Exceptions to Employment Restrictions Under Section 205(d) of the Federal Credit Union Act (“Second Chance IRPS”), 65907-65923 [2019-25699]

Download as PDF 65907 Rules and Regulations Federal Register Vol. 84, No. 231 Monday, December 2, 2019 This section of the FEDERAL REGISTER contains regulatory documents having general applicability and legal effect, most of which are keyed to and codified in the Code of Federal Regulations, which is published under 50 titles pursuant to 44 U.S.C. 1510. The Code of Federal Regulations is sold by the Superintendent of Documents. NATIONAL CREDIT UNION ADMINISTRATION 12 CFR Chapter VII RIN 3133–AF02 Exceptions to Employment Restrictions Under Section 205(d) of the Federal Credit Union Act (‘‘Second Chance IRPS’’) National Credit Union Administration (NCUA). ACTION: Final interpretive ruling and policy statement 19–1. AGENCY: The NCUA Board (Board) is updating and revising its Interpretive Ruling and Policy Statement (IRPS) regarding statutory prohibitions imposed by Section 205(d) of the Federal Credit Union Act (FCU Act). Section 205(d) prohibits, except with the prior written consent of the Board, any 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 in the affairs of an insured credit union. The Board is rescinding current IRPS 08–1 and issuing a revised and updated IRPS to reduce regulatory burden. The Board is amending and expanding the current de minimis exception to reduce the scope and number of offenses that will require an application to the Board. Specifically, the final IRPS will not require an application for convictions involving insufficient funds checks of aggregate moderate value, small dollar simple theft, false identification, simple drug possession, and isolated minor offenses committed by covered persons as young adults. DATES: The final IRPS takes effect January 2, 2020. FOR FURTHER INFORMATION CONTACT: Pamela Yu, Special Counsel to the General Counsel, Office of General jbell on DSKJLSW7X2PROD with RULES SUMMARY: VerDate Sep<11>2014 15:54 Nov 29, 2019 Jkt 250001 Counsel, at the above address or telephone (703) 518–6540. SUPPLEMENTARY INFORMATION: I. Introduction The Board recognizes that many Americans face hiring barriers due to a criminal record, a great number of which are not violent or career criminals, but rather people who made poor choices early in life who have since paid their debt to society. Offering second chances to those who are truly penitent is consistent with our nation’s shared values of forgiveness and redemption. In keeping with this spirit of clemency, the Board endeavors to expand career opportunities for those who have demonstrated remorse and responsibility for past indiscretions and wish to set on a path to productive living. Toward that end, the Board is revising its guidance regarding prohibitions imposed by Section 205(d) of the FCU Act. Section 205(d) of the FCU Act prohibits, without the prior written consent of the Board, a person 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 becoming or continuing as an institution-affiliated party, or otherwise participating, directly or indirectly, in the conduct of the affairs of an insured credit union.1 In August 2008, the Board issued final IRPS 08–1, 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.2 The IRPS has not been revised since 2008 and, based on its experience with the IRPS over the past decade, the Board is updating and revising the guidance to reduce regulatory burden while protecting federally insured credit unions from risk by convicted persons. II. Background Under Section 205(d)(1) of the FCU Act, except with the prior written 1 12 2 73 PO 00000 U.S.C. 1785(d)(1). FR 48399 (Aug. 19, 2008). Frm 00001 Fmt 4700 Sfmt 4700 consent of the Board, a person who has been convicted of any criminal offense involving dishonesty or breach of trust, or has agreed to enter into a pretrial diversion or similar program in connection with a prosecution for such offense may not: • Become, or continue as, an institution-affiliated party with respect to any insured credit union; or • Otherwise participate, directly or indirectly, in the conduct of the affairs of any insured credit union. Section 205(d)(1)(B) further provides that an insured credit union may not allow any person described above to participate in the affairs of the credit union without Board consent. Section 205(d)(2) imposes a ten-year ban against the Board’s consent for a person convicted of certain crimes enumerated in Title 18 of the United States Code, absent a motion by the Board and approval by the sentencing court. Finally, Section 205(d)(3) states that ‘‘whoever knowingly violates’’ (d)(1)(A) or (d)(1)(B) commits a felony, punishable by up to five years in jail and a fine of up to $1,000,000 a day. Recognizing that certain offenses are so minor and occurred so far in the past so as to not currently present a substantial risk to the insured credit union, IRPS 08–1 excludes certain de minimis offenses from the need to obtain consent from the Board. However, several recent applications requesting the Board’s consent pursuant to Section 205(d) involved fairly minor, low-risk, erstwhile, and isolated offenses that did not fall within the current de minimis exception.3 In light of these recent cases, the substantial passage of time since IRPS 08–1 was adopted, and importantly, the Board’s commitment to opening a path forward for those seeking redemption for past criminal activities, the Board has determined it is appropriate to now amend IRPS 08–1. In issuing these final amendments to IRPS 08–1, the Board remains mindful of a corresponding Statement of Policy (SOP) issued by the Federal Deposit Insurance Corporation (FDIC) to promote consistency between the 3 For example, in several recent cases, the offense in question met four of the five de minimis criteria but did not qualify for the de minimis exception because the potential—but not actual—punishment exceeded the standard set forth by IRPS 08–1. See BD–02–18 (Oct. 18, 2018); BD–01–19 (Mar. 14, 2019). E:\FR\FM\02DER1.SGM 02DER1 65908 Federal Register / Vol. 84, No. 231 / Monday, December 2, 2019 / Rules and Regulations prudential regulators and to reduce regulatory burden. Section 19 of the Federal Deposit Insurance Act (FDIA) contains a prohibition provision similar to Section 205(d) of the FCU Act. In 1998, the FDIC implemented an SOP regarding prohibitions imposed by Section 19 of the FDIA, and it has subsequently modified and updated its guidance on several occasions.4 In the past, the NCUA has drawn on the FDIC’s SOP for guidance on this topic. In 2018, the FDIC updated and revised its SOP to expand its de minimis exception and to make other clarifying changes.5 In the Board’s view, it is beneficial to both institutions and covered individuals for the NCUA’s Section 205(d) requirements to be reasonably consistent, to the extent possible, with the FDIC’s Section 19 requirements. Consistent guidelines between our sister agencies with respect to these parallel statutory provisions will help streamline the application process, particularly for those individuals seeking consent from both the NCUA and the FDIC to allow for potential employment at federally insured financial institutions. jbell on DSKJLSW7X2PROD with RULES III. Proposed Second Chance IRPS (IRPS 19–1) In July 2019, the Board published and sought public comment on a proposal to expand exceptions to employment restrictions under Section 205(d).6 Deemed the ‘‘Second Chance IRPS,’’ the Board proposed to amend the current de minimis exception to reduce the scope and number of offenses that would require an application to the Board. Specifically, the proposed Second Chance IRPS did not require an application for insufficient funds checks of aggregate moderate value, small dollar simple theft, false identification, simple drug possession, and isolated minor offenses committed by covered persons as young adults. In addition, the Board proposed some minor grammatical, formatting, and clarifying changes. The Board received a total of twelve comments from national credit union trade associations, state credit union associations, advocacy groups (including one joint letter representing 36 individual groups), one federal credit union, and one fidelity bond provider. The commenters generally supported 4 The FDIC has revised its SOP multiple times since its implementation in 1998. See 63 FR 66177 (Dec. 1, 1998); 72 FR 73823 (Dec. 28, 2007); 73 FR 5270 (Jan. 29, 2008); 76 FR 28031 (May 13, 2011); 77 FR 74847 (Dec. 18, 2012); 83 FR 38143 (Aug. 3, 2018). 5 83 FR 38143 (Aug. 3, 2018). 6 84 FR 36488 (July 29, 2019). VerDate Sep<11>2014 15:54 Nov 29, 2019 Jkt 250001 the proposed IRPS and appreciated the Board’s efforts to reduce regulatory burden, and to expand employment opportunities to those deserving of a second chance. The general consensus among commenters was that the proposed guidance was well-measured, balanced, and flexible and will reduce burdens on credit unions, covered individuals, and the agency, while maintaining appropriate safeguards to ensure the new exceptions do not present undue safety and soundness risks to insured credit unions. Commenters widely applauded the NCUA’s efforts to expand employment opportunities for low-risk convicted persons and noted the second chance amendments are consistent with our nation’s redemptive spirit. One commenter was particularly gratified that the NCUA’s issuance will represent a strong message in support of second chances and act as a signal to other industries that many former offenders are worthy of the opportunity for inclusion and trust. A joint comment letter representing numerous advocacy groups supported the proposed Second Chance IRPS overall, but asked that the NCUA go further than the proposal to adopt additional reforms and improvements to promote expanded employment opportunities for people with conviction records, including, among other things, additional expansions of the de minimis exception; further clarifications regarding expungements, set-asides, and reversed convictions; and clarifications to the evaluation standards for Section 205(d) consent applications. Substantive comments on specific aspects of the proposed Second Chance IRPS are discussed in detail below. For the reasons described below, the Board is adopting the proposal with a few minor modifications. IV. Final Second Chance IRPS A. Background IRPS 08–1 currently provides background regarding Section 205(d)’s prohibition, and discusses its purpose to provide requirements, direction, and guidance to federally insured credit unions and individuals covered by the statutory ban. The proposed IRPS revised the background section to make clear that IRPS 19–1 supersedes and replaces IRPS 08–1. There were no comments on this aspect of the proposal, and the Board adopts this amendment as proposed. PO 00000 Frm 00002 Fmt 4700 Sfmt 4700 B. Scope 1. Persons Covered The proposed Second Chance IRPS modified the scope section to clarify the persons covered by the Section 205(d) prohibition. Under the statute, the prohibition applies to institutionaffiliated parties, as defined by Section 206(r) of the FCU Act,7 and others who are participants in the conduct of the affairs of an insured credit union.8 Under Section 206(r), independent contractors are considered institutionaffiliated parties if they knowingly or recklessly participate in violations, unsafe or unsound practices, or breaches of fiduciary duty which are likely to cause significant loss to, or a significant adverse effect on, an insured credit union. Over the years, the definition of independent contractors in Section 206(r), which is included in IRPS 08–1, has created confusion among interested parties. Given that the term is actually unnecessary in determining whether Section 205(d) applies at the time the individual commenced work for, or participated in the affairs of, the credit union, the proposed Second Chance IRPS deleted reference to certain language in the definition of ‘‘independent contractor.’’ It also clarified that an independent contractor typically does not have a relationship with the insured credit union other than the specific activity for which the insured credit union has contracted, and that the relevant factor in determining whether an independent contractor is covered by Section 205(d)’s prohibition is whether the independent contractor influences or controls the management or affairs of that credit union. A person who does not meet the statutory definition of institutionaffiliated party is nevertheless prohibited by Section 205(d) if he or she is considered to be participating, directly or indirectly, in the conduct of the affairs of an insured credit union. The proposed Second Chance IRPS did not precisely define what constitutes direct or indirect participation in the conduct of the affairs of an insured credit union, but rather updated and clarified how the NCUA will determine whether a person qualifies as a participant in the affairs of an insured credit union. One commenter specifically agreed the NCUA should not expressly define who qualifies as a participant. Another commenter questioned why it is necessary for the guidance to address both institution-affiliated parties and 7 12 8 12 E:\FR\FM\02DER1.SGM U.S.C. 1786(r). U.S.C. 1785(d). 02DER1 Federal Register / Vol. 84, No. 231 / Monday, December 2, 2019 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES participants in the affairs of an insured credit union. The commenter encouraged the Board to delete reference to participants as the term appears redundant and does not seem to expand the scope of coverage. As noted above, the statute expressly applies the employment prohibition to institution-affiliated parties and others who are participants in the conduct of the affairs of an insured credit union. Specifically, Section 205(d) provides that except with prior written consent of the Board— 1. any person who has been convicted of any criminal offense involving dishonesty or a breach of trust, or has agreed to enter into a pretrial diversion or similar program in connection with a prosecution for such offense, may not— a. become, or continue as, an institution-affiliated party with respect to any insured credit union; or b. otherwise participate, directly or indirectly, in the conduct of the affairs of any insured credit union; and 2. any insured credit union may not permit any person referred to in paragraph (1) to engage in any conduct or continue any relationship prohibited under such paragraph.9 In the Board’s view, for consistency with the operative statute, it is helpful and appropriate for the guidance to continue to address both institutionaffiliated parties and participants in the affairs of an insured credit union. While there may be overlap between the two, retaining reference to the two distinct statutory terms in the final IRPS will promote clarity and maintain consistency between the statute and guidance. The Board continues to maintain that participants in the affairs of a credit union is a term of art that defies precise definition. Thus, the final Second Chance IRPS 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. Each individual’s conduct will be analyzed on a case-by-case basis to determine if that conduct constitutes participation in the conduct of the affairs of an insured credit union. 2. Offenses Covered The proposed Second Chance IRPS clarified that in order for an application to be considered by the Board, the case must be considered final by the procedures of the applicable jurisdiction. This means all of the 9 12 U.S.C. 1785(d). VerDate Sep<11>2014 15:54 Nov 29, 2019 Jkt 250001 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. There were no comments on this aspect of the proposal, and the Board is adopting these provisions without modification. 3. Offenses not Covered Currently, where the covered offense is considered de minimis, approval is automatically granted, and an application for the Board’s consent is not required. The proposed Second Chance IRPS modified the current exception for de minimis offenses in two ways: First, by updating the general criteria for the exception; and second, by substantially expanding the scope of the exception to include additional offenses to qualify as de minimis offenses. De minimis offenses. Under IRPS 08– 1, a covered offense is considered de minimis if it meets all of the following five criteria: (1) There is only one conviction or entry into a pretrial diversion program of record for a covered offense; (2) 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; (3) the conviction or pretrial diversion program was entered at least five years prior to the date an application would otherwise be required; (4) the offense did not involve an insured depository institution or insured credit union; and (5) the Board or the FDIC has not previously denied consent under Section 205(d) of the FCU Act or Section 19 of the FDIA, respectively, for the same conviction or participation in a pretrial diversion program. The proposed Second Chance IRPS updated the general criteria for the de minimis offenses exception to better align with developments in criminal reform and sentencing guidelines that have occurred since IRPS 08–1 was adopted in 2008. Specifically, the potential punishment and/or fine provision (current criterion 2) was 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 offenses punishable by three days or less of jail time, to meet that de minimis criterion. Commenters noted that these changes to the general criteria, while modest, will nevertheless result in a meaningful PO 00000 Frm 00003 Fmt 4700 Sfmt 4700 65909 reduction in the number of applications to the Board. In particular, several commenters indicated that simply amending criterion 2 from ‘‘less than one year’’ to ‘‘one year or less’’ will result in significant regulatory relief. Commenters also agreed the increase in the dollar threshold better aligns with criminal reform and sentencing guidelines. One commenter was supportive overall of the proposed amendments to the general criteria for the de minimis exception, but asserted that the single conviction criterion (criterion 1), which was not modified in the proposal, is too restrictive. The proposed IRPS also added a definition of ‘‘jail time’’ to clarify that the term includes any significant restraint on an individual’s freedom of movement, including confinement to a specific facility or building on a continuous basis where the person may leave temporarily only to perform specific functions or during specified time periods or both. One commenter specifically supported the proposed definition of jail time. However, another comment letter expressed concerns that the proposal’s definition would include time served in pretrial confinement, for civil infractions, or in home confinement since these penalties impose a ‘‘significant restraint on an individual’s freedom of movement.’’ As one example, the comment letter noted lowrisk individuals who had their freedom of movement restricted for failure to pay a traffic fine would fall outside of the exception because of the more expansive proposed definition. Thus, this comment letter recommended the Board retain the current language relative to jail time. Another commenter suggested the definition of jail time should include probation if probation was the only confinement imposed as part of an individual’s punishment. After a review and analysis of the comments, the Board is adopting this aspect of the guidance unchanged in the final Second Chance IRPS. The Board anticipates the measured changes to criterion 2 of the general de minimis exception alone should result in a fairly significant reduction in regulatory burden. The Board is not inclined to further relax the general criteria at this time to allow for more than one de minimis offense to qualify for the general exception. The Board wishes to emphasize, however, that for any offense that does fit a de minimis category, an application can still be filed. The Board also adopts the proposed definition of ‘‘jail time’’ without modification. As discussed in the E:\FR\FM\02DER1.SGM 02DER1 jbell on DSKJLSW7X2PROD with RULES 65910 Federal Register / Vol. 84, No. 231 / Monday, December 2, 2019 / Rules and Regulations proposal, the NCUA is aware that various jurisdictions take different approaches to confinement depending on the nature of the crime (e.g., house arrest, home detention, ankle monitor, voice curfew, work release) and the proposed definition was intended to improve transparency and enhance compliance in that context. In the Board’s view, the new definition is appropriately tailored to address those varied jurisdictional approaches in order to clarify the circumstances under which a lesser crime will qualify as de minimis. In response to the comment letter expressing concern that the proposed definition was overly broad to exclude individuals whose freedom of movement is restricted for minor crimes, such as for failure to pay a traffic fine, the Board notes that minor traffic violations are not criminal offenses involving dishonesty or a breach of trust within the scope of Section 205(d). Additional applications of the de minimis exception. The proposed Second Chance IRPS also expanded the scope of the exception to include several additional offenses to qualify as de minimis offenses in order to eliminate the need to submit an application for certain low-risk, isolated offenses. The proposed expansion was intended to reduce regulatory burden to credit unions, covered individuals, and the agency, while continuing to mitigate the risk to insured credit unions posed by convicted persons. Most commenters were very supportive of the expansion of the current de minimis exception to include new qualifying offenses. One commenter, however, disagreed with expanding the exception to include additional offenses, preferring the Board have the opportunity to evaluate all aspects of a covered individual’s criminal past. Another commenter expressed concern that the new exceptions could risk the safety and soundness of credit unions (particularly smaller institutions), and thus, opposed the addition of new de minimis offenses. As described in more detail below, the Board generally adopts the new qualifying offenses for de minimis treatment as proposed, with some minor modifications for improvement. Age at time of covered offense. Under the proposed Second Chance IRPS, a person with a covered conviction or program entry that occurred when the individual was 21 years of age or younger at the time of the conviction or program entry, and who otherwise meets the general de minimis criteria, will qualify for this de minimis VerDate Sep<11>2014 15:54 Nov 29, 2019 Jkt 250001 exception if: (1) The conviction or program entry was at least 30 months 10 prior to the date an application would otherwise be required and (2) all sentencing or program requirements have been met prior to the date an application would otherwise be required. One commenter generally supported this proposed change, but urged the Board to go further by also modifying the other general criteria applying to offenses committed prior to the age of 21, namely, that the offense be punishable by a jail term of less than one year or a fine of less than $2,500. The Board declines this recommendation. While this measured exception is intended to recognize that isolated, youthful mistakes are particularly worthy of forgiveness and second chances, the Board remains mindful of its safety and soundness mandate. Reducing by half the passage of time required for individuals with a minor youthful conviction to qualify for the exception provides meaningful relief while still appropriately mitigating risks to insured credit unions posed by convicted persons. Accordingly, the Board is adopting the age-based de minimis treatment, as proposed, in the final Second Chance IRPS. Convictions or program entries for insufficient funds checks. The Board also proposed to expand the de minimis exception to cover certain convictions for ‘‘bad’’ or insufficient funds checks, which, in the Board’s view, generally are low-risk offenses that can be treated as de minimis. Under the proposal, these types of offenses were considered de minimis and were not considered as involving an insured depository institution or insured credit