QUESTION
We are a lender in the northwest. We
have a Code of Ethics that was accepted by our banking department. Recently,
they did an audit. In the exit interview, they said we should have a hiring and
employment policy that screens for character and fitness.
Our Compliance Manager asked who should
be screened, and the auditor said we should screen for loan and senior
officers, managers, and directors. We do this, but it’s not formal enough for
them. They want a set of procedures and criteria.
In researching procedures, we found that
some banking departments have broad statements but not many procedures, and
others have pretty rigorous ones. We’re leaning toward the rigorous approach
since we are licensed in several states and plan to expand into more states
this year.
What are some procedures and criteria to
use for determining character and fitness?
ANSWER
Character and fitness, taken together,
form an evaluation in many professional fields. Many people don’t know this,
but such criteria are a central pillar of ethics in the legal profession. Just
because somebody is admitted into law school doesn’t mean the state bar has to
admit them into legal practice. It is up to them to prove to the state bar that
they possess the requisite character and fitness to be a member of the bar. Evaluation
may be based, among other things, on such issues as alcohol and substance abuse
problems, previous disbarment or suspension, mental health issues, civil legal
actions, misdemeanor and felony convictions, academic misconduct, and
straight-out lack of honest candor and full disclosure.
In financial services such as mortgage
banking, character and fitness failures can disrupt safety and soundness
requirements, increase the significant risks resulting from contact with the
public, and degrade a financial institution’s operational and financial
structure. This is why the evaluation