewing certain applications to streamline the application process.

Bond Coverage

Under Part 713 of NCUA's Rules and Regulations, credit unions are required to have bond coverage against dishonesty or fraud by employees, and the terms of that coverage may have its own policy or background search requirements in connection with the issuance of that bond. Proposed IRPS 19-1 would continue to require that any person who meets the de minimis criteria must be covered by a fidelity bond to the same extent as other employees in similar positions. In addition, that person is required to disclose the presence of the conviction or pretrial diversion program entry to all insured credit unions or insured depository institutions in the affairs of which he or she intends to participate.

Comments are due to NCUA on September 27, 2019. Comments are due to NAFCU (survey here) on September 13, 2019. To learn more about the proposed IRPS, please read NAFCU's Regulatory Alert.

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About the Author

Alma Calcano, NCCO, NCBSO, Regulatory Compliance Specialist, NAFCU

Alma joined NAFCU in February 2019.  As part of the Regulatory Compliance Team, she provides daily compliance assistance to member credit unions on a variety of topics. 
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