union if the following conditions apply: • Other than for ‘‘bad’’ or insufficient funds check(s), there is no other conviction or pretrial diversion program entry subject to Section 205(d); • The aggregate total face value of all ‘‘bad’’ or insufficient funds check(s) cited across all the conviction(s) or program entry or entries for bad or insufficient checks is $1,000 or less; and • No insured depository institution or insured credit union was a payee on any of the ‘‘bad’’ or insufficient funds checks that were the basis of the conviction(s) or program entry or entries. One commenter expressed concern with the proposed exception for offenses involving insufficient funds 10 Half of the regular five-year period applicable to individuals with a covered conviction or program entry that occurred when the individual was over 21 years of age at the time of the conviction or program entry. PO 00000 Frm 00004 Fmt 4700 Sfmt 4700 checks and asked that the Board readjust the qualifying aggregate total face value amount. The same commenter also suggested this exception category should be revised to impose a qualifying timeframe (e.g., five years since the conviction or program entry (or 30 months in the case of a person 21 years or younger at the time of the conviction or program entry)). Another commenter suggested that references to covered offenses that took place at an ‘‘insured credit union’’ or an ‘‘insured depository institution’’ should be revised throughout the guidance to eliminate the ‘‘insured’’ modifier. In this commenter’s view, the proposed language is overly specific as any prior offense by a covered individual involving a financial institution, insured or not, can increase risks to insured credit unions. The Board agrees that covered individuals with convictions or program entries for crimes involving financial institutions may pose risks to insured credit unions, regardless of the financial institution’s insurance status. After careful review, the Board maintains that no offense category should be included in the de minimis exception if the covered crime was committed against a financial institution, insured or not. Accordingly, to the extent the distinction between insured and uninsured institutions is immaterial in this context, the final IRPS eliminates the ‘‘insured’’ modifier throughout. However, the Board declines to impose additional conditions on this exception category at this time. Imposing a lower qualifying aggregate total face value amount or a qualifying timeframe for this de minimis category would limit its utility and undermine the Board’s objective of providing well-balanced, yet meaningful, regulatory relief. The Board continues to take the view that convictions for ‘‘bad’’ or insufficient funds checks generally are low-risk offenses that can be treated as de minimis. Thus, offenses that meet all the above-listed criteria, as revised to eliminate the ‘‘insured’’ modifier, will not require an application for the Board’s consent under the final Second Chance IRPS. Convictions or program entries for small-dollar, simple theft. As the Board discussed in the proposed Second Chance IRPS, a substantial number of applications that have come before the Board since 2008 have involved convictions or program entries for relatively minor, low-risk, small-dollar, simple theft (e.g., shoplifting, retail theft). Based on a historical review of Section 205(d) applications, the Board granted its consent to the vast majority E:\FR\FM\02DER1.SGM 02DER1 jbell on DSKJLSW7X2PROD with RULES Federal Register / Vol. 84, No. 231 / Monday, December 2, 2019 / Rules and Regulations of those covered individuals with convictions or program entries related to small-dollar, simple theft. Thus, under the proposal, a conviction or pretrial diversion program entry based on a simple theft of goods, services and/or currency (or other monetary instrument) was considered de minimis where the following conditions are met: • The aggregate value of the currency, goods, and/or services taken was $500 or less at the time of conviction or program entry; and • The person has no other conviction or program entry described in Section 205(d); and • It has been five years since the conviction or program entry (or 30 months in the case of a person 21 years or younger at the time of the conviction or program entry); and • It does not involve an insured depository institution or insured credit union. For purposes of the exception, simple theft did not include the offenses of burglary, forgery, robbery, identity theft, or fraud. Under the proposal, these crimes continued to require an application for the Board’s consent, unless otherwise qualifying as de minimis. Stakeholders providing comment on this aspect of the proposed IRPS generally supported the exception for small-dollar, simple theft. Several commenters supported the express exclusion of burglary, forgery, robbery, identity theft, and fraud from the exception and agreed those offenses should continue to require an application for the Board’s consent. Several commenters asked the Board to clarify that all of the stated conditions must be met in order for the exception to apply. A number of commenters also asked the Board to confirm and emphasize in the final IRPS that simple theft, of any value, involving a depository institution or credit union falls outside the de minimis exception and will require an application to the Board. One commenter suggested the condition that the conviction or program entry does not involve an insured depository institution or insured credit union should be revised to eliminate the ‘‘insured’’ modifier. One comment letter was generally in favor of an exception for simple theft, but contended the practical application of the proposed exception is limited because most simple theft convictions involving $500 or less are likely already covered as de minimis under the general criteria (i.e., unlikely to be punishable by imprisonment for a term of more than one year or a fine of more than $2,500, and the covered person is VerDate Sep<11>2014 15:54 Nov 29, 2019 Jkt 250001 unlikely to have served more than three days in jail). Thus, the comment letter urged that the Board go further to exclude from Section 205(d) coverage certain minor dishonesty offenses, such as all convictions for the use of a fake ID (not only limited to alcohol-related use), shoplifting, fare evasion, and other lesser offenses. Alternatively, at a minimum, the comment letter suggested these types of convictions should be excluded from Section 205(d) coverage after one year from the time of conviction or program entry. Upon careful consideration of the public comments, the Board continues to take the view that the exception is appropriately tailored to streamline the application process without creating undue or substantial risk to insured credit unions, and declines to expand it further at this time to include additional offenses. Accordingly, the final Second Chance IRPS adopts the small-dollar, simple theft exception largely as proposed. A conviction or pretrial diversion program entry based on a simple theft of goods, services and/or currency (or other monetary instrument) is considered de minimis where all of the above-listed conditions are met. As discussed above, the Board agrees, however, that the distinction between insured and uninsured institutions is immaterial in this context. Thus, the final Second Chance IRPS eliminates the ‘‘insured’’ modifier in this exception category. Simple theft, of any value, involving a depository institution or credit union, whether insured or not, falls outside the de minimis exception and will require an application to the Board. Where pertinent throughout, the final Second Chance IRPS also adds the word ‘‘all’’ to clarify that all the described conditions must be met in order for the exception to apply. Convictions or program entries for the use of a fake identification card. Under the proposed Second Chance IRPS, the use of a fake, false, or altered identification card by a person under the legal age to obtain or purchase alcohol, or to enter a premises where alcohol is served and age appropriate identification is required, was considered de minimis, provided there is no other conviction or program entry for the covered offense. All commenters that provided feedback on this aspect of the proposal were supportive of the exception and agreed that individuals with convictions or program entries for the use of a fake identification card pose little risk to insured credit unions. Accordingly, the Board adopts as proposed the provision allowing de minimis treatment for the use of fake identification by a person PO 00000 Frm 00005 Fmt 4700 Sfmt 4700 65911 under the legal age for alcohol-related purposes. Convictions or program entries for simple misdemeanor drug possession. While not discounting the public health implications of illegal drug use and possession, the Board continues to believe covered persons with single convictions or program entries for simple drug possession pose minimal risk to insured credit unions. As discussed in the proposed Second Chance IRPS, there are already a host of significant extrajudicial consequences for individuals with nonviolent drug possession convictions, including not only employment bans but the loss of federal financial aid, eviction from public housing, disqualification from occupational licenses, loss of voting rights, and denial of public assistance. Moreover, research shows that drug convictions disproportionately burden people of color. In addition, the Board recognizes that some uncertainty and confusion exists with respect to marijuana-related offenses, with marijuana now legal in many states but still illegal at the federal level.11 Accordingly, the proposed Second Chance IRPS also classified as de minimis those convictions or entries for drug offenses meeting the following conditions: • The person has no other conviction or program entry described in Section 205(d); and • The single conviction or program entry for simple possession of a controlled substance was classified as a misdemeanor and did not involve the illegal distribution (including an intent to distribute), sale, trafficking, or manufacture of a controlled substance or other related offense; and • It has been five years since the conviction or program entry (or 30 months in the case of a person 21 years or younger at the time of the conviction or program entry). Under the proposal, convictions or program entries for intent to distribute, illegal distribution, illegal sale or trafficking of a controlled substance, or illegal manufacture of a controlled substance continued to require an application for the Board’s consent, unless otherwise qualifying as de minimis. Most commenters that provided input on this part of the proposed Second 11 Marijuana laws are rapidly evolving across all 50 states. Multiple states have legalized or decriminalized marijuana in some form at the state level. However, marijuana remains a Schedule I drug under the Federal Controlled Substances Act. See 21 U.S.C. 812(b)(1). Further information about marijuana legalization may be found online at https://disa.com/map-of-marijuana-legality-bystate. E:\FR\FM\02DER1.SGM 02DER1 jbell on DSKJLSW7X2PROD with RULES 65912 Federal Register / Vol. 84, No. 231 / Monday, December 2, 2019 / Rules and Regulations Chance IRPS supported the exception and agreed that individuals with convictions or program entries for single convictions for simple drug possession pose minimal risk to insured credit unions. Several commenters echoed the Board’s view that the exception is appropriate given the current uncertainty and confusion with respect to marijuana-related offenses, with marijuana legal under various state laws but still federally illegal. A number of commenters also shared the Board’s observation that drug convictions disproportionately burden people of color and impose significant extrajudicial consequences on convicted individuals. One comment letter, however, recommended the Board more broadly expand the exception to include most drug convictions (beyond simple possession), arguing that drug offenses are not criminal offenses involving dishonesty or breach of trust that should be covered by Section 205(d). The comment letter urged the Board to eliminate the requirement to request consent for persons with a conviction or program entry for any drug possession offense (i.e., not limited to misdemeanors that occurred more than five years ago), as well as for drug offenses involving sales or distribution of a controlled substance. The comment letter further argued that mandatory minimum federal sentences imposed for drug offenses limits the effectiveness of the proposed exception. After careful review of the comments, the Board maintains that an application should be required for most drug offenses so it can determine the nature of the offense and elements of the crime; thus, it will continue the current requirement that an application be filed for drug offenses that do not qualify as de minimis. Moreover, while the Board recognizes the de minimis treatment for single convictions or program entries for simple misdemeanor drug possession is relatively narrowly tailored, it once again emphasizes that, as with any offense that does not fit a de minimis category, an application can still be filed for any drug crime that does not qualify for de minimis treatment. Accordingly, the Board adopts this exception category, without change, in the final IRPS. Fidelity bond coverage. The proposed Second Chance IRPS maintained the agency’s current policy 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 must disclose the presence of the conviction or pretrial VerDate Sep<11>2014 15:54 Nov 29, 2019 Jkt 250001 diversion program entry to all insured credit unions or insured depository institutions in the affairs of which he or she intends to participate. One commenter noted that, historically, insurers have increased premiums where an employee has a theft or fraud conviction; thus, some credit unions are concerned about their ability to obtain insurance coverage for covered individuals. This commenter asked the NCUA to weigh the costs and benefits of requiring a fidelity bond for individuals that meet the de minimis criteria under the final Second Chance IRPS. Several commenters expressed some degree of concern that increasing the number of excepted offenses not requiring application could ultimately lead to increased theft or fraud, thereby resulting in increased insurance costs to credit unions (costs that ultimately would be borne by members). However, most of those commenters shared the view that this is a fairly remote possibility and, at least in the shortterm, no immediate premium increases are likely to result from the proposed IRPS. Commenters noted that if such a result were to occur, the Board should revisit the IRPS to determine if it should be modified. Comments from one insurer that provides fidelity bond coverage to credit unions were particularly helpful on this point. Specifically, the commenter indicated that, while the full implications of the proposal may not be known for several years, it currently does not anticipate any immediate premium adjustments for credit unions to result from the proposed changes. The commenter noted, however, that beyond fidelity bond coverage, there could be potential future impacts for risk management services provided to credit unions, as well as business auto and business liability coverages, as new general, safety concerns may arise. This commenter also indicated that, as a fidelity insurer, it will reexamine its own de minimis category to consider if updates to its policies are necessary given the important goals underlying the agency’s amendments. The Board continues to maintain that any person who meets the de minimis criteria must still be covered by a fidelity bond to the same extent as other employees in similar positions. Fidelity bond coverage provides important protection against losses caused by fraud, dishonesty, theft, and similar activities committed by credit union employees, directors, officers, supervisory committee members, and credit committee members. Based on stakeholder feedback, the Board is PO 00000 Frm 00006 Fmt 4700 Sfmt 4700 satisfied that, at least in the immediate near-term, the final Second Chance IRPS will not result in higher premiums for insured credit unions. The Board is cognizant of the possibility that, should the incidence of theft or fraud increase as a result of its amendments to the de minimis exception, future impacts could mean higher insurance premiums. The Board will continue to monitor whether updates to its policy are necessary if concerns regarding premium adjustments arise. Expunged convictions. Under the NCUA’s current policy, a conviction that has been ‘‘completely expunged’’ is not considered a conviction of record and will not require an application for the Board’s consent under Section 205(d). However, the Board is aware that it is sometimes unclear whether certain state set-aside provisions constitute a complete expungement for Section 205(d) purposes (i.e., where the conviction may still be revealed under certain circumstances or otherwise remains on the individual’s record). Accordingly, the proposed Second Chance IRPS clarified the circumstances under which a conviction is deemed expunged for purposes of Section 205(d). Specifically, if an order of expungement has been issued in regard to a conviction or program entry and is intended by the language in the order itself, or in the legislative provisions under which the order was issued, to be a complete expungement, then the jurisdiction, either in the order or the underlying legislative provisions, cannot allow the conviction or program entry to be used for any subsequent purpose. This includes, but is not limited to, an evaluation of a person’s fitness or character. Under the proposal, the failure to destroy or seal the records did not prevent the expungement from being considered complete for purposes of Section 205(d). Expungements of pretrial diversion or similar program entries are treated the same as expungements for convictions. Moreover, under the proposed Second Chance IRPS, convictions set aside or reversed after the applicant has completed sentencing were treated consistently with pretrial diversions programs unless the court records reflect that the underlying conviction was set aside based on a finding on the merits that such conviction was wrongful. Commenters generally indicated the proposal’s clarifications regarding expunged convictions were helpful. Several commenters were particularly supportive of the clarification regarding state set-aside provisions as it is sometimes unclear whether those E:\FR\FM\02DER1.SGM 02DER1 jbell on DSKJLSW7X2PROD with RULES Federal Register / Vol. 84, No. 231 / Monday, December 2, 2019 / Rules and Regulations provisions constitute a complete expungement for purposes of Section 205(d). One commenter indicated the clarification that the failure to destroy or seal records would not preclude them from being considered expunged is a positive modification that will allow greater flexibility for credit unions. One comment letter, however, recommended that all expungements be treated as complete expungements for purposes of Section 205(d), regardless of whether the conviction or program entry can subsequently be used for an evaluation of the person’s fitness or character. The same comment letter opposed the proposal’s clarification regarding state set-aside provisions, interpreting the proposed clarification as creating a new expansion of the Section 205(d) consent requirements to now cover individuals with set aside or reversed convictions where there was not a finding of wrongful conviction. The Board is adopting this aspect of the proposed guidance unchanged in the final Second Chance IRPS. It notes that its decision to add clarifying language regarding expunged convictions to the Second Chance IRPS is intended to promote transparency in the consent application process and, thereby, to streamline the process and give a measure of regulatory relief to covered individuals and insured credit unions seeking consent from the Board. While the Board acknowledges that making policy clarifications may actually result in a temporary spike in applications (due to an increased awareness of the Section 205(d) employment restrictions generally and/ or greater awareness of what constitutes a conviction of record specifically), the Board does not view the clarifying language regarding expunged convictions to represent an expansion of the Section 205(d) consent requirements to cover individuals with set aside or reversed convictions who were not previously covered under IRPS 08–1. Indeed, prior Board decisions on Section 205(d) consent requests have found that certain state set-aside provisions are not the equivalent of an expungement within the meaning of IRPS 08–1, as the conviction may still be revealed under certain circumstances.12 Thus, the clarifying language regarding expunged convictions does not represent a departure from the Board’s past policy in any regard. 