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Financial Services Law Insights and Observations

8th Circuit: Bank that discharged employees as a “business necessity” did not violate Section 19 of the FDI Act

Courts Appellate Eighth Circuit FDI Act Disparate Impact


On August 29, the U.S. Court of Appeals for the 8th Circuit affirmed a lower court’s order granting summary judgment in favor of a national bank, holding that the bank did not violate the Federal Deposit Insurance Act’s Section 19 employment ban when it discharged African-American and Latino employees who previously had been convicted of crimes involving dishonesty. Under Section 19, individuals who have been convicted of a crime “involving dishonesty or a breach of trust” cannot be employed by a financial institution covered by federal deposit insurance. A bank that violates the ban is subject to criminal penalties, although an individual may request a waiver from the FDIC. According to the order, the bank screened all home mortgage division employees in 2012 and discharged anyone who was found to have a conviction without providing the option to apply for a waiver. The class members—who brought discrimination claims based on a disparate impact theory—complained that the bank’s automatic discharge of all affected employees impacted African Americans and Latinos at a higher rate than white employees, and contended that the bank could have prevented this result with an alternative such as giving employees “advance notice of the need for a Section 19 discharge, granting leave time to seek a waiver, and/or sponsoring a waiver.” The appellate court relied on data showing that approximately half of waiver applications are approved by the FDIC, and class members presented no data to show that sponsored waivers would ameliorate any racial disparity. In addition, the appellate court held that the bank’s decision to comply with the statute was a business necessity in light of the possibility of a $1 million-per-day fine “even if [the bank’s] policy of summarily terminating or not hiring any Section 19 disqualified individual creates a disparate impact.” Moreover, the appellate court stated that the class members “failed to establish a prima facie case of disparate impact,” and did not present a less discriminatory alternative that would serve the bank’s interests in compliance with the statute.