On Compliance: NCUA Second Chance Rule Expands Credit Unions’ Talent Pool

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5 minutes

Candidates whose past offenses meet the criteria for being ‘de minimis’ may now be hired.

In November 2019, the National Credit Union Administration finalized an updated interpretive ruling and policy statement called the Second Chance IRPS. This liberalizes the ability of federally insured credit unions to hire individuals who have been convicted of “de minimis” (trivial) offenses involving “dishonesty” or “breach of trust”—or who entered pretrial diversion programs for such offenses—without prior NCUA Board approval.

The Second Chance IRPS interprets the employment restrictions applicable to federally insured credit union “institution affiliated parties” under Section 205(d) of the Federal Credit Union Act. Section 205(d) also requires credit unions to do a reasonable investigation into the background of any potential “institution affiliated party.”

In addition, the Second Chance IRPS clarifies that federally insured credit unions can hire individuals who committed non-“de minimis offenses” involving dishonesty or breach of trust with the prior approval of the NCUA Board, unless the offense was a violation of a federal criminal law involving a financial institution, such as bank theft or embezzlement committed within the past 10 years.

Federally insured credit unions or executives who “knowingly” hire someone who committed a non-“de minimis offense” without the NCUA Board’s prior approval, however, commit a federal felony that is punishable by up to five years in prison or fines of $1 million per day.

To Whom Do These Employment Restrictions Apply?

“Institution affiliated parties” include employees, directors, committee members, officers, agents, consultants and joint-venture partners of a federally insured credit union.

In addition, “institution affiliated parties” can include natural-person independent contractors whom the NCUA determines are “de facto employees” of the credit union based on generally applicable employment law principles, such as if the independent contractor “influences or controls the management or affairs of” the credit union. This can occur if the independent contractor has the ability to control aspects of the credit union’s affairs without oversight by the credit union.

What Types of Offenses Involve ‘Dishonesty’ or ‘Breach of Trust’?

As a threshold matter, the individual must have been convicted of, or agreed to pretrial diversion for, a crime involving “dishonesty” or “breach of trust” for the Section 205(d) employment restrictions to apply. Many crimes do not involve “dishonesty” or “breach of trust” as defined by the Second Chance IRPS.

NCUA’s Second Chance IRPS defines “dishonesty” to mean “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.”

The IRPS defines “breach of trust” to include “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.”

Reckless driving or murder, for example, would not generally involve “dishonesty” or “breach of trust” as the Second Chance IRPS defines those terms. Notably, however, NCUA has interpreted offenses involving illegal drug dealing or manufacture to be “dishonest” based on federal court precedents holding that drug traffickers typically seek to conceal their involvement in the drug trade.

What Qualifies as ‘De Minimis Offenses’?

The Second Chance IRPS expands the definition of “de minimis offenses” involving dishonesty or breach of trust where the credit union does not need prior approval from the NCUA Board to hire the individual who committed the offense. In general, the Second Chance IRPS defines “de minimis offense” as one that meets all of the following conditions:

  • The individual only has one conviction or pretrial diversion for an offense involving dishonesty or breach of trust;
  • The offense was punishable by imprisonment of one year or less and/or a fine of $2,500, and the individual served no more than three days in jail, under house arrest or in detention;
  • The conviction or pretrial diversion order was entered by a court more than five years ago (or more than 30 months ago if the individual was 21 or younger when he or she was convicted or entered the pretrial diversion program);
  • The offense did not involve a credit union or other depository institution (unless the offense was only for passing a “bad” check); and
  • The NCUA Board or any other federal financial institution regulatory agency has not previously denied a consent request to hire the individual.

The Second Chance IRPS’s definition of “de minimis offenses” also includes:

  • “Small-dollar, simple theft” of currency, goods or services worth less than $500;
  • Offenses involving using fake identification to purchase alcohol; and
  • Offenses involving simple misdemeanor drug possession.

What If the Conviction Has Been Expunged?

The Second Chance IRPS treats expunged convictions involving dishonesty or breach of trust similarly to de minimis offenses. The Second Chance IRPS states that a “conviction that has been completely expunged is not considered a conviction of record and will not require an application” to obtain prior NCUA Board approval before the credit union hires the individual.

A pardon or a conviction being overturned on a technicality, however, are not considered “expungements.” Offenses involving dishonesty or breach of trust where the individual was pardoned or had his or her conviction set aside after sentencing would still require prior NCUA Board approval before hiring unless “the conviction was set aside based on a finding on the merits that such conviction was wrongful.”

NCUA’s Second Chance IRPS is appropriately named in the sense that it makes it easier for federally insured credit unions to hire individuals who committed minor offenses involving dishonesty or breach of trust several years ago. Importantly, however, the Second Chance IRPS does not make these individuals a protected class, meaning that federally insured credit unions retain the option not to hire individuals who have a criminal record, even a “de minimis” one, so long as the credit union complies with other applicable federal and state employment laws.

Michael S. Edwards is an attorney-at-law with extensive experience representing credit unions, community banks and credit union organizations in the United States and around the world on a wide range of regulatory, compliance and other legal matters. Now with his own law firm based in the Washington, D.C., area, Edwards previously served as SVP/advocacy and general counsel of the World Council of Credit Unions and was senior assistant general counsel in the regulatory advocacy section of the Credit Union National Association.

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