12 See, e.g., BD–05–16, fn 7 (Dec. 20, 2016) (citing McCully v. Schwenn, 220 F. App’x 475 (9th Cir. 2007) (‘‘[Ariz. Rev. Stat.] section 13–907 . . . does not expunge or remove the fact of conviction in Arizona.’’)). VerDate Sep<11>2014 15:54 Nov 29, 2019 Jkt 250001 Further, the Board does not consider it appropriate to treat all expungements, set asides, reversed convictions, or other similar case dispositions as complete expungements for purposes of Section 205(d). State law varies and, in some jurisdictions, an expungement is not ‘‘complete’’ and is still subject to subsequent use. In the Board’s view, expungements that reflect the intent of the particular jurisdiction to completely purge a conviction or program entry from an individual’s background records supports an interpretation that, from a legal and policy perspective, the intent is to place the individual in the same position as if there were no conviction or program entry in the first place. However, an expunged criminal record that is still accessible to be used for subsequent purposes, including an evaluation of the person’s fitness or character, reflects the jurisdiction’s public policy that that record is still relevant and germane to certain subsequent inquiries. In considering whether an expungement is one that should fall outside the scope of Section 205(d), the Board’s key consideration is whether the respective jurisdiction, by statute or court order, intended for the conviction or program entry to be fully purged from the individual’s background. Preservation in a jurisdiction’s expungement statute or by court order of the ability to use the conviction or program entry for a subsequent purpose indicates the record has not been completely expunged. Under these circumstances, the Board’s interpretation is the conviction or program entry comes within the scope of Section 205(d). Again, however, the Board reiterates that covered individuals with expunged convictions or program entries still qualifying as convictions or record for purposes of Section 205(d) may still apply to the NCUA for the Board’s consent. C. Duty Imposed on Credit Unions Section 205(d) imposes a duty upon every federally insured credit union to make a reasonable inquiry regarding the history of every applicant for employment, including taking appropriate steps to avoid hiring or permitting the participation of convicted persons. Under the NCUA’s current policy, federally insured credit unions should, at a minimum, establish a screening process to obtain information about convictions and program entries from job applicants. However, the current policy is unclear as to what steps a credit union should or must take when it learns about a job applicant’s de minimis offense. Thus, the proposed Second Chance IRPS PO 00000 Frm 00007 Fmt 4700 Sfmt 4700 65913 clarified that when a credit union learns a prospective employee has a prior conviction or program entry for a de minimis offense, the credit union should document in its files that an application is not required because the covered offense is considered de minimis and meets the criteria for the exception. Comments on this aspect of the proposal were generally positive. A number of commenters, however, asked for reassurance that a credit union’s failure to maintain a record that an application is not necessary because the de minimis exception applies will not be subject to supervisory action. These commenters asked for clarification that the recordkeeping requirement is a suggested best practice, not a mandatory compliance obligation. In addition, one commenter noted that, irrespective of the guidance, each credit union retains the right to consider an applicant’s past crime(s) and maintains individual discretion in making hiring decisions. The Board emphasizes that while the source of the consent requirements stem from federal statute, namely Section 205(d), this final IRPS is supervisory guidance, not regulation. The NCUA, along with the other federal prudential regulators, in 2018 issued an interagency statement to reaffirm the role of supervisory guidance.13 The statement confirmed that, unlike a law or regulation, supervisory guidance does not have the force and effect of law, and the NCUA does not take enforcement actions based on supervisory guidance. Rather, supervisory guidance outlines the NCUA’s supervisory expectations or priorities and articulates the agency’s general views regarding appropriate practices for a given subject area. The Board wishes to underscore that documentation of an employee’s or applicant’s de minimis offense is a recommended practice that does not have the force and effect of law, and the NCUA will not take enforcement action based on this guidance. Nevertheless, the Board continues to believe it is helpful to both industry and supervisory staff to clarify the steps a credit union should take when it learns about an employee’s or applicant’s de minimis offense; as such, the Board is adopting this clarification in the final Second Chance IRPS. The Board encourages industry to offer second chances and to expand employment opportunities for former offenders seeking redemptive paths forward, but no insured credit union is under any obligation to hire or retain an 13 See FFIEC ‘‘Interagency Statement Clarifying the Role of Supervisory Guidance,’’ (Sept. 11, 2018). E:\FR\FM\02DER1.SGM 02DER1 jbell on DSKJLSW7X2PROD with RULES 65914 Federal Register / Vol. 84, No. 231 / Monday, December 2, 2019 / Rules and Regulations employee with a criminal background. Insured credit unions have discretion to establish their own internal employment policies and should make hiring decisions that best suit their own individual needs and risk tolerance. Conditional offers. The proposal provided for extensions of conditional offers of employment to prospective employees requiring the Board’s consent under Section 205(d). A credit union may extend a conditional offer of employment contingent on the completion of a satisfactory background check to determine if the applicant is barred by Section 205(d). If a conditional offer is extended, however, the job applicant may not commence work for or be employed by the credit union until the applicant is determined to not be barred under Section 205(d) or receives consent from the Board. One commenter was skeptical of the practical benefit of this provision, if the credit union does not have a reasonable expectation of the timing of the approval process. Thus, the commenter recommended the Board clarify in the final IRPS the general length of time necessary for the agency to process a consent application. One comment letter urged the Board to instruct credit unions to inquire into an applicant’s criminal background only after the conditional offer stage of the hiring process, to safeguard against credit unions unfairly discarding the applications of people with conviction histories. Alternatively, at a minimum, this comment letter urged that the Board clarify credit unions are not required to make criminal record inquiries on an initial job application and may adopt a policy to collect criminal background history only after the conditional offer stage (i.e., credit unions may adopt socalled ‘‘ban the box’’ policies). The Board is mindful that the Section 205(d) consent application process may impose inconveniences and uncertainties to covered individuals and credit unions, as both applicant and employer remain in indeterminate state during the process of seeking consent from the Board. While the industry’s desire for certainty as to the timing of the consent application process is understandable, the Board maintains it is impracticable to establish a timetable for action on consent applications because each individual application is fact specific and varies in complexity. However, past applications submitted to the Board have generally been adjudicated within 60 days from receipt, and, in most cases, the processing time was significantly less. The Board remains committed to streamlining the application process and endeavors to VerDate Sep<11>2014 15:54 Nov 29, 2019 Jkt 250001 decide on consent applications as quickly as possible. The Board anticipates that its decision to delegate responsibility for reviewing certain applications, discussed in more detail below, will further speed up the application process and reduce burdens on credit unions and applicants. The Board also reiterates that insured credit unions are responsible for establishing their own internal employment policies and have discretion to make hiring decisions in their best judgment. The proposal’s provision for extensions of conditional offers of employment to prospective employees requiring the Board’s consent under Section 205(d) was intended to reduce burdens in the hiring and consent application process; accordingly, the Board is adopting this provision in the final Second Chance IRPS. An insured credit union choosing to adopt a policy to extend conditional offers may establish its own procedures to make criminal record inquiries at any stage of its choosing in its hiring process, so long as applicants do not commence work for or be employed by the credit union until the applicant is determined to not be barred under Section 205(d) or receives consent from the Board. D. Procedures for Requesting the Board’s Consent Under Section 205(d) Application types. The proposed Second Chance IRPS did not modify the current procedures for requesting the Board’s consent under Section 205(d). However, the proposal added language to clarify the distinction between a credit union-sponsored application filed by the institution on behalf of a covered individual and an individual application filed on a covered person’s own behalf. Generally, an application must be filed by an insured credit union on behalf of a person (credit unionsponsored application) unless the Board, for substantial good cause, grants a waiver of that requirement and allows the person to file an application in their own right (individual application). In most cases, a credit union-sponsored application is for a particular person, in a particular job, at a particular credit union. On the other hand, an individual application is typically requesting a blanket waiver for the applicant to be employed or participate in the conduct of the affairs of any insured credit union. The Section 205(d) application form was also revised to more clearly distinguish between the two types of applications and the supporting information required for each. One comment letter urged the Board to go further than the proposal to PO 00000 Frm 00008 Fmt 4700 Sfmt 4700 expressly encourage individuals to directly file applications in their own right, rather than requiring that a credit union sponsor the application. This letter noted that while the FDIC’s Statement of Policy (SOP) on Section 19 contains similar ‘‘substantial good cause’’ language, in practice the FDIC routinely accepts individual applications and the vast majority of applications it processes are not sponsored by a financial institution. The Board notes that both credit union-sponsored applications and individual applications were permitted under IRPS 08–1 and both options will continue to be available under this final IRPS. While historically consent applications submitted to the NCUA are more typically credit union-sponsored, individuals are not precluded from filing an application in their own right if there is substantial good cause. In the Board’s view, highlighting the distinction between individual applications and credit union-sponsored applications in the final Second Chance IRPS may help encourage more individuals to apply for consent without sponsorship by a credit union. The NCUA also intends to publish in the near term an informational brochure to further educate the public about the Section 205(d) process and will highlight the two different application options. Regional office for application submission. Additionally, the proposed IRPS clarified that the appropriate regional office for submission of a credit union-sponsored application is the program office that oversees the credit union (i.e., the program office covering the state where the credit union’s home office is located, or the Office of National Examinations and Supervision), and the appropriate regional office for an individual application and waiver of the credit union-sponsored filing requirement is the program office covering the state where the person resides. One comment letter urged the NCUA to consider creating a central office to accept and review Section 205(d) consent applications and to be a resource to credit unions seeking to verify that covered individuals have received the Board’s consent to work. The comment letter further suggested that this centralized office could be delegated the responsibility to only forward applications for Board review that significantly merit additional scrutiny. Historically, the Board has received less than ten Section 205(d) consent applications on an annual basis. Given this relatively low volume, it is E:\FR\FM\02DER1.SGM 02DER1 jbell on DSKJLSW7X2PROD with RULES Federal Register / Vol. 84, No. 231 / Monday, December 2, 2019 / Rules and Regulations unnecessary to establish a centralized office to process consent applications. The Board continues to maintain that the appropriate office for submission of a credit union-sponsored application is the program office that oversees the credit union, and the appropriate office for an individual application and waiver of the credit union-sponsored filing requirement is the program office covering the state where the person resides. Accordingly, the Board adopts these clarifications in the final IRPS. Delegation of authority. The proposal requested public comment on whether delegating responsibility for reviewing certain applications could further streamline the application process and reduce burdens on credit unions and applicants. One commenter was strongly supportive of delegating authority to regional directors to consider 205(d) consent applications, noting that such delegation will likely ensure a more timely response given the region’s greater understanding of any relevant local factors or information that may be pertinent to the decision. The same commenter, however, recommended the Board establish a reasonable timeframe for the region’s response so that applications are processed expeditiously. One comment letter agreed that delegating responsibility for reviewing certain applications would help streamline the process, but suggested responsibility should be delegated to a central office specifically created to accept and review Section 205(d) applications. A different commenter was not opposed to delegating the review of certain applications, but expressed concern that delegation to third-party entities could compromise sensitive credit union information. This commenter urged the agency to institute proper data security protocols, and requested additional information on the process of delegation, including efforts the NCUA will take to protect sensitive credit union and individual applicant data. Upon review and careful consideration of the public comments, the Board has determined that in order to further streamline the application process it will delegate authority to program offices to process, review, and act upon credit union-sponsored consent applications. But the Board will retain authority to decide on individual applications, which tend to be more complex and fact-specific. Individual applications also require the Board’s waiver of the institution filing requirement for substantial good cause and, typically, request a blanket waiver for the applicant to be employed or VerDate Sep<11>2014 15:54 Nov 29, 2019 Jkt 250001 participate in the conduct of the affairs of any insured credit union. These factors support the Board’s retention of its authority to consider individual applications for Section 205(d) consent. However, in delegating responsibility for reviewing credit union-sponsored applications, the Board wishes to assure stakeholders that the NCUA will make all reasonable efforts to duly secure all sensitive information it receives in connection with any consent application. Toward that end, the NCUA has conducted a Privacy Impact Assessment (PIA) on the Second Chance IRPS. Sensitive personally identifiable information (PII) is encrypted if shared intra-agency and data is stored on secured drives with restricted access. The Board does not anticipate that PII will generally be shared outside the agency, however, the NCUA’s Office of Continuity and Security Management may conduct criminal background checks that may require contacting a federal, state, or local agency which maintains civil, criminal or other relevant enforcement information or other pertinent information relevant to the Board’s decision on a Section 205(d) consent request. E. Application Form The proposed Second Chance IRPS also revised and updated the application form that is required to be used to submit a Section 205(d) consent request, ‘‘Application to Request Consent Pursuant to Section 205(d),’’ to reflect the proposed changes and to conform to current regulatory requirements. The Section 205(d) application form was also modified to more clearly delineate between the two types of applications (credit unionsponsored versus individual) and the supporting documentation required for each. Stakeholders who commented on this aspect of the proposal were generally supportive of the proposed edits to the Section 205(d) application form. One commenter, however, noted some credit unions have found the current information requested to be lengthy and onerous to both the credit union and the covered individual, particularly in cases where background information is difficult to obtain from old criminal record systems. Another commenter urged the Board to go further in more expressly encouraging covered individuals to submit individual applications. Upon review of the comments, the Board is adopting the improvements to the Section 205(d) application form in the final Second Chance IRPS. The revised application form will more PO 00000 Frm 00009 Fmt 4700 Sfmt 4700 65915 clearly delineate between the two application options, which will make it more user friendly and may encourage more applicants to file individual applications for blanket waivers. While the Board recognizes it may be difficult to obtain older records pertaining to offenses that occurred long ago, it remains incumbent on the applicant to provide pertinent documentation to support the application in order for the NCUA to properly evaluate the merits of the consent request. The purpose of an application is to provide the applicant an opportunity to demonstrate that, notwithstanding the statutory employment restrictions under Section 205(d), the individual is fit to participate in the conduct of the affairs of an insured credit union without posing undue risks to its safety and soundness or impairing public confidence in the insured credit union. The Board maintains that the information requested on the application form is the minimum amount necessary for the agency to gain an understanding of the circumstances surrounding the conviction or program entry and to evaluate all the relevant factors and criteria the NCUA will consider in determining whether to grant consent. Finally, the Board reiterates that the burden remains upon the applicant to establish that the application warrants approval. IV. Regulatory Procedures A. Regulatory Flexibility Act The Regulatory Flexibility Act (RFA) generally requires the NCUA to prepare an analysis of any significant economic impact a regulation may have on a substantial number of small entities (those with less than $100 million in assets).14 This final IRPS will provide regulatory relief by decreasing the number of covered offenses that will require an application to the Board. Accordingly, the NCUA certifies that final IRPS 19–1 will not have a significant economic impact on a substantial number of small credit unions. B. Paperwork Reduction Act The Paperwork Reduction Act of 1995 (PRA), 44 U.S.C. 3501 et seq., requires that the Office of Management and Budget (OMB) approve all collections of information by a federal agency from the public before they can be implemented. Respondents are not required to respond to any collection of information unless it displays a valid OMB control number. 14 5 U.S.C. 603(a). E:\FR\FM\02DER1.SGM 02DER1 65916 Federal Register / Vol. 84, No. 231 / Monday, December 2, 2019 / Rules and Regulations In accordance with the PRA, the information collection requirements included in this final IRPS has been submitted to OMB for approval under control number 3133–0203. By the National Credit Union Administration Board, on November 21, 2019. Gerard Poliquin, Secretary of the Board. C. Executive Order 13132 Executive Order 13132 encourages independent regulatory agencies to consider the impact of their actions on state and local interests.15 The NCUA, an independent regulatory agency, as defined in 44 U.S.C. 3502(5), voluntarily complies with the executive order to adhere to fundamental federalism principles. The final IRPS does not have a substantial direct effect on the states, on the relationship between the national government and the states, or on the distribution of power and responsibilities among the various levels of government. As such, the NCUA has determined that this IRPS does not constitute a policy that has federalism implications for purposes of the executive order. Note: The following text will not appear in the Code of Federal Regulations. jbell on DSKJLSW7X2PROD with RULES D. Assessment of Federal Regulations and Policies on Families The NCUA has determined that this final IRPS will not affect family wellbeing within the meaning of Section 654 of the Treasury and General Government Appropriations Act, 1999, Public Law 105–277, 112 Stat. 2681 (1998). E. Small Business Regulatory Enforcement Fairness Act The Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA) 16 generally provides for congressional review of agency rules. A reporting requirement is triggered in instances where the NCUA issues a final rule as defined by section 551 of the Administrative Procedure Act.17 An agency rule, in addition to being subject to congressional oversight, may also be subject to a delayed effective date if the rule is a ‘‘major rule.’’ The NCUA does not believe this final IRPS is a ‘‘major rule’’ within the meaning of the relevant sections of SBREFA. As required by SBREFA, the NCUA submitted this final IRPS to OMB for it to determine if the final IRPS is a ‘‘major rule’’ for purposes of SBREFA. The OMB determined that the final IRPS is not major. The NCUA also will file appropriate reports with Congress and the Government Accountability Office so this rule may be reviewed. Authority: 12 U.S.C. 1752a, 1756, 1766, 1785. 15 64 FR 43255 (Aug. 4, 1999). Law 104–121. 17 5 U.S.C. 551. 16 Public VerDate Sep<11>2014 15:54 Nov 29, 2019 Jkt 250001 Interpretive Ruling and Policy Statement 19–1; Exceptions to Employment Restrictions Under Section 205(d) of the Federal Credit Union Act (‘‘Second Chance IRPS’’) I. Background This Interpretive Ruling and Policy Statement (IRPS) provides requirements, direction, and guidance to federally insured credit unions (insured credit unions) and individuals regarding the prohibition imposed by operation of law by Section 205(d) of the Federal Credit Union Act (FCU Act), 12 U.S.C. 1785(d). Section 205(d)(1) provides that, except with the prior written consent of the National Credit Union Administration Board (Board), a person who has been convicted of any criminal offense involving dishonesty or breach of trust, or has agreed to enter into a pretrial diversion or similar program in connection with a prosecution for such offense may not: • Become, or continue as, an institution-affiliated party with respect to any insured credit union; or • Otherwise participate, directly or indirectly, in the conduct of the affairs of any insured credit union. Section 205(d)(1)(B) further provides that an insured credit union may not allow any person described above to engage in any conduct or to continue any relationship prohibited by Section 205(d). The statute imposes a ten-year ban against the Board granting consent for a person convicted of certain crimes enumerated in Title 18 of the United States Code. In order for the Board to grant consent during the ten-year period, the Board must file a motion with, and obtain the approval of, the sentencing court. Finally, Section 205(d)(3) states that ‘‘whoever knowingly violates’’ (d)(1)(A) or (d)(1)(B) is committing a felony, punishable by up to five years in jail and a fine of up to $1,000,000 a day. This IRPS provides guidance to credit unions and individuals regarding who is subject to the prohibition provision of Section 205(d). The IRPS defines what offenses come within the prohibition provision of Section 205(d) and thus require an application for the Board’s consent to participate in the affairs of an insured credit union. The IRPS also identifies certain offenses that will be excluded from Section 205(d) and do PO 00000 Frm 00010 Fmt 4700 Sfmt 4700 not require the Board’s consent. In order to assist those who may need the consent of the Board to participate in the affairs of an insured credit union, the IRPS explains the procedures to request such consent, specifies the application form that must be used, clarifies the duty imposed on credit unions by Section 205(d), and identifies the factors the Board will consider in deciding whether to provide such consent. Finally, the IRPS explains how an applicant may appeal a decision by the Board denying an application for its consent. This IRPS supersedes and replaces former IRPS 08–1.18 II. Policies and Procedures Regarding Prohibitions Imposed by Section 205(d) A. Scope of Section 205(d) of the FCU Act 1. Persons Covered by Section 205(D) Section 205(d) of the FCU Act applies to institution-affiliated parties, as defined by Section 206(r) of the FCU Act, 12 U.S.C. 1786(r), and others who are participants in the conduct of the affairs of a federally insured credit union. This IRPS applies only to insured credit unions, their institutionaffiliated parties, and those participating in the affairs of an insured credit union. Institution-affiliated parties. Institution-affiliated parties include any committee member, director, officer, or employee of, or agent for, and insured credit union; any consultant, joint venture partner, and any other person as determined by the Board (by regulation or on a case-by-case basis) who participates in the conduct of the affairs of an insured credit union; or any independent contractor (including any attorney, appraiser, or accountant). Therefore, all officials, committee members and employees of an insured credit union fall within the scope of Section 205(d) of the FCU Act. Additionally, anyone the NCUA determines to be a de facto employee, applying generally applicable standards of employment law, will also be subject to Section 205(d). Typically, an independent contractor does not have a relationship with the insured credit union other than the activity for which the insured credit union has contracted. As a general rule, an independent contractor who influences or controls the management or affairs of an insured credit union, is covered by Section 205(d). In addition, a ‘‘person’’ for purposes of Section 205(d) means an individual, and does not include a corporation, firm or other business entity. 18 73 E:\FR\FM\02DER1.SGM FR 48399 (Aug. 19, 2008). 02DER1 Federal Register / Vol. 84, No. 231 / Monday, December 2, 2019 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES Participants in the affairs of an insured credit union. A person who does not meet the definition of institution-affiliated party is nevertheless prohibited by Section 205(d) if he or she is considered to be participating, directly or indirectly, in the conduct of the affairs of an insured credit union. Whether persons who are not institution-affiliated parties are covered depends upon their degree of influence or control over the management or affairs of an insured institution. Those who exercise major policymaking functions of an insured institution are deemed participants in the affairs of that institution and covered by Section 205(d). Participants in the affairs of a credit union is a term of art and is not capable of more precise definition. The NCUA does not define what constitutes participation in the conduct of the affairs of an insured credit union but will analyze each individual’s conduct on a case-by-case basis and make a determination. Agency and court decisions will provide the guide as to what standards will be applied. As a general proposition, however, participation will depend upon the degree of influence or control over the management or affairs of the insured credit union. Those who exercise major policymaking functions at an insured credit union fall within this category. 2. Offenses Covered by Section 205(D) Except as indicated in subsection 3, below, an application requesting the consent of the Board under Section 205(d) is required where any adult, or minor treated as an adult, has received a conviction by a court of competent jurisdiction for any criminal offense involving dishonesty or breach of trust (a covered offense), or where such person has entered a pretrial diversion or similar program regarding a covered offense. Before an application is considered by the Board, 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, and the case must be considered final by the procedures of the applicable jurisdiction. The following definitions apply: Conviction. There must be a conviction of record. Section 205(d) does not apply to arrests, pending cases not brought to trial, acquittals, or any conviction which has been reversed on appeal. A conviction with regard to which an appeal is pending will require VerDate Sep<11>2014 15:54 Nov 29, 2019 Jkt 250001 an application until or unless reversed. A conviction for which a pardon has been granted will require an application. Pretrial diversion or similar program. A pretrial diversion program, whether formal or informal, is characterized by a suspension or eventual dismissal of charges or criminal prosecution upon agreement by the accused to treatment, rehabilitation, restitution, or other noncriminal or non-punitive alternatives. Whether a program constitutes a pretrial diversion is determined by relevant federal, state or local law, and, if not so designated under applicable law then the determination ow whether it is a pretrial diversion or similar program will be made by the Board on a case-bycase basis. Dishonesty or breach of trust. The conviction or entry into a pretrial diversion program must have been for a criminal offense involving dishonesty or breach of trust. ‘‘Dishonesty’’ means directly or indirectly to cheat or defraud; to cheat or defraud for monetary gain or its equivalent; or wrongfully to take property belonging to another in violation of any criminal statute. Dishonesty includes acts involving want of integrity, lack of probity, or a disposition to distort, cheat, or act deceitfully or fraudulently, and may include crimes which federal, state or local laws define as dishonest. ‘‘Breach of trust’’ means a wrongful act, use, misappropriation or omission with respect to any property or fund which 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. Whether a crime involves dishonesty or breach of trust will be determined from the statutory elements of the crime itself. All convictions or pretrial diversion program entries for offenses concerning the illegal manufacture, sale, distribution of or trafficking in controlled substances require an application for the Board’s consent under Section 205(d) unless they fall within the provisions for the de minimis offenses set out below. 3. Offenses Not Covered by Section 205(D) De minimis offenses. In general. Approval is automatically granted and an application for the Board’s consent under Section 205(d) will not be required where the covered offense is considered de minimis, because it meets all of the following criteria: PO 00000 Frm 00011 Fmt 4700 Sfmt 4700 65917 • There is only one conviction or entry into a pretrial diversion program of record for a covered offense; • The offense was punishable by imprisonment for a term of one year or less and/or a fine of $2,500 or less, and the individual served three (3) days or less of jail time. The Board considers jail time to include any significant restraint on an individual’s freedom of movement which includes, as part of the restriction, confinement to a specific facility or building on a continuous basis where the person may leave temporarily only to perform specific functions or during specified time periods or both. However, this definition is not intended to include those on probation or parole who may be restricted to a particular jurisdiction, or who must report occasionally to an individual or to a specified location; • The conviction or pretrial diversion program was entered at least five years prior to the date an application would otherwise be required; • The offense did not involve a depository institution or credit union; and • The Board or any other federal financial institution regulatory agency has not previously denied consent under Section 205(d) of the FCU Act or Section 19 of the FDIA, respectively, for the same conviction or participation in a pretrial diversion program. Additional applications of the de minimis offenses exception to filing. Age at time of covered offense. If the actions that resulted in a covered conviction or pretrial diversion program entry of record all occur when the individual was 21 years of age or younger, then the subsequent conviction or program entry, that otherwise meets the general de minimis criteria above will be considered de minimis 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. Convictions or program entries for insufficient funds checks. Convictions or pretrial diversion program entries of record based on the writing of ‘‘bad’’ or insufficient funds check(s) will be considered a de minimis offense and will not be considered as having involved a depository institution or credit union if the all of the following applies: • Other than for ‘‘bad’’ or insufficient funds check(s), there is no other conviction or pretrial diversion program entry subject to Section 205(d) and the aggregate total face value of all ‘‘bad’’ or insufficient funds check(s) cited across all the conviction(s) or program entry or E:\FR\FM\02DER1.SGM 02DER1 jbell on DSKJLSW7X2PROD with RULES 65918 Federal Register / Vol. 84, No. 231 / Monday, December 2, 2019 / Rules and Regulations entries for bad or insufficient checks is $1,000 or less and; • No depository institution or credit union was a payee on any of the ‘‘bad’’ or insufficient funds checks that were the basis of the conviction(s) or program entry or entries. Convictions or program entries for small-dollar, simple theft. A conviction or pretrial diversion program entry based on a simple theft of goods, services and/or currency (or other monetary instrument) where the aggregate value of the currency, goods, and/or services taken was $500 or less at the time of conviction or program entry, where the person has no other conviction or program entry described in Section 205(d), and where it has been five years since the conviction or program entry (or 30 months in the case of a person 21 years or younger at the time of the conviction or program entry) and which does not involve a depository institution or credit union is considered de minimis. Simple theft excludes burglary, forgery, robbery, identity theft, and fraud. Convictions or program entries for the use of a fake, false, or altered identification card. The use of a fake, false, or altered identification card used by a person under the legal age for the purpose of obtaining or purchasing alcohol, or used for the purpose of entering a premises where alcohol is served but for which age appropriate identification is required, provided that there is no other conviction or pretrial diversion program entry for the covered offense, will be considered de minimis. Convictions or program entries for simple misdemeanor drug possession. A conviction or pretrial diversion program entry based on simple drug possession or illegal possession of a controlled substance where the offense was classified as a misdemeanor at the time of conviction or program entry, where the person has no other conviction or program entry described in Section 205(d), and where it has been five years since the conviction or program entry (or 30 months in the case of a person 21 years or younger at the time of the conviction or program entry) and which does not involve the illegal distribution (including an intent to distribute), sale, trafficking, or manufacture of a controlled substance or other related offense is considered de minimis. Simple possession excludes intent to distribute, illegal distribution, illegal sale or trafficking of a controlled substance, or illegal manufacture of a controlled substance. Any person who meets all of the foregoing de minimis criteria must be covered by a fidelity bond to the same VerDate Sep<11>2014 15:54 Nov 29, 2019 Jkt 250001 extent as other employees in similar positions. An insured credit union may not allow any person to participate in its affairs, even if that person has a conviction for what would constitute a de minimis covered offense, if the person cannot obtain required fidelity bond coverage. Any person who meets all the foregoing criteria for a de minimis offense must disclose the presence of the conviction or pretrial diversion program entry to all insured credit unions or other insured institutions in the affairs of which he or she intends to participate. Further, no conviction or pretrial diversion program entry for a violation of the Title 18 sections set out in 12 U.S.C. 1785(d)(2) can qualify under any of the de minimis exceptions to filing set out above. Youthful offender adjudgments. An adjudgment by a court against a person as a ‘‘youthful offender’’ under any youth offender law, or any adjudgment as a ‘‘juvenile delinquent’’ by any court having jurisdiction over minors as defined by state law does not require an application for the Board’s consent. Such adjudications are not considered convictions for criminal offenses. Such adjudications do no constitute a matter covered under Section 205(d) and is not an offense or program entry for determining the applicability of the de minimis offenses exception to the filing of an application. Expunged convictions. A conviction that has been completely expunged is not considered a conviction of record and will not require an application for the Board’s consent under Section 205(d). If an order of expungement has been issued in regard to a conviction or pretrial diversion program entry and is intended by the language in the order itself, or in the legislative provisions under which the order was issued, to be a complete expungement, then the jurisdiction, either in the order or the underlying legislative provisions, cannot allow the conviction or program entry to be used for any subsequent purpose including, but not limited to, an evaluation of a person’s fitness or character. The failure to destroy or seal the records will not prevent the expungement from being considered complete for the purposes of Section 205(d) in such a case. Expungements of pretrial diversion or similar program entries will be treated the same as those for convictions. Convictions that are set aside or reversed after the applicant has competed sentencing will be treated consistent with pretrial diversions or similar programs unless the court records reflect that the underlying PO 00000 Frm 00012 Fmt 4700 Sfmt 4700 conviction was set aside based on a finding on the merits that such conviction was wrongful. B. Duty Imposed on Credit Unions Insured credit unions are responsible for establishing their own internal employment policies and have discretion to make hiring decisions, consistent with applicable law, that best suit their own individual needs and risk tolerance. However, Section 205(d) imposes a duty upon every insured credit union to make a reasonable inquiry regarding the history of every applicant for employment. The NCUA maintains that inquiry should consist of taking steps appropriate under the circumstances, consistent with applicable law, to avoid hiring or permitting participation in its affairs by a person who has a conviction or entry into a pretrial diversion program for a covered offense. At a minimum, each insured credit union should establish a screening process which provides the insured credit union with information concerning any convictions or pretrial diversion programs pertaining to a job applicant. This includes, for example, the completion of a written employment application which requires a listing of all convictions and pretrial diversion program entries.19 When the credit union learns that a prospective employee has a prior conviction or entered into a pretrial diversion program for a covered offense, the credit union should document in its files that an application is not required because the covered offense is considered de minimis and meets all of the criteria for the exception, or submit an application requesting the Board’s consent under Section 205(d) prior to hiring the person or otherwise permitting him or her to participate in its affairs. In the alternative, for the purposes of Section 205(d), a credit union may extend a conditional offer of employment contingent on the completion of a background check satisfactory to the credit union and to determine if the applicant is barred by Section 205(d). In such a case, the job applicant may not commence work for or be employed by the credit union until such time that the applicant is determined to not be barred under Section 205(d). If an insured credit union discovers that an employee, official, or anyone 19 Consistent with applicable law, an insured credit union may establish its own procedures to make conviction history inquiries at any stage of its choosing in its hiring process, so long as applicants do not commence work for or be employed by the credit union until the applicant is determined to not be barred under Section 205(d) or receives consent from the Board. E:\FR\FM\02DER1.SGM 02DER1 Federal Register / Vol. 84, No. 231 / Monday, December 2, 2019 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES else who is an institution-affiliated party or who participates, directly or indirectly, in its affairs, is in violation of Section 205(d), the credit union must immediately place that person on a temporary leave of absence from the credit union and file an application seeking the Board’s consent under Section 205(d). The person must remain on such temporary leave of absence until such time as the Board has acted on the application. When the NCUA learns that an institution-affiliated party or a person participating in the affairs of an insured credit union should have received the Board’s consent under Section 205(d) but did not, the NCUA will look at the circumstances of each situation to determine whether the inquiry made by the credit union was reasonable under the circumstances. C. Procedures for Requesting the NCUA Board’s Consent Under Section 205(d) Section 205(d) of the FCU Act serves, by operation of law, as a statutory bar to participation in the affairs of an insured credit union, absent the written consent of the Board. When an application for the Board’s consent under Section 205(d) is required, the insured credit union must file a written application using the attached form with the appropriate NCUA regional office. The purpose of an application is to provide the applicant an opportunity to demonstrate that, notwithstanding the bar, the person is fit to participate in the conduct of the affairs of an insured credit union without posing a risk to its safety and soundness or impairing public confidence in that institution. Such an application should thoroughly explain the circumstances surrounding the conviction or pretrial diversion program. The applicant may also address the relevant factors and criteria the Board will consider in determining whether to grant consent, specified below. The burden is upon the applicant to establish that the application warrants approval. The application must be filed by an insured credit union on behalf of a person (credit union-sponsored application) unless the Board grants a waiver of that requirement and allows the person to file an application in their own right (individual application). Such waivers will be considered on a case-bycase basis where substantial good cause for granting a waiver is shown. The appropriate regional office for a credit union-sponsored application is the program office that oversees the credit union (i.e., the program office covering the state where the credit union’s home office is located, or the Office of National Examinations and VerDate Sep<11>2014 15:54 Nov 29, 2019 Jkt 250001 Supervision). The appropriate regional office for an individual filing for waiver of the credit union-sponsored filing requirement is the program office covering the state where the person resides. When an application is not required because the covered offense is considered de minimis, the credit union should document in its files and be prepared to demonstrate that the covered offense meets the de minimis criteria enumerated above. D. Evaluation of Section 205(d) Applications The essential criteria in assessing an application for consent under Section 205(d) are whether the person has demonstrated his or her fitness to participate in the conduct of the affairs of an insured credit union, and whether the employment, affiliation, or participation by the person in the conduct of the affairs of the insured credit union may constitute a threat to the safety and soundness of the institution or the interests of its members or threaten to impair public confidence in the insured credit union. In evaluating an application, the Board will consider: 1. The conviction or pretrial diversion program entry and the specific nature and circumstances of the covered offense; 2. Evidence of rehabilitation, including the person’s reputation since the conviction or pretrial diversion program entry, the person’s age at the time of conviction or program entry, and the time which has elapsed since the conviction or program entry; 3. Whether participation, directly or indirectly, by the person in any manner in the conduct of the affairs of the insured credit union constitutes a threat to the safety or soundness of the insured credit union or the interest of its members, or threatens to impair public confidence in the insured credit union; 4. The position to be held or the level of participation by the person at the insured credit union; 5. The amount of influence and control the person will be able to exercise over the management or affairs of the insured credit union; 6. The ability of management of the insured credit union to supervise and control the person’s activities; 7. The applicability of the insured institution’s fidelity bond coverage to the person; 8. For state-chartered, federally insured credit unions, the opinion or position of the state regulator; and 9. Any additional factors in the specific case that appear relevant. PO 00000 Frm 00013 Fmt 4700 Sfmt 4700 65919 The foregoing criteria will also be applied by the Board to determine whether the interests of justice are served in seeking an exception in the appropriate court when an application is made to terminate the ten-year ban for certain enumerated offenses in violation of Title 18 of the United States Code prior to its expiration date. The NCUA believes such requests will be extremely rare and will be made only upon a showing of compelling reasons. Some applications can be approved without an extensive review because the person will not be in a position to present any substantial risk to the safety and soundness of the insured credit union. Persons who will occupy clerical, maintenance, service or purely administrative positions generally fall into this category. A more detailed analysis will be performed in the case of persons who will be in a position to influence or control the management or affairs of the insured credit union. Approval by the Board will be subject to the condition that the person shall be covered by a fidelity bond to the same extent as others in similar positions. In cases in which the Board has granted a waiver of the credit unionsponsored filing requirement to allow a person to file an application in their own right, approval of the application will be conditioned upon that person disclosing the presence of the conviction(s) or program entry or entries to all insured credit unions or insured depository institutions in the affairs of which he or she wishes to participate. When deemed appropriate, credit union-sponsored applications are to allow the person to work in a specific job at a specific credit union and may also be subject to the condition that the prior consent of the Board will be required for any proposed significant changes in the person’s duties and/or responsibilities. Such proposed changes may, in the discretion of the appropriate Regional Director, require a new application for the Board’s consent. When approval has been granted for a person to participate in the affairs of a particular insured credit union and subsequently that person seeks to participate in the affairs of another insured credit union, approval does not automatically follow. In such cases, another application must be submitted. Moreover, any person who has received consent from the Board under Section 205(d) and subsequently wishes to become an institution-affiliated party or participate in the affairs of an FDICinsured institution, he or she must obtain the prior approval of the FDIC pursuant to Section 19 of the FDIA. E:\FR\FM\02DER1.SGM 02DER1 Federal Register / Vol. 84, No. 231 / Monday, December 2, 2019 / Rules and Regulations E. Right To Request a Hearing Following the Denial of an Application Under Section 205(d) jbell on DSKJLSW7X2PROD with RULES If a consent application is denied under Section 205(d), the insured credit VerDate Sep<11>2014 15:54 Nov 29, 2019 Jkt 250001 union (or, in the case where a goodcause waiver has been granted, the individual that submitted the application) may request a hearing by submitting a written request within 30 days following the date of notification of PO 00000 Frm 00014 Fmt 4700 Sfmt 4725 the denial. The Board will apply the process contained in regulations governing prohibitions based on felony convictions, found at 12 CFR part 747, to any request for a hearing. BILLING CODE 7535–01–P E:\FR\FM\02DER1.SGM 02DER1 ER02DE19.000</GPH> 65920 VerDate Sep<11>2014 15:54 Nov 29, 2019 Jkt 250001 PO 00000 Frm 00015 Fmt 4700 Sfmt 4725 E:\FR\FM\02DER1.SGM 02DER1 65921 ER02DE19.001</GPH> jbell on DSKJLSW7X2PROD with RULES Federal Register / Vol. 84, No. 231 / Monday, December 2, 2019 / Rules and Regulations VerDate Sep<11>2014 Federal Register / Vol. 84, No. 231 / Monday, December 2, 2019 / Rules and Regulations 15:54 Nov 29, 2019 Jkt 250001 PO 00000 Frm 00016 Fmt 4700 Sfmt 4725 E:\FR\FM\02DER1.SGM 02DER1 ER02DE19.002</GPH> jbell on DSKJLSW7X2PROD with RULES 65922 65923 [FR Doc. 2019–25699 Filed 11–29–19; 8:45 am] BILLING CODE 7535–01–C VerDate Sep<11>2014 15:54 Nov 29, 2019 Jkt 250001 PO 00000 Frm 00017 Fmt 4700 Sfmt 9990 E:\FR\FM\02DER1.SGM 02DER1 ER02DE19.003</GPH> jbell on DSKJLSW7X2PROD with RULES Federal Register / Vol. 84, No. 231 / Monday, December 2, 2019 / Rules and Regulations

Agencies

[Federal Register Volume 84, Number 231 (Monday, December 2, 2019)]
[Rules and Regulations]
[Pages 65907-65923]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-25699]



========================================================================
Rules and Regulations
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains regulatory documents 
having general applicability and legal effect, most of which are keyed 
to and codified in the Code of Federal Regulations, which is published 
under 50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold by the Superintendent of Documents. 

========================================================================


Federal Register / Vol. 84, No. 231 / Monday, December 2, 2019 / 
Rules and Regulations

[[Page 65907]]



NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Chapter VII

RIN 3133-AF02


Exceptions to Employment Restrictions Under Section 205(d) of the 
Federal Credit Union Act (``Second Chance IRPS'')

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final interpretive ruling and policy statement 19-1.

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SUMMARY: The NCUA Board (Board) is updating and revising its 
Interpretive Ruling and Policy Statement (IRPS) regarding statutory 
prohibitions imposed by Section 205(d) of the Federal Credit Union Act 
(FCU Act). Section 205(d) prohibits, except with the prior written 
consent of the Board, any 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 in the affairs of an 
insured credit union. The Board is rescinding current IRPS 08-1 and 
issuing a revised and updated IRPS to reduce regulatory burden. The 
Board is amending and expanding the current de minimis exception to 
reduce the scope and number of offenses that will require an 
application to the Board. Specifically, the final IRPS will not require 
an application for convictions involving insufficient funds checks of 
aggregate moderate value, small dollar simple theft, false 
identification, simple drug possession, and isolated minor offenses 
committed by covered persons as young adults.

DATES: The final IRPS takes effect January 2, 2020.

FOR FURTHER INFORMATION CONTACT: Pamela Yu, Special Counsel to the 
General Counsel, Office of General Counsel, at the above address or 
telephone (703) 518-6540.

SUPPLEMENTARY INFORMATION:

I. Introduction

    The Board recognizes that many Americans face hiring barriers due 
to a criminal record, a great number of which are not violent or career 
criminals, but rather people who made poor choices early in life who 
have since paid their debt to society. Offering second chances to those 
who are truly penitent is consistent with our nation's shared values of 
forgiveness and redemption. In keeping with this spirit of clemency, 
the Board endeavors to expand career opportunities for those who have 
demonstrated remorse and responsibility for past indiscretions and wish 
to set on a path to productive living. Toward that end, the Board is 
revising its guidance regarding prohibitions imposed by Section 205(d) 
of the FCU Act.
    Section 205(d) of the FCU Act prohibits, without the prior written 
consent of the Board, a person 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 becoming or continuing as an institution-
affiliated party, or otherwise participating, directly or indirectly, 
in the conduct of the affairs of an insured credit union.\1\ In August 
2008, the Board issued final IRPS 08-1, 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.\2\
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    \1\ 12 U.S.C. 1785(d)(1).
    \2\ 73 FR 48399 (Aug. 19, 2008).
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    The IRPS has not been revised since 2008 and, based on its 
experience with the IRPS over the past decade, the Board is updating 
and revising the guidance to reduce regulatory burden while protecting 
federally insured credit unions from risk by convicted persons.

II. Background

    Under Section 205(d)(1) of the FCU Act, except with the prior 
written consent of the Board, a person who has been convicted of any 
criminal offense involving dishonesty or breach of trust, or has agreed 
to enter into a pretrial diversion or similar program in connection 
with a prosecution for such offense may not:
     Become, or continue as, an institution-affiliated party 
with respect to any insured credit union; or
     Otherwise participate, directly or indirectly, in the 
conduct of the affairs of any insured credit union.
    Section 205(d)(1)(B) further provides that an insured credit union 
may not allow any person described above to participate in the affairs 
of the credit union without Board consent. Section 205(d)(2) imposes a 
ten-year ban against the Board's consent for a person convicted of 
certain crimes enumerated in Title 18 of the United States Code, absent 
a motion by the Board and approval by the sentencing court. Finally, 
Section 205(d)(3) states that ``whoever knowingly violates'' (d)(1)(A) 
or (d)(1)(B) commits a felony, punishable by up to five years in jail 
and a fine of up to $1,000,000 a day.
    Recognizing that certain offenses are so minor and occurred so far 
in the past so as to not currently present a substantial risk to the 
insured credit union, IRPS 08-1 excludes certain de minimis offenses 
from the need to obtain consent from the Board. However, several recent 
applications requesting the Board's consent pursuant to Section 205(d) 
involved fairly minor, low-risk, erstwhile, and isolated offenses that 
did not fall within the current de minimis exception.\3\ In light of 
these recent cases, the substantial passage of time since IRPS 08-1 was 
adopted, and importantly, the Board's commitment to opening a path 
forward for those seeking redemption for past criminal activities, the 
Board has determined it is appropriate to now amend IRPS 08-1.
---------------------------------------------------------------------------

    \3\ For example, in several recent cases, the offense in 
question met four of the five de minimis criteria but did not 
qualify for the de minimis exception because the potential--but not 
actual--punishment exceeded the standard set forth by IRPS 08-1. See 
BD-02-18 (Oct. 18, 2018); BD-01-19 (Mar. 14, 2019).
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    In issuing these final amendments to IRPS 08-1, the Board remains 
mindful of a corresponding Statement of Policy (SOP) issued by the 
Federal Deposit Insurance Corporation (FDIC) to promote consistency 
between the

[[Page 65908]]

prudential regulators and to reduce regulatory burden. Section 19 of 
the Federal Deposit Insurance Act (FDIA) contains a prohibition 
provision similar to Section 205(d) of the FCU Act. In 1998, the FDIC 
implemented an SOP regarding prohibitions imposed by Section 19 of the 
FDIA, and it has subsequently modified and updated its guidance on 
several occasions.\4\ In the past, the NCUA has drawn on the FDIC's SOP 
for guidance on this topic. In 2018, the FDIC updated and revised its 
SOP to expand its de minimis exception and to make other clarifying 
changes.\5\ In the Board's view, it is beneficial to both institutions 
and covered individuals for the NCUA's Section 205(d) requirements to 
be reasonably consistent, to the extent possible, with the FDIC's 
Section 19 requirements. Consistent guidelines between our sister 
agencies with respect to these parallel statutory provisions will help 
streamline the application process, particularly for those individuals 
seeking consent from both the NCUA and the FDIC to allow for potential 
employment at federally insured financial institutions.
---------------------------------------------------------------------------

    \4\ The FDIC has revised its SOP multiple times since its 
implementation in 1998. See 63 FR 66177 (Dec. 1, 1998); 72 FR 73823 
(Dec. 28, 2007); 73 FR 5270 (Jan. 29, 2008); 76 FR 28031 (May 13, 
2011); 77 FR 74847 (Dec. 18, 2012); 83 FR 38143 (Aug. 3, 2018).
    \5\ 83 FR 38143 (Aug. 3, 2018).
---------------------------------------------------------------------------

III. Proposed Second Chance IRPS (IRPS 19-1)

    In July 2019, the Board published and sought public comment on a 
proposal to expand exceptions to employment restrictions under Section 
205(d).\6\ Deemed the ``Second Chance IRPS,'' the Board proposed to 
amend the current de minimis exception to reduce the scope and number 
of offenses that would require an application to the Board. 
Specifically, the proposed Second Chance IRPS did not require an 
application for insufficient funds checks of aggregate moderate value, 
small dollar simple theft, false identification, simple drug 
possession, and isolated minor offenses committed by covered persons as 
young adults. In addition, the Board proposed some minor grammatical, 
formatting, and clarifying changes.
---------------------------------------------------------------------------

    \6\ 84 FR 36488 (July 29, 2019).
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    The Board received a total of twelve comments from national credit 
union trade associations, state credit union associations, advocacy 
groups (including one joint letter representing 36 individual groups), 
one federal credit union, and one fidelity bond provider. The 
commenters generally supported the proposed IRPS and appreciated the 
Board's efforts to reduce regulatory burden, and to expand employment 
opportunities to those deserving of a second chance. The general 
consensus among commenters was that the proposed guidance was well-
measured, balanced, and flexible and will reduce burdens on credit 
unions, covered individuals, and the agency, while maintaining 
appropriate safeguards to ensure the new exceptions do not present 
undue safety and soundness risks to insured credit unions. Commenters 
widely applauded the NCUA's efforts to expand employment opportunities 
for low-risk convicted persons and noted the second chance amendments 
are consistent with our nation's redemptive spirit. One commenter was 
particularly gratified that the NCUA's issuance will represent a strong 
message in support of second chances and act as a signal to other 
industries that many former offenders are worthy of the opportunity for 
inclusion and trust.
    A joint comment letter representing numerous advocacy groups 
supported the proposed Second Chance IRPS overall, but asked that the 
NCUA go further than the proposal to adopt additional reforms and 
improvements to promote expanded employment opportunities for people 
with conviction records, including, among other things, additional 
expansions of the de minimis exception; further clarifications 
regarding expungements, set-asides, and reversed convictions; and 
clarifications to the evaluation standards for Section 205(d) consent 
applications.
    Substantive comments on specific aspects of the proposed Second 
Chance IRPS are discussed in detail below. For the reasons described 
below, the Board is adopting the proposal with a few minor 
modifications.

IV. Final Second Chance IRPS

A. Background

    IRPS 08-1 currently provides background regarding Section 205(d)'s 
prohibition, and discusses its purpose to provide requirements, 
direction, and guidance to federally insured credit unions and 
individuals covered by the statutory ban. The proposed IRPS revised the 
background section to make clear that IRPS 19-1 supersedes and replaces 
IRPS 08-1. There were no comments on this aspect of the proposal, and 
the Board adopts this amendment as proposed.

B. Scope

1. Persons Covered
    The proposed Second Chance IRPS modified the scope section to 
clarify the persons covered by the Section 205(d) prohibition. Under 
the statute, the prohibition applies to institution-affiliated parties, 
as defined by Section 206(r) of the FCU Act,\7\ and others who are 
participants in the conduct of the affairs of an insured credit 
union.\8\
---------------------------------------------------------------------------

    \7\ 12 U.S.C. 1786(r).
    \8\ 12 U.S.C. 1785(d).
---------------------------------------------------------------------------

    Under Section 206(r), independent contractors are considered 
institution-affiliated parties if they knowingly or recklessly 
participate in violations, unsafe or unsound practices, or breaches of 
fiduciary duty which are likely to cause significant loss to, or a 
significant adverse effect on, an insured credit union. Over the years, 
the definition of independent contractors in Section 206(r), which is 
included in IRPS 08-1, has created confusion among interested parties. 
Given that the term is actually unnecessary in determining whether 
Section 205(d) applies at the time the individual commenced work for, 
or participated in the affairs of, the credit union, the proposed 
Second Chance IRPS deleted reference to certain language in the 
definition of ``independent contractor.'' It also clarified that an 
independent contractor typically does not have a relationship with the 
insured credit union other than the specific activity for which the 
insured credit union has contracted, and that the relevant factor in 
determining whether an independent contractor is covered by Section 
205(d)'s prohibition is whether the independent contractor influences 
or controls the management or affairs of that credit union.
    A person who does not meet the statutory definition of institution-
affiliated party is nevertheless prohibited by Section 205(d) if he or 
she is considered to be participating, directly or indirectly, in the 
conduct of the affairs of an insured credit union. The proposed Second 
Chance IRPS did not precisely define what constitutes direct or 
indirect participation in the conduct of the affairs of an insured 
credit union, but rather updated and clarified how the NCUA will 
determine whether a person qualifies as a participant in the affairs of 
an insured credit union.
    One commenter specifically agreed the NCUA should not expressly 
define who qualifies as a participant. Another commenter questioned why 
it is necessary for the guidance to address both institution-affiliated 
parties and

[[Page 65909]]

participants in the affairs of an insured credit union. The commenter 
encouraged the Board to delete reference to participants as the term 
appears redundant and does not seem to expand the scope of coverage.
    As noted above, the statute expressly applies the employment 
prohibition to institution-affiliated parties and others who are 
participants in the conduct of the affairs of an insured credit union. 
Specifically, Section 205(d) provides that except with prior written 
consent of the Board--
    1. any person who has been convicted of any criminal offense 
involving dishonesty or a breach of trust, or has agreed to enter into 
a pretrial diversion or similar program in connection with a 
prosecution for such offense, may not--
    a. become, or continue as, an institution-affiliated party with 
respect to any insured credit union; or
    b. otherwise participate, directly or indirectly, in the conduct of 
the affairs of any insured credit union; and
    2. any insured credit union may not permit any person referred to 
in paragraph (1) to engage in any conduct or continue any relationship 
prohibited under such paragraph.\9\
---------------------------------------------------------------------------

    \9\ 12 U.S.C. 1785(d).
---------------------------------------------------------------------------

    In the Board's view, for consistency with the operative statute, it 
is helpful and appropriate for the guidance to continue to address both 
institution-affiliated parties and participants in the affairs of an 
insured credit union. While there may be overlap between the two, 
retaining reference to the two distinct statutory terms in the final 
IRPS will promote clarity and maintain consistency between the statute 
and guidance.
    The Board continues to maintain that participants in the affairs of 
a credit union is a term of art that defies precise definition. Thus, 
the final Second Chance IRPS 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. 
Each individual's conduct will be analyzed on a case-by-case basis to 
determine if that conduct constitutes participation in the conduct of 
the affairs of an insured credit union.
2. Offenses Covered
    The proposed Second Chance IRPS clarified that in order for an 
application to be considered by the Board, the case must be considered 
final by the procedures of the applicable jurisdiction. This means 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. There were no comments 
on this aspect of the proposal, and the Board is adopting these 
provisions without modification.
3. Offenses not Covered
    Currently, where the covered offense is considered de minimis, 
approval is automatically granted, and an application for the Board's 
consent is not required. The proposed Second Chance IRPS modified the 
current exception for de minimis offenses in two ways: First, by 
updating the general criteria for the exception; and second, by 
substantially expanding the scope of the exception to include 
additional offenses to qualify as de minimis offenses.
    De minimis offenses. Under IRPS 08-1, a covered offense is 
considered de minimis if it meets all of the following five criteria: 
(1) There is only one conviction or entry into a pretrial diversion 
program of record for a covered offense; (2) 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; (3) the conviction or pretrial diversion program was 
entered at least five years prior to the date an application would 
otherwise be required; (4) the offense did not involve an insured 
depository institution or insured credit union; and (5) the Board or 
the FDIC has not previously denied consent under Section 205(d) of the 
FCU Act or Section 19 of the FDIA, respectively, for the same 
conviction or participation in a pretrial diversion program.
    The proposed Second Chance IRPS updated the general criteria for 
the de minimis offenses exception to better align with developments in 
criminal reform and sentencing guidelines that have occurred since IRPS 
08-1 was adopted in 2008. Specifically, the potential punishment and/or 
fine provision (current criterion 2) was 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 offenses punishable by three 
days or less of jail time, to meet that de minimis criterion.
    Commenters noted that these changes to the general criteria, while 
modest, will nevertheless result in a meaningful reduction in the 
number of applications to the Board. In particular, several commenters 
indicated that simply amending criterion 2 from ``less than one year'' 
to ``one year or less'' will result in significant regulatory relief. 
Commenters also agreed the increase in the dollar threshold better 
aligns with criminal reform and sentencing guidelines. One commenter 
was supportive overall of the proposed amendments to the general 
criteria for the de minimis exception, but asserted that the single 
conviction criterion (criterion 1), which was not modified in the 
proposal, is too restrictive.
    The proposed IRPS also added a definition of ``jail time'' to 
clarify that the term includes any significant restraint on an 
individual's freedom of movement, including confinement to a specific 
facility or building on a continuous basis where the person may leave 
temporarily only to perform specific functions or during specified time 
periods or both.
    One commenter specifically supported the proposed definition of 
jail time. However, another comment letter expressed concerns that the 
proposal's definition would include time served in pretrial 
confinement, for civil infractions, or in home confinement since these 
penalties impose a ``significant restraint on an individual's freedom 
of movement.'' As one example, the comment letter noted low-risk 
individuals who had their freedom of movement restricted for failure to 
pay a traffic fine would fall outside of the exception because of the 
more expansive proposed definition. Thus, this comment letter 
recommended the Board retain the current language relative to jail 
time. Another commenter suggested the definition of jail time should 
include probation if probation was the only confinement imposed as part 
of an individual's punishment.
    After a review and analysis of the comments, the Board is adopting 
this aspect of the guidance unchanged in the final Second Chance IRPS. 
The Board anticipates the measured changes to criterion 2 of the 
general de minimis exception alone should result in a fairly 
significant reduction in regulatory burden. The Board is not inclined 
to further relax the general criteria at this time to allow for more 
than one de minimis offense to qualify for the general exception. The 
Board wishes to emphasize, however, that for any offense that does fit 
a de minimis category, an application can still be filed.
    The Board also adopts the proposed definition of ``jail time'' 
without modification. As discussed in the

[[Page 65910]]

proposal, the NCUA is aware that various jurisdictions take different 
approaches to confinement depending on the nature of the crime (e.g., 
house arrest, home detention, ankle monitor, voice curfew, work 
release) and the proposed definition was intended to improve 
transparency and enhance compliance in that context. In the Board's 
view, the new definition is appropriately tailored to address those 
varied jurisdictional approaches in order to clarify the circumstances 
under which a lesser crime will qualify as de minimis. In response to 
the comment letter expressing concern that the proposed definition was 
overly broad to exclude individuals whose freedom of movement is 
restricted for minor crimes, such as for failure to pay a traffic fine, 
the Board notes that minor traffic violations are not criminal offenses 
involving dishonesty or a breach of trust within the scope of Section 
205(d).
    Additional applications of the de minimis exception. The proposed 
Second Chance IRPS also expanded the scope of the exception to include 
several additional offenses to qualify as de minimis offenses in order 
to eliminate the need to submit an application for certain low-risk, 
isolated offenses. The proposed expansion was intended to reduce 
regulatory burden to credit unions, covered individuals, and the 
agency, while continuing to mitigate the risk to insured credit unions 
posed by convicted persons.
    Most commenters were very supportive of the expansion of the 
current de minimis exception to include new qualifying offenses. One 
commenter, however, disagreed with expanding the exception to include 
additional offenses, preferring the Board have the opportunity to 
evaluate all aspects of a covered individual's criminal past. Another 
commenter expressed concern that the new exceptions could risk the 
safety and soundness of credit unions (particularly smaller 
institutions), and thus, opposed the addition of new de minimis 
offenses.
    As described in more detail below, the Board generally adopts the 
new qualifying offenses for de minimis treatment as proposed, with some 
minor modifications for improvement.
    Age at time of covered offense. Under the proposed Second Chance 
IRPS, a person with a covered conviction or program entry that occurred 
when the individual was 21 years of age or younger at the time of the 
conviction or program entry, and who otherwise meets the general de 
minimis criteria, will qualify for this de minimis exception if: (1) 
The conviction or program entry was at least 30 months \10\ prior to 
the date an application would otherwise be required and (2) all 
sentencing or program requirements have been met prior to the date an 
application would otherwise be required.
---------------------------------------------------------------------------

    \10\ Half of the regular five-year period applicable to 
individuals with a covered conviction or program entry that occurred 
when the individual was over 21 years of age at the time of the 
conviction or program entry.
---------------------------------------------------------------------------

    One commenter generally supported this proposed change, but urged 
the Board to go further by also modifying the other general criteria 
applying to offenses committed prior to the age of 21, namely, that the 
offense be punishable by a jail term of less than one year or a fine of 
less than $2,500.
    The Board declines this recommendation. While this measured 
exception is intended to recognize that isolated, youthful mistakes are 
particularly worthy of forgiveness and second chances, the Board 
remains mindful of its safety and soundness mandate. Reducing by half 
the passage of time required for individuals with a minor youthful 
conviction to qualify for the exception provides meaningful relief 
while still appropriately mitigating risks to insured credit unions 
posed by convicted persons. Accordingly, the Board is adopting the age-
based de minimis treatment, as proposed, in the final Second Chance 
IRPS.
    Convictions or program entries for insufficient funds checks. The 
Board also proposed to expand the de minimis exception to cover certain 
convictions for ``bad'' or insufficient funds checks, which, in the 
Board's view, generally are low-risk offenses that can be treated as de 
minimis. Under the proposal, these types of offenses were considered de 
minimis and were not considered as involving an insured depository 
institution or insured credit union if the following conditions apply:
     Other than for ``bad'' or insufficient funds check(s), 
there is no other conviction or pretrial diversion program entry 
subject to Section 205(d);
     The aggregate total face value of all ``bad'' or 
insufficient funds check(s) cited across all the conviction(s) or 
program entry or entries for bad or insufficient checks is $1,000 or 
less; and
     No insured depository institution or insured credit union 
was a payee on any of the ``bad'' or insufficient funds checks that 
were the basis of the conviction(s) or program entry or entries.
    One commenter expressed concern with the proposed exception for 
offenses involving insufficient funds checks and asked that the Board 
readjust the qualifying aggregate total face value amount. The same 
commenter also suggested this exception category should be revised to 
impose a qualifying timeframe (e.g., five years since the conviction or 
program entry (or 30 months in the case of a person 21 years or younger 
at the time of the conviction or program entry)). Another commenter 
suggested that references to covered offenses that took place at an 
``insured credit union'' or an ``insured depository institution'' 
should be revised throughout the guidance to eliminate the ``insured'' 
modifier. In this commenter's view, the proposed language is overly 
specific as any prior offense by a covered individual involving a 
financial institution, insured or not, can increase risks to insured 
credit unions.
    The Board agrees that covered individuals with convictions or 
program entries for crimes involving financial institutions may pose 
risks to insured credit unions, regardless of the financial 
institution's insurance status. After careful review, the Board 
maintains that no offense category should be included in the de minimis 
exception if the covered crime was committed against a financial 
institution, insured or not. Accordingly, to the extent the distinction 
between insured and uninsured institutions is immaterial in this 
context, the final IRPS eliminates the ``insured'' modifier throughout. 
However, the Board declines to impose additional conditions on this 
exception category at this time. Imposing a lower qualifying aggregate 
total face value amount or a qualifying timeframe for this de minimis 
category would limit its utility and undermine the Board's objective of 
providing well-balanced, yet meaningful, regulatory relief. The Board 
continues to take the view that convictions for ``bad'' or insufficient 
funds checks generally are low-risk offenses that can be treated as de 
minimis. Thus, offenses that meet all the above-listed criteria, as 
revised to eliminate the ``insured'' modifier, will not require an 
application for the Board's consent under the final Second Chance IRPS.
    Convictions or program entries for small-dollar, simple theft. As 
the Board discussed in the proposed Second Chance IRPS, a substantial 
number of applications that have come before the Board since 2008 have 
involved convictions or program entries for relatively minor, low-risk, 
small-dollar, simple theft (e.g., shoplifting, retail theft). Based on 
a historical review of Section 205(d) applications, the Board granted 
its consent to the vast majority

[[Page 65911]]

of those covered individuals with convictions or program entries 
related to small-dollar, simple theft. Thus, under the proposal, a 
conviction or pretrial diversion program entry based on a simple theft 
of goods, services and/or currency (or other monetary instrument) was 
considered de minimis where the following conditions are met:
     The aggregate value of the currency, goods, and/or 
services taken was $500 or less at the time of conviction or program 
entry; and
     The person has no other conviction or program entry 
described in Section 205(d); and
     It has been five years since the conviction or program 
entry (or 30 months in the case of a person 21 years or younger at the 
time of the conviction or program entry); and
     It does not involve an insured depository institution or 
insured credit union.
    For purposes of the exception, simple theft did not include the 
offenses of burglary, forgery, robbery, identity theft, or fraud. Under 
the proposal, these crimes continued to require an application for the 
Board's consent, unless otherwise qualifying as de minimis.
    Stakeholders providing comment on this aspect of the proposed IRPS 
generally supported the exception for small-dollar, simple theft. 
Several commenters supported the express exclusion of burglary, 
forgery, robbery, identity theft, and fraud from the exception and 
agreed those offenses should continue to require an application for the 
Board's consent. Several commenters asked the Board to clarify that all 
of the stated conditions must be met in order for the exception to 
apply. A number of commenters also asked the Board to confirm and 
emphasize in the final IRPS that simple theft, of any value, involving 
a depository institution or credit union falls outside the de minimis 
exception and will require an application to the Board. One commenter 
suggested the condition that the conviction or program entry does not 
involve an insured depository institution or insured credit union 
should be revised to eliminate the ``insured'' modifier.
    One comment letter was generally in favor of an exception for 
simple theft, but contended the practical application of the proposed 
exception is limited because most simple theft convictions involving 
$500 or less are likely already covered as de minimis under the general 
criteria (i.e., unlikely to be punishable by imprisonment for a term of 
more than one year or a fine of more than $2,500, and the covered 
person is unlikely to have served more than three days in jail). Thus, 
the comment letter urged that the Board go further to exclude from 
Section 205(d) coverage certain minor dishonesty offenses, such as all 
convictions for the use of a fake ID (not only limited to alcohol-
related use), shoplifting, fare evasion, and other lesser offenses. 
Alternatively, at a minimum, the comment letter suggested these types 
of convictions should be excluded from Section 205(d) coverage after 
one year from the time of conviction or program entry.
    Upon careful consideration of the public comments, the Board 
continues to take the view that the exception is appropriately tailored 
to streamline the application process without creating undue or 
substantial risk to insured credit unions, and declines to expand it 
further at this time to include additional offenses. Accordingly, the 
final Second Chance IRPS adopts the small-dollar, simple theft 
exception largely as proposed. A conviction or pretrial diversion 
program entry based on a simple theft of goods, services and/or 
currency (or other monetary instrument) is considered de minimis where 
all of the above-listed conditions are met. As discussed above, the 
Board agrees, however, that the distinction between insured and 
uninsured institutions is immaterial in this context. Thus, the final 
Second Chance IRPS eliminates the ``insured'' modifier in this 
exception category. Simple theft, of any value, involving a depository 
institution or credit union, whether insured or not, falls outside the 
de minimis exception and will require an application to the Board. 
Where pertinent throughout, the final Second Chance IRPS also adds the 
word ``all'' to clarify that all the described conditions must be met 
in order for the exception to apply.
    Convictions or program entries for the use of a fake identification 
card. Under the proposed Second Chance IRPS, the use of a fake, false, 
or altered identification card by a person under the legal age to 
obtain or purchase alcohol, or to enter a premises where alcohol is 
served and age appropriate identification is required, was considered 
de minimis, provided there is no other conviction or program entry for 
the covered offense.
    All commenters that provided feedback on this aspect of the 
proposal were supportive of the exception and agreed that individuals 
with convictions or program entries for the use of a fake 
identification card pose little risk to insured credit unions. 
Accordingly, the Board adopts as proposed the provision allowing de 
minimis treatment for the use of fake identification by a person under 
the legal age for alcohol-related purposes.
    Convictions or program entries for simple misdemeanor drug 
possession. While not discounting the public health implications of 
illegal drug use and possession, the Board continues to believe covered 
persons with single convictions or program entries for simple drug 
possession pose minimal risk to insured credit unions.
    As discussed in the proposed Second Chance IRPS, there are already 
a host of significant extrajudicial consequences for individuals with 
nonviolent drug possession convictions, including not only employment 
bans but the loss of federal financial aid, eviction from public 
housing, disqualification from occupational licenses, loss of voting 
rights, and denial of public assistance. Moreover, research shows that 
drug convictions disproportionately burden people of color. In 
addition, the Board recognizes that some uncertainty and confusion 
exists with respect to marijuana-related offenses, with marijuana now 
legal in many states but still illegal at the federal level.\11\
---------------------------------------------------------------------------

    \11\ Marijuana laws are rapidly evolving across all 50 states. 
Multiple states have legalized or decriminalized marijuana in some 
form at the state level. However, marijuana remains a Schedule I 
drug under the Federal Controlled Substances Act. See 21 U.S.C. 
812(b)(1). Further information about marijuana legalization may be 
found online at https://disa.com/map-of-marijuana-legality-by-state.
---------------------------------------------------------------------------

    Accordingly, the proposed Second Chance IRPS also classified as de 
minimis those convictions or entries for drug offenses meeting the 
following conditions:
     The person has no other conviction or program entry 
described in Section 205(d); and
     The single conviction or program entry for simple 
possession of a controlled substance was classified as a misdemeanor 
and did not involve the illegal distribution (including an intent to 
distribute), sale, trafficking, or manufacture of a controlled 
substance or other related offense; and
     It has been five years since the conviction or program 
entry (or 30 months in the case of a person 21 years or younger at the 
time of the conviction or program entry).
    Under the proposal, convictions or program entries for intent to 
distribute, illegal distribution, illegal sale or trafficking of a 
controlled substance, or illegal manufacture of a controlled substance 
continued to require an application for the Board's consent, unless 
otherwise qualifying as de minimis.
    Most commenters that provided input on this part of the proposed 
Second

[[Page 65912]]

Chance IRPS supported the exception and agreed that individuals with 
convictions or program entries for single convictions for simple drug 
possession pose minimal risk to insured credit unions. Several 
commenters echoed the Board's view that the exception is appropriate 
given the current uncertainty and confusion with respect to marijuana-
related offenses, with marijuana legal under various state laws but 
still federally illegal. A number of commenters also shared the Board's 
observation that drug convictions disproportionately burden people of 
color and impose significant extrajudicial consequences on convicted 
individuals.
    One comment letter, however, recommended the Board more broadly 
expand the exception to include most drug convictions (beyond simple 
possession), arguing that drug offenses are not criminal offenses 
involving dishonesty or breach of trust that should be covered by 
Section 205(d). The comment letter urged the Board to eliminate the 
requirement to request consent for persons with a conviction or program 
entry for any drug possession offense (i.e., not limited to 
misdemeanors that occurred more than five years ago), as well as for 
drug offenses involving sales or distribution of a controlled 
substance. The comment letter further argued that mandatory minimum 
federal sentences imposed for drug offenses limits the effectiveness of 
the proposed exception.
    After careful review of the comments, the Board maintains that an 
application should be required for most drug offenses so it can 
determine the nature of the offense and elements of the crime; thus, it 
will continue the current requirement that an application be filed for 
drug offenses that do not qualify as de minimis. Moreover, while the 
Board recognizes the de minimis treatment for single convictions or 
program entries for simple misdemeanor drug possession is relatively 
narrowly tailored, it once again emphasizes that, as with any offense 
that does not fit a de minimis category, an application can still be 
filed for any drug crime that does not qualify for de minimis 
treatment. Accordingly, the Board adopts this exception category, 
without change, in the final IRPS.
    Fidelity bond coverage. The proposed Second Chance IRPS maintained 
the agency's current policy 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 must 
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.
    One commenter noted that, historically, insurers have increased 
premiums where an employee has a theft or fraud conviction; thus, some 
credit unions are concerned about their ability to obtain insurance 
coverage for covered individuals. This commenter asked the NCUA to 
weigh the costs and benefits of requiring a fidelity bond for 
individuals that meet the de minimis criteria under the final Second 
Chance IRPS.
    Several commenters expressed some degree of concern that increasing 
the number of excepted offenses not requiring application could 
ultimately lead to increased theft or fraud, thereby resulting in 
increased insurance costs to credit unions (costs that ultimately would 
be borne by members). However, most of those commenters shared the view 
that this is a fairly remote possibility and, at least in the short-
term, no immediate premium increases are likely to result from the 
proposed IRPS. Commenters noted that if such a result were to occur, 
the Board should revisit the IRPS to determine if it should be 
modified.
    Comments from one insurer that provides fidelity bond coverage to 
credit unions were particularly helpful on this point. Specifically, 
the commenter indicated that, while the full implications of the 
proposal may not be known for several years, it currently does not 
anticipate any immediate premium adjustments for credit unions to 
result from the proposed changes. The commenter noted, however, that 
beyond fidelity bond coverage, there could be potential future impacts 
for risk management services provided to credit unions, as well as 
business auto and business liability coverages, as new general, safety 
concerns may arise. This commenter also indicated that, as a fidelity 
insurer, it will reexamine its own de minimis category to consider if 
updates to its policies are necessary given the important goals 
underlying the agency's amendments.
    The Board continues to maintain that any person who meets the de 
minimis criteria must still be covered by a fidelity bond to the same 
extent as other employees in similar positions. Fidelity bond coverage 
provides important protection against losses caused by fraud, 
dishonesty, theft, and similar activities committed by credit union 
employees, directors, officers, supervisory committee members, and 
credit committee members. Based on stakeholder feedback, the Board is 
satisfied that, at least in the immediate near-term, the final Second 
Chance IRPS will not result in higher premiums for insured credit 
unions. The Board is cognizant of the possibility that, should the 
incidence of theft or fraud increase as a result of its amendments to 
the de minimis exception, future impacts could mean higher insurance 
premiums. The Board will continue to monitor whether updates to its 
policy are necessary if concerns regarding premium adjustments arise.
    Expunged convictions. Under the NCUA's current policy, a conviction 
that has been ``completely expunged'' is not considered a conviction of 
record and will not require an application for the Board's consent 
under Section 205(d). However, the Board is aware that it is sometimes 
unclear whether certain state set-aside provisions constitute a 
complete expungement for Section 205(d) purposes (i.e., where the 
conviction may still be revealed under certain circumstances or 
otherwise remains on the individual's record). Accordingly, the 
proposed Second Chance IRPS clarified the circumstances under which a 
conviction is deemed expunged for purposes of Section 205(d). 
Specifically, if an order of expungement has been issued in regard to a 
conviction or program entry and is intended by the language in the 
order itself, or in the legislative provisions under which the order 
was issued, to be a complete expungement, then the jurisdiction, either 
in the order or the underlying legislative provisions, cannot allow the 
conviction or program entry to be used for any subsequent purpose. This 
includes, but is not limited to, an evaluation of a person's fitness or 
character. Under the proposal, the failure to destroy or seal the 
records did not prevent the expungement from being considered complete 
for purposes of Section 205(d). Expungements of pretrial diversion or 
similar program entries are treated the same as expungements for 
convictions. Moreover, under the proposed Second Chance IRPS, 
convictions set aside or reversed after the applicant has completed 
sentencing were treated consistently with pretrial diversions programs 
unless the court records reflect that the underlying conviction was set 
aside based on a finding on the merits that such conviction was 
wrongful.
    Commenters generally indicated the proposal's clarifications 
regarding expunged convictions were helpful. Several commenters were 
particularly supportive of the clarification regarding state set-aside 
provisions as it is sometimes unclear whether those

[[Page 65913]]

provisions constitute a complete expungement for purposes of Section 
205(d). One commenter indicated the clarification that the failure to 
destroy or seal records would not preclude them from being considered 
expunged is a positive modification that will allow greater flexibility 
for credit unions.
    One comment letter, however, recommended that all expungements be 
treated as complete expungements for purposes of Section 205(d), 
regardless of whether the conviction or program entry can subsequently 
be used for an evaluation of the person's fitness or character. The 
same comment letter opposed the proposal's clarification regarding 
state set-aside provisions, interpreting the proposed clarification as 
creating a new expansion of the Section 205(d) consent requirements to 
now cover individuals with set aside or reversed convictions where 
there was not a finding of wrongful conviction.
    The Board is adopting this aspect of the proposed guidance 
unchanged in the final Second Chance IRPS. It notes that its decision 
to add clarifying language regarding expunged convictions to the Second 
Chance IRPS is intended to promote transparency in the consent 
application process and, thereby, to streamline the process and give a 
measure of regulatory relief to covered individuals and insured credit 
unions seeking consent from the Board. While the Board acknowledges 
that making policy clarifications may actually result in a temporary 
spike in applications (due to an increased awareness of the Section 
205(d) employment restrictions generally and/or greater awareness of 
what constitutes a conviction of record specifically), the Board does 
not view the clarifying language regarding expunged convictions to 
represent an expansion of the Section 205(d) consent requirements to 
cover individuals with set aside or reversed convictions who were not 
previously covered under IRPS 08-1. Indeed, prior Board decisions on 
Section 205(d) consent requests have found that certain state set-aside 
provisions are not the equivalent of an expungement within the meaning 
of IRPS 08-1, as the conviction may still be revealed under certain 
circumstances.\12\ Thus, the clarifying language regarding expunged 
convictions does not represent a departure from the Board's past policy 
in any regard.
---------------------------------------------------------------------------

    \12\ See, e.g., BD-05-16, fn 7 (Dec. 20, 2016) (citing McCully 
v. Schwenn, 220 F. App'x 475 (9th Cir. 2007) (``[Ariz. Rev. Stat.] 
section 13-907 . . . does not expunge or remove the fact of 
conviction in Arizona.'')).
---------------------------------------------------------------------------

    Further, the Board does not consider it appropriate to treat all 
expungements, set asides, reversed convictions, or other similar case 
dispositions as complete expungements for purposes of Section 205(d). 
State law varies and, in some jurisdictions, an expungement is not 
``complete'' and is still subject to subsequent use. In the Board's 
view, expungements that reflect the intent of the particular 
jurisdiction to completely purge a conviction or program entry from an 
individual's background records supports an interpretation that, from a 
legal and policy perspective, the intent is to place the individual in 
the same position as if there were no conviction or program entry in 
the first place. However, an expunged criminal record that is still 
accessible to be used for subsequent purposes, including an evaluation 
of the person's fitness or character, reflects the jurisdiction's 
public policy that that record is still relevant and germane to certain 
subsequent inquiries. In considering whether an expungement is one that 
should fall outside the scope of Section 205(d), the Board's key 
consideration is whether the respective jurisdiction, by statute or 
court order, intended for the conviction or program entry to be fully 
purged from the individual's background. Preservation in a 
jurisdiction's expungement statute or by court order of the ability to 
use the conviction or program entry for a subsequent purpose indicates 
the record has not been completely expunged. Under these circumstances, 
the Board's interpretation is the conviction or program entry comes 
within the scope of Section 205(d). Again, however, the Board 
reiterates that covered individuals with expunged convictions or 
program entries still qualifying as convictions or record for purposes 
of Section 205(d) may still apply to the NCUA for the Board's consent.

C. Duty Imposed on Credit Unions

    Section 205(d) imposes a duty upon every federally insured credit 
union to make a reasonable inquiry regarding the history of every 
applicant for employment, including taking appropriate steps to avoid 
hiring or permitting the participation of convicted persons. Under the 
NCUA's current policy, federally insured credit unions should, at a 
minimum, establish a screening process to obtain information about 
convictions and program entries from job applicants. However, the 
current policy is unclear as to what steps a credit union should or 
must take when it learns about a job applicant's de minimis offense. 
Thus, the proposed Second Chance IRPS clarified that when a credit 
union learns a prospective employee has a prior conviction or program 
entry for a de minimis offense, the credit union should document in its 
files that an application is not required because the covered offense 
is considered de minimis and meets the criteria for the exception.
    Comments on this aspect of the proposal were generally positive. A 
number of commenters, however, asked for reassurance that a credit 
union's failure to maintain a record that an application is not 
necessary because the de minimis exception applies will not be subject 
to supervisory action. These commenters asked for clarification that 
the recordkeeping requirement is a suggested best practice, not a 
mandatory compliance obligation. In addition, one commenter noted that, 
irrespective of the guidance, each credit union retains the right to 
consider an applicant's past crime(s) and maintains individual 
discretion in making hiring decisions.
    The Board emphasizes that while the source of the consent 
requirements stem from federal statute, namely Section 205(d), this 
final IRPS is supervisory guidance, not regulation. The NCUA, along 
with the other federal prudential regulators, in 2018 issued an 
interagency statement to reaffirm the role of supervisory guidance.\13\ 
The statement confirmed that, unlike a law or regulation, supervisory 
guidance does not have the force and effect of law, and the NCUA does 
not take enforcement actions based on supervisory guidance. Rather, 
supervisory guidance outlines the NCUA's supervisory expectations or 
priorities and articulates the agency's general views regarding 
appropriate practices for a given subject area.
---------------------------------------------------------------------------

    \13\ See FFIEC ``Interagency Statement Clarifying the Role of 
Supervisory Guidance,'' (Sept. 11, 2018).
---------------------------------------------------------------------------

    The Board wishes to underscore that documentation of an employee's 
or applicant's de minimis offense is a recommended practice that does 
not have the force and effect of law, and the NCUA will not take 
enforcement action based on this guidance. Nevertheless, the Board 
continues to believe it is helpful to both industry and supervisory 
staff to clarify the steps a credit union should take when it learns 
about an employee's or applicant's de minimis offense; as such, the 
Board is adopting this clarification in the final Second Chance IRPS.
    The Board encourages industry to offer second chances and to expand 
employment opportunities for former offenders seeking redemptive paths 
forward, but no insured credit union is under any obligation to hire or 
retain an

[[Page 65914]]

employee with a criminal background. Insured credit unions have 
discretion to establish their own internal employment policies and 
should make hiring decisions that best suit their own individual needs 
and risk tolerance.
    Conditional offers. The proposal provided for extensions of 
conditional offers of employment to prospective employees requiring the 
Board's consent under Section 205(d). A credit union may extend a 
conditional offer of employment contingent on the completion of a 
satisfactory background check to determine if the applicant is barred 
by Section 205(d). If a conditional offer is extended, however, the job 
applicant may not commence work for or be employed by the credit union 
until the applicant is determined to not be barred under Section 205(d) 
or receives consent from the Board.
    One commenter was skeptical of the practical benefit of this 
provision, if the credit union does not have a reasonable expectation 
of the timing of the approval process. Thus, the commenter recommended 
the Board clarify in the final IRPS the general length of time 
necessary for the agency to process a consent application. One comment 
letter urged the Board to instruct credit unions to inquire into an 
applicant's criminal background only after the conditional offer stage 
of the hiring process, to safeguard against credit unions unfairly 
discarding the applications of people with conviction histories. 
Alternatively, at a minimum, this comment letter urged that the Board 
clarify credit unions are not required to make criminal record 
inquiries on an initial job application and may adopt a policy to 
collect criminal background history only after the conditional offer 
stage (i.e., credit unions may adopt so-called ``ban the box'' 
policies).
    The Board is mindful that the Section 205(d) consent application 
process may impose inconveniences and uncertainties to covered 
individuals and credit unions, as both applicant and employer remain in 
indeterminate state during the process of seeking consent from the 
Board. While the industry's desire for certainty as to the timing of 
the consent application process is understandable, the Board maintains 
it is impracticable to establish a timetable for action on consent 
applications because each individual application is fact specific and 
varies in complexity. However, past applications submitted to the Board 
have generally been adjudicated within 60 days from receipt, and, in 
most cases, the processing time was significantly less. The Board 
remains committed to streamlining the application process and endeavors 
to decide on consent applications as quickly as possible. The Board 
anticipates that its decision to delegate responsibility for reviewing 
certain applications, discussed in more detail below, will further 
speed up the application process and reduce burdens on credit unions 
and applicants.
    The Board also reiterates that insured credit unions are 
responsible for establishing their own internal employment policies and 
have discretion to make hiring decisions in their best judgment. The 
proposal's provision for extensions of conditional offers of employment 
to prospective employees requiring the Board's consent under Section 
205(d) was intended to reduce burdens in the hiring and consent 
application process; accordingly, the Board is adopting this provision 
in the final Second Chance IRPS. An insured credit union choosing to 
adopt a policy to extend conditional offers may establish its own 
procedures to make criminal record inquiries at any stage of its 
choosing in its hiring process, so long as applicants do not commence 
work for or be employed by the credit union until the applicant is 
determined to not be barred under Section 205(d) or receives consent 
from the Board.

D. Procedures for Requesting the Board's Consent Under Section 205(d)

    Application types. The proposed Second Chance IRPS did not modify 
the current procedures for requesting the Board's consent under Section 
205(d). However, the proposal added language to clarify the distinction 
between a credit union-sponsored application filed by the institution 
on behalf of a covered individual and an individual application filed 
on a covered person's own behalf. Generally, an application must be 
filed by an insured credit union on behalf of a person (credit union-
sponsored application) unless the Board, for substantial good cause, 
grants a waiver of that requirement and allows the person to file an 
application in their own right (individual application). In most cases, 
a credit union-sponsored application is for a particular person, in a 
particular job, at a particular credit union. On the other hand, an 
individual application is typically requesting a blanket waiver for the 
applicant to be employed or participate in the conduct of the affairs 
of any insured credit union. The Section 205(d) application form was 
also revised to more clearly distinguish between the two types of 
applications and the supporting information required for each.
    One comment letter urged the Board to go further than the proposal 
to expressly encourage individuals to directly file applications in 
their own right, rather than requiring that a credit union sponsor the 
application. This letter noted that while the FDIC's Statement of 
Policy (SOP) on Section 19 contains similar ``substantial good cause'' 
language, in practice the FDIC routinely accepts individual 
applications and the vast majority of applications it processes are not 
sponsored by a financial institution.
    The Board notes that both credit union-sponsored applications and 
individual applications were permitted under IRPS 08-1 and both options 
will continue to be available under this final IRPS. While historically 
consent applications submitted to the NCUA are more typically credit 
union-sponsored, individuals are not precluded from filing an 
application in their own right if there is substantial good cause. In 
the Board's view, highlighting the distinction between individual 
applications and credit union-sponsored applications in the final 
Second Chance IRPS may help encourage more individuals to apply for 
consent without sponsorship by a credit union. The NCUA also intends to 
publish in the near term an informational brochure to further educate 
the public about the Section 205(d) process and will highlight the two 
different application options.
    Regional office for application submission. Additionally, the 
proposed IRPS clarified that the appropriate regional office for 
submission of a credit union-sponsored application is the program 
office that oversees the credit union (i.e., the program office 
covering the state where the credit union's home office is located, or 
the Office of National Examinations and Supervision), and the 
appropriate regional office for an individual application and waiver of 
the credit union-sponsored filing requirement is the program office 
covering the state where the person resides.
    One comment letter urged the NCUA to consider creating a central 
office to accept and review Section 205(d) consent applications and to 
be a resource to credit unions seeking to verify that covered 
individuals have received the Board's consent to work. The comment 
letter further suggested that this centralized office could be 
delegated the responsibility to only forward applications for Board 
review that significantly merit additional scrutiny.
    Historically, the Board has received less than ten Section 205(d) 
consent applications on an annual basis. Given this relatively low 
volume, it is

[[Page 65915]]

unnecessary to establish a centralized office to process consent 
applications. The Board continues to maintain that the appropriate 
office for submission of a credit union-sponsored application is the 
program office that oversees the credit union, and the appropriate 
office for an individual application and waiver of the credit union-
sponsored filing requirement is the program office covering the state 
where the person resides. Accordingly, the Board adopts these 
clarifications in the final IRPS.
    Delegation of authority. The proposal requested public comment on 
whether delegating responsibility for reviewing certain applications 
could further streamline the application process and reduce burdens on 
credit unions and applicants.
    One commenter was strongly supportive of delegating authority to 
regional directors to consider 205(d) consent applications, noting that 
such delegation will likely ensure a more timely response given the 
region's greater understanding of any relevant local factors or 
information that may be pertinent to the decision. The same commenter, 
however, recommended the Board establish a reasonable timeframe for the 
region's response so that applications are processed expeditiously. One 
comment letter agreed that delegating responsibility for reviewing 
certain applications would help streamline the process, but suggested 
responsibility should be delegated to a central office specifically 
created to accept and review Section 205(d) applications. A different 
commenter was not opposed to delegating the review of certain 
applications, but expressed concern that delegation to third-party 
entities could compromise sensitive credit union information. This 
commenter urged the agency to institute proper data security protocols, 
and requested additional information on the process of delegation, 
including efforts the NCUA will take to protect sensitive credit union 
and individual applicant data.
    Upon review and careful consideration of the public comments, the 
Board has determined that in order to further streamline the 
application process it will delegate authority to program offices to 
process, review, and act upon credit union-sponsored consent 
applications. But the Board will retain authority to decide on 
individual applications, which tend to be more complex and fact-
specific. Individual applications also require the Board's waiver of 
the institution filing requirement for substantial good cause and, 
typically, request a blanket waiver for the applicant to be employed or 
participate in the conduct of the affairs of any insured credit union. 
These factors support the Board's retention of its authority to 
consider individual applications for Section 205(d) consent.
    However, in delegating responsibility for reviewing credit union-
sponsored applications, the Board wishes to assure stakeholders that 
the NCUA will make all reasonable efforts to duly secure all sensitive 
information it receives in connection with any consent application. 
Toward that end, the NCUA has conducted a Privacy Impact Assessment 
(PIA) on the Second Chance IRPS. Sensitive personally identifiable 
information (PII) is encrypted if shared intra-agency and data is 
stored on secured drives with restricted access. The Board does not 
anticipate that PII will generally be shared outside the agency, 
however, the NCUA's Office of Continuity and Security Management may 
conduct criminal background checks that may require contacting a 
federal, state, or local agency which maintains civil, criminal or 
other relevant enforcement information or other pertinent information 
relevant to the Board's decision on a Section 205(d) consent request.

E. Application Form

    The proposed Second Chance IRPS also revised and updated the 
application form that is required to be used to submit a Section 205(d) 
consent request, ``Application to Request Consent Pursuant to Section 
205(d),'' to reflect the proposed changes and to conform to current 
regulatory requirements. The Section 205(d) application form was also 
modified to more clearly delineate between the two types of 
applications (credit union-sponsored versus individual) and the 
supporting documentation required for each.
    Stakeholders who commented on this aspect of the proposal were 
generally supportive of the proposed edits to the Section 205(d) 
application form. One commenter, however, noted some credit unions have 
found the current information requested to be lengthy and onerous to 
both the credit union and the covered individual, particularly in cases 
where background information is difficult to obtain from old criminal 
record systems. Another commenter urged the Board to go further in more 
expressly encouraging covered individuals to submit individual 
applications.
    Upon review of the comments, the Board is adopting the improvements 
to the Section 205(d) application form in the final Second Chance IRPS. 
The revised application form will more clearly delineate between the 
two application options, which will make it more user friendly and may 
encourage more applicants to file individual applications for blanket 
waivers.
    While the Board recognizes it may be difficult to obtain older 
records pertaining to offenses that occurred long ago, it remains 
incumbent on the applicant to provide pertinent documentation to 
support the application in order for the NCUA to properly evaluate the 
merits of the consent request. The purpose of an application is to 
provide the applicant an opportunity to demonstrate that, 
notwithstanding the statutory employment restrictions under Section 
205(d), the individual is fit to participate in the conduct of the 
affairs of an insured credit union without posing undue risks to its 
safety and soundness or impairing public confidence in the insured 
credit union. The Board maintains that the information requested on the 
application form is the minimum amount necessary for the agency to gain 
an understanding of the circumstances surrounding the conviction or 
program entry and to evaluate all the relevant factors and criteria the 
NCUA will consider in determining whether to grant consent. Finally, 
the Board reiterates that the burden remains upon the applicant to 
establish that the application warrants approval.

IV. Regulatory Procedures

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) generally requires the NCUA to 
prepare an analysis of any significant economic impact a regulation may 
have on a substantial number of small entities (those with less than 
$100 million in assets).\14\ This final IRPS will provide regulatory 
relief by decreasing the number of covered offenses that will require 
an application to the Board. Accordingly, the NCUA certifies that final 
IRPS 19-1 will not have a significant economic impact on a substantial 
number of small credit unions.
---------------------------------------------------------------------------

    \14\ 5 U.S.C. 603(a).
---------------------------------------------------------------------------

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA), 44 U.S.C. 3501 et seq., 
requires that the Office of Management and Budget (OMB) approve all 
collections of information by a federal agency from the public before 
they can be implemented. Respondents are not required to respond to any 
collection of information unless it displays a valid OMB control 
number.

[[Page 65916]]

In accordance with the PRA, the information collection requirements 
included in this final IRPS has been submitted to OMB for approval 
under control number 3133-0203.

C. Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on state and local interests.\15\ 
The NCUA, an independent regulatory agency, as defined in 44 U.S.C. 
3502(5), voluntarily complies with the executive order to adhere to 
fundamental federalism principles. The final IRPS does not have a 
substantial direct effect on the states, on the relationship between 
the national government and the states, or on the distribution of power 
and responsibilities among the various levels of government. As such, 
the NCUA has determined that this IRPS does not constitute a policy 
that has federalism implications for purposes of the executive order.
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    \15\ 64 FR 43255 (Aug. 4, 1999).
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D. Assessment of Federal Regulations and Policies on Families

    The NCUA has determined that this final IRPS will not affect family 
well-being within the meaning of Section 654 of the Treasury and 
General Government Appropriations Act, 1999, Public Law 105-277, 112 
Stat. 2681 (1998).

E. Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act of 1996 
(SBREFA) \16\ generally provides for congressional review of agency 
rules. A reporting requirement is triggered in instances where the NCUA 
issues a final rule as defined by section 551 of the Administrative 
Procedure Act.\17\ An agency rule, in addition to being subject to 
congressional oversight, may also be subject to a delayed effective 
date if the rule is a ``major rule.'' The NCUA does not believe this 
final IRPS is a ``major rule'' within the meaning of the relevant 
sections of SBREFA. As required by SBREFA, the NCUA submitted this 
final IRPS to OMB for it to determine if the final IRPS is a ``major 
rule'' for purposes of SBREFA. The OMB determined that the final IRPS 
is not major. The NCUA also will file appropriate reports with Congress 
and the Government Accountability Office so this rule may be reviewed.
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    \16\ Public Law 104-121.
    \17\ 5 U.S.C. 551.

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    Authority: 12 U.S.C. 1752a, 1756, 1766, 1785.

    By the National Credit Union Administration Board, on November 
21, 2019.
Gerard Poliquin,
Secretary of the Board.

    Note: The following text will not appear in the Code of Federal 
Regulations.

Interpretive Ruling and Policy Statement 19-1; Exceptions to Employment 
Restrictions Under Section 205(d) of the Federal Credit Union Act 
(``Second Chance IRPS'')

I. Background

    This Interpretive Ruling and Policy Statement (IRPS) provides 
requirements, direction, and guidance to federally insured credit 
unions (insured credit unions) and individuals regarding the 
prohibition imposed by operation of law by Section 205(d) of the 
Federal Credit Union Act (FCU Act), 12 U.S.C. 1785(d). Section 
205(d)(1) provides that, except with the prior written consent of the 
National Credit Union Administration Board (Board), a person who has 
been convicted of any criminal offense involving dishonesty or breach 
of trust, or has agreed to enter into a pretrial diversion or similar 
program in connection with a prosecution for such offense may not:
     Become, or continue as, an institution-affiliated party 
with respect to any insured credit union; or
     Otherwise participate, directly or indirectly, in the 
conduct of the affairs of any insured credit union.
    Section 205(d)(1)(B) further provides that an insured credit union 
may not allow any person described above to engage in any conduct or to 
continue any relationship prohibited by Section 205(d). The statute 
imposes a ten-year ban against the Board granting consent for a person 
convicted of certain crimes enumerated in Title 18 of the United States 
Code. In order for the Board to grant consent during the ten-year 
period, the Board must file a motion with, and obtain the approval of, 
the sentencing court. Finally, Section 205(d)(3) states that ``whoever 
knowingly violates'' (d)(1)(A) or (d)(1)(B) is committing a felony, 
punishable by up to five years in jail and a fine of up to $1,000,000 a 
day.
    This IRPS provides guidance to credit unions and individuals 
regarding who is subject to the prohibition provision of Section 
205(d). The IRPS defines what offenses come within the prohibition 
provision of Section 205(d) and thus require an application for the 
Board's consent to participate in the affairs of an insured credit 
union. The IRPS also identifies certain offenses that will be excluded 
from Section 205(d) and do not require the Board's consent. In order to 
assist those who may need the consent of the Board to participate in 
the affairs of an insured credit union, the IRPS explains the 
procedures to request such consent, specifies the application form that 
must be used, clarifies the duty imposed on credit unions by Section 
205(d), and identifies the factors the Board will consider in deciding 
whether to provide such consent. Finally, the IRPS explains how an 
applicant may appeal a decision by the Board denying an application for 
its consent. This IRPS supersedes and replaces former IRPS 08-1.\18\
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    \18\ 73 FR 48399 (Aug. 19, 2008).
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II. Policies and Procedures Regarding Prohibitions Imposed by Section 
205(d)

A. Scope of Section 205(d) of the FCU Act

1. Persons Covered by Section 205(D)
    Section 205(d) of the FCU Act applies to institution-affiliated 
parties, as defined by Section 206(r) of the FCU Act, 12 U.S.C. 
1786(r), and others who are participants in the conduct of the affairs 
of a federally insured credit union. This IRPS applies only to insured 
credit unions, their institution-affiliated parties, and those 
participating in the affairs of an insured credit union.
    Institution-affiliated parties.
    Institution-affiliated parties include any committee member, 
director, officer, or employee of, or agent for, and insured credit 
union; any consultant, joint venture partner, and any other person as 
determined by the Board (by regulation or on a case-by-case basis) who 
participates in the conduct of the affairs of an insured credit union; 
or any independent contractor (including any attorney, appraiser, or 
accountant). Therefore, all officials, committee members and employees 
of an insured credit union fall within the scope of Section 205(d) of 
the FCU Act. Additionally, anyone the NCUA determines to be a de facto 
employee, applying generally applicable standards of employment law, 
will also be subject to Section 205(d). Typically, an independent 
contractor does not have a relationship with the insured credit union 
other than the activity for which the insured credit union has 
contracted. As a general rule, an independent contractor who influences 
or controls the management or affairs of an insured credit union, is 
covered by Section 205(d). In addition, a ``person'' for purposes of 
Section 205(d) means an individual, and does not include a corporation, 
firm or other business entity.

[[Page 65917]]

    Participants in the affairs of an insured credit union.
    A person who does not meet the definition of institution-affiliated 
party is nevertheless prohibited by Section 205(d) if he or she is 
considered to be participating, directly or indirectly, in the conduct 
of the affairs of an insured credit union. Whether persons who are not 
institution-affiliated parties are covered depends upon their degree of 
influence or control over the management or affairs of an insured 
institution. Those who exercise major policymaking functions of an 
insured institution are deemed participants in the affairs of that 
institution and covered by Section 205(d). Participants in the affairs 
of a credit union is a term of art and is not capable of more precise 
definition. The NCUA does not define what constitutes participation in 
the conduct of the affairs of an insured credit union but will analyze 
each individual's conduct on a case-by-case basis and make a 
determination. Agency and court decisions will provide the guide as to 
what standards will be applied. As a general proposition, however, 
participation will depend upon the degree of influence or control over 
the management or affairs of the insured credit union. Those who 
exercise major policymaking functions at an insured credit union fall 
within this category.
2. Offenses Covered by Section 205(D)
    Except as indicated in subsection 3, below, an application 
requesting the consent of the Board under Section 205(d) is required 
where any adult, or minor treated as an adult, has received a 
conviction by a court of competent jurisdiction for any criminal 
offense involving dishonesty or breach of trust (a covered offense), or 
where such person has entered a pretrial diversion or similar program 
regarding a covered offense. Before an application is considered by the 
Board, 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, and the 
case must be considered final by the procedures of the applicable 
jurisdiction. The following definitions apply:
    Conviction. There must be a conviction of record. Section 205(d) 
does not apply to arrests, pending cases not brought to trial, 
acquittals, or any conviction which has been reversed on appeal. A 
conviction with regard to which an appeal is pending will require an 
application until or unless reversed. A conviction for which a pardon 
has been granted will require an application.
    Pretrial diversion or similar program. A pretrial diversion 
program, whether formal or informal, is characterized by a suspension 
or eventual dismissal of charges or criminal prosecution upon agreement 
by the accused to treatment, rehabilitation, restitution, or other non-
criminal or non-punitive alternatives. Whether a program constitutes a 
pretrial diversion is determined by relevant federal, state or local 
law, and, if not so designated under applicable law then the 
determination ow whether it is a pretrial diversion or similar program 
will be made by the Board on a case-by-case basis.
    Dishonesty or breach of trust. The conviction or entry into a 
pretrial diversion program must have been for a criminal offense 
involving dishonesty or breach of trust.
    ``Dishonesty'' means directly or indirectly to cheat or defraud; to 
cheat or defraud for monetary gain or its equivalent; or wrongfully to 
take property belonging to another in violation of any criminal 
statute. Dishonesty includes acts involving want of integrity, lack of 
probity, or a disposition to distort, cheat, or act deceitfully or 
fraudulently, and may include crimes which federal, state or local laws 
define as dishonest.
    ``Breach of trust'' means a wrongful act, use, misappropriation or 
omission with respect to any property or fund which 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.
    Whether a crime involves dishonesty or breach of trust will be 
determined from the statutory elements of the crime itself. All 
convictions or pretrial diversion program entries for offenses 
concerning the illegal manufacture, sale, distribution of or 
trafficking in controlled substances require an application for the 
Board's consent under Section 205(d) unless they fall within the 
provisions for the de minimis offenses set out below.
3. Offenses Not Covered by Section 205(D)
    De minimis offenses.
    In general. Approval is automatically granted and an application 
for the Board's consent under Section 205(d) will not be required where 
the covered offense is considered de minimis, because it meets all of 
the following criteria:
     There is only one conviction or entry into a pretrial 
diversion program of record for a covered offense;
     The offense was punishable by imprisonment for a term of 
one year or less and/or a fine of $2,500 or less, and the individual 
served three (3) days or less of jail time. The Board considers jail 
time to include any significant restraint on an individual's freedom of 
movement which includes, as part of the restriction, confinement to a 
specific facility or building on a continuous basis where the person 
may leave temporarily only to perform specific functions or during 
specified time periods or both. However, this definition is not 
intended to include those on probation or parole who may be restricted 
to a particular jurisdiction, or who must report occasionally to an 
individual or to a specified location;
     The conviction or pretrial diversion program was entered 
at least five years prior to the date an application would otherwise be 
required;
     The offense did not involve a depository institution or 
credit union; and
     The Board or any other federal financial institution 
regulatory agency has not previously denied consent under Section 
205(d) of the FCU Act or Section 19 of the FDIA, respectively, for the 
same conviction or participation in a pretrial diversion program.
    Additional applications of the de minimis offenses exception to 
filing.
    Age at time of covered offense. If the actions that resulted in a 
covered conviction or pretrial diversion program entry of record all 
occur when the individual was 21 years of age or younger, then the 
subsequent conviction or program entry, that otherwise meets the 
general de minimis criteria above will be considered de minimis 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.
    Convictions or program entries for insufficient funds checks. 
Convictions or pretrial diversion program entries of record based on 
the writing of ``bad'' or insufficient funds check(s) will be 
considered a de minimis offense and will not be considered as having 
involved a depository institution or credit union if the all of the 
following applies:
     Other than for ``bad'' or insufficient funds check(s), 
there is no other conviction or pretrial diversion program entry 
subject to Section 205(d) and the aggregate total face value of all 
``bad'' or insufficient funds check(s) cited across all the 
conviction(s) or program entry or

[[Page 65918]]

entries for bad or insufficient checks is $1,000 or less and;
     No depository institution or credit union was a payee on 
any of the ``bad'' or insufficient funds checks that were the basis of 
the conviction(s) or program entry or entries.
    Convictions or program entries for small-dollar, simple theft. A 
conviction or pretrial diversion program entry based on a simple theft 
of goods, services and/or currency (or other monetary instrument) where 
the aggregate value of the currency, goods, and/or services taken was 
$500 or less at the time of conviction or program entry, where the 
person has no other conviction or program entry described in Section 
205(d), and where it has been five years since the conviction or 
program entry (or 30 months in the case of a person 21 years or younger 
at the time of the conviction or program entry) and which does not 
involve a depository institution or credit union is considered de 
minimis. Simple theft excludes burglary, forgery, robbery, identity 
theft, and fraud.
    Convictions or program entries for the use of a fake, false, or 
altered identification card. The use of a fake, false, or altered 
identification card used by a person under the legal age for the 
purpose of obtaining or purchasing alcohol, or used for the purpose of 
entering a premises where alcohol is served but for which age 
appropriate identification is required, provided that there is no other 
conviction or pretrial diversion program entry for the covered offense, 
will be considered de minimis.
    Convictions or program entries for simple misdemeanor drug 
possession. A conviction or pretrial diversion program entry based on 
simple drug possession or illegal possession of a controlled substance 
where the offense was classified as a misdemeanor at the time of 
conviction or program entry, where the person has no other conviction 
or program entry described in Section 205(d), and where it has been 
five years since the conviction or program entry (or 30 months in the 
case of a person 21 years or younger at the time of the conviction or 
program entry) and which does not involve the illegal distribution 
(including an intent to distribute), sale, trafficking, or manufacture 
of a controlled substance or other related offense is considered de 
minimis. Simple possession excludes intent to distribute, illegal 
distribution, illegal sale or trafficking of a controlled substance, or 
illegal manufacture of a controlled substance.
    Any person who meets all of the foregoing de minimis criteria must 
be covered by a fidelity bond to the same extent as other employees in 
similar positions. An insured credit union may not allow any person to 
participate in its affairs, even if that person has a conviction for 
what would constitute a de minimis covered offense, if the person 
cannot obtain required fidelity bond coverage.
    Any person who meets all the foregoing criteria for a de minimis 
offense must disclose the presence of the conviction or pretrial 
diversion program entry to all insured credit unions or other insured 
institutions in the affairs of which he or she intends to participate.
    Further, no conviction or pretrial diversion program entry for a 
violation of the Title 18 sections set out in 12 U.S.C. 1785(d)(2) can 
qualify under any of the de minimis exceptions to filing set out above.
    Youthful offender adjudgments. An adjudgment by a court against a 
person as a ``youthful offender'' under any youth offender law, or any 
adjudgment as a ``juvenile delinquent'' by any court having 
jurisdiction over minors as defined by state law does not require an 
application for the Board's consent. Such adjudications are not 
considered convictions for criminal offenses. Such adjudications do no 
constitute a matter covered under Section 205(d) and is not an offense 
or program entry for determining the applicability of the de minimis 
offenses exception to the filing of an application.
    Expunged convictions. A conviction that has been completely 
expunged is not considered a conviction of record and will not require 
an application for the Board's consent under Section 205(d). If an 
order of expungement has been issued in regard to a conviction or 
pretrial diversion program entry and is intended by the language in the 
order itself, or in the legislative provisions under which the order 
was issued, to be a complete expungement, then the jurisdiction, either 
in the order or the underlying legislative provisions, cannot allow the 
conviction or program entry to be used for any subsequent purpose 
including, but not limited to, an evaluation of a person's fitness or 
character. The failure to destroy or seal the records will not prevent 
the expungement from being considered complete for the purposes of 
Section 205(d) in such a case. Expungements of pretrial diversion or 
similar program entries will be treated the same as those for 
convictions. Convictions that are set aside or reversed after the 
applicant has competed sentencing will be treated consistent with 
pretrial diversions or similar programs unless the court records 
reflect that the underlying conviction was set aside based on a finding 
on the merits that such conviction was wrongful.

B. Duty Imposed on Credit Unions

    Insured credit unions are responsible for establishing their own 
internal employment policies and have discretion to make hiring 
decisions, consistent with applicable law, that best suit their own 
individual needs and risk tolerance. However, Section 205(d) imposes a 
duty upon every insured credit union to make a reasonable inquiry 
regarding the history of every applicant for employment. The NCUA 
maintains that inquiry should consist of taking steps appropriate under 
the circumstances, consistent with applicable law, to avoid hiring or 
permitting participation in its affairs by a person who has a 
conviction or entry into a pretrial diversion program for a covered 
offense. At a minimum, each insured credit union should establish a 
screening process which provides the insured credit union with 
information concerning any convictions or pretrial diversion programs 
pertaining to a job applicant. This includes, for example, the 
completion of a written employment application which requires a listing 
of all convictions and pretrial diversion program entries.\19\ When the 
credit union learns that a prospective employee has a prior conviction 
or entered into a pretrial diversion program for a covered offense, the 
credit union should document in its files that an application is not 
required because the covered offense is considered de minimis and meets 
all of the criteria for the exception, or submit an application 
requesting the Board's consent under Section 205(d) prior to hiring the 
person or otherwise permitting him or her to participate in its 
affairs. In the alternative, for the purposes of Section 205(d), a 
credit union may extend a conditional offer of employment contingent on 
the completion of a background check satisfactory to the credit union 
and to determine if the applicant is barred by Section 205(d). In such 
a case, the job applicant may not commence work for or be employed by 
the credit union until such time that the applicant is determined to 
not be barred under Section 205(d).
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    \19\ Consistent with applicable law, an insured credit union may 
establish its own procedures to make conviction history inquiries at 
any stage of its choosing in its hiring process, so long as 
applicants do not commence work for or be employed by the credit 
union until the applicant is determined to not be barred under 
Section 205(d) or receives consent from the Board.
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    If an insured credit union discovers that an employee, official, or 
anyone

[[Page 65919]]

else who is an institution-affiliated party or who participates, 
directly or indirectly, in its affairs, is in violation of Section 
205(d), the credit union must immediately place that person on a 
temporary leave of absence from the credit union and file an 
application seeking the Board's consent under Section 205(d). The 
person must remain on such temporary leave of absence until such time 
as the Board has acted on the application. When the NCUA learns that an 
institution-affiliated party or a person participating in the affairs 
of an insured credit union should have received the Board's consent 
under Section 205(d) but did not, the NCUA will look at the 
circumstances of each situation to determine whether the inquiry made 
by the credit union was reasonable under the circumstances.

C. Procedures for Requesting the NCUA Board's Consent Under Section 
205(d)

    Section 205(d) of the FCU Act serves, by operation of law, as a 
statutory bar to participation in the affairs of an insured credit 
union, absent the written consent of the Board. When an application for 
the Board's consent under Section 205(d) is required, the insured 
credit union must file a written application using the attached form 
with the appropriate NCUA regional office. The purpose of an 
application is to provide the applicant an opportunity to demonstrate 
that, notwithstanding the bar, the person is fit to participate in the 
conduct of the affairs of an insured credit union without posing a risk 
to its safety and soundness or impairing public confidence in that 
institution. Such an application should thoroughly explain the 
circumstances surrounding the conviction or pretrial diversion program. 
The applicant may also address the relevant factors and criteria the 
Board will consider in determining whether to grant consent, specified 
below. The burden is upon the applicant to establish that the 
application warrants approval.
    The application must be filed by an insured credit union on behalf 
of a person (credit union-sponsored application) unless the Board 
grants a waiver of that requirement and allows the person to file an 
application in their own right (individual application). Such waivers 
will be considered on a case-by-case basis where substantial good cause 
for granting a waiver is shown. The appropriate regional office for a 
credit union-sponsored application is the program office that oversees 
the credit union (i.e., the program office covering the state where the 
credit union's home office is located, or the Office of National 
Examinations and Supervision). The appropriate regional office for an 
individual filing for waiver of the credit union-sponsored filing 
requirement is the program office covering the state where the person 
resides.
    When an application is not required because the covered offense is 
considered de minimis, the credit union should document in its files 
and be prepared to demonstrate that the covered offense meets the de 
minimis criteria enumerated above.

D. Evaluation of Section 205(d) Applications

    The essential criteria in assessing an application for consent 
under Section 205(d) are whether the person has demonstrated his or her 
fitness to participate in the conduct of the affairs of an insured 
credit union, and whether the employment, affiliation, or participation 
by the person in the conduct of the affairs of the insured credit union 
may constitute a threat to the safety and soundness of the institution 
or the interests of its members or threaten to impair public confidence 
in the insured credit union.
    In evaluating an application, the Board will consider:
    1. The conviction or pretrial diversion program entry and the 
specific nature and circumstances of the covered offense;
    2. Evidence of rehabilitation, including the person's reputation 
since the conviction or pretrial diversion program entry, the person's 
age at the time of conviction or program entry, and the time which has 
elapsed since the conviction or program entry;
    3. Whether participation, directly or indirectly, by the person in 
any manner in the conduct of the affairs of the insured credit union 
constitutes a threat to the safety or soundness of the insured credit 
union or the interest of its members, or threatens to impair public 
confidence in the insured credit union;
    4. The position to be held or the level of participation by the 
person at the insured credit union;
    5. The amount of influence and control the person will be able to 
exercise over the management or affairs of the insured credit union;
    6. The ability of management of the insured credit union to 
supervise and control the person's activities;
    7. The applicability of the insured institution's fidelity bond 
coverage to the person;
    8. For state-chartered, federally insured credit unions, the 
opinion or position of the state regulator; and
    9. Any additional factors in the specific case that appear 
relevant.
    The foregoing criteria will also be applied by the Board to 
determine whether the interests of justice are served in seeking an 
exception in the appropriate court when an application is made to 
terminate the ten-year ban for certain enumerated offenses in violation 
of Title 18 of the United States Code prior to its expiration date. The 
NCUA believes such requests will be extremely rare and will be made 
only upon a showing of compelling reasons.
    Some applications can be approved without an extensive review 
because the person will not be in a position to present any substantial 
risk to the safety and soundness of the insured credit union. Persons 
who will occupy clerical, maintenance, service or purely administrative 
positions generally fall into this category. A more detailed analysis 
will be performed in the case of persons who will be in a position to 
influence or control the management or affairs of the insured credit 
union. Approval by the Board will be subject to the condition that the 
person shall be covered by a fidelity bond to the same extent as others 
in similar positions.
    In cases in which the Board has granted a waiver of the credit 
union-sponsored filing requirement to allow a person to file an 
application in their own right, approval of the application will be 
conditioned upon that person disclosing the presence of the 
conviction(s) or program entry or entries to all insured credit unions 
or insured depository institutions in the affairs of which he or she 
wishes to participate. When deemed appropriate, credit union-sponsored 
applications are to allow the person to work in a specific job at a 
specific credit union and may also be subject to the condition that the 
prior consent of the Board will be required for any proposed 
significant changes in the person's duties and/or responsibilities. 
Such proposed changes may, in the discretion of the appropriate 
Regional Director, require a new application for the Board's consent. 
When approval has been granted for a person to participate in the 
affairs of a particular insured credit union and subsequently that 
person seeks to participate in the affairs of another insured credit 
union, approval does not automatically follow. In such cases, another 
application must be submitted. Moreover, any person who has received 
consent from the Board under Section 205(d) and subsequently wishes to 
become an institution-affiliated party or participate in the affairs of 
an FDIC-insured institution, he or she must obtain the prior approval 
of the FDIC pursuant to Section 19 of the FDIA.

[[Page 65920]]

E. Right To Request a Hearing Following the Denial of an Application 
Under Section 205(d)

    If a consent application is denied under Section 205(d), the 
insured credit union (or, in the case where a good-cause waiver has 
been granted, the individual that submitted the application) may 
request a hearing by submitting a written request within 30 days 
following the date of notification of the denial. The Board will apply 
the process contained in regulations governing prohibitions based on 
felony convictions, found at 12 CFR part 747, to any request for a 
hearing.
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[FR Doc. 2019-25699 Filed 11-29-19; 8:45 am]
BILLING CODE 7535-01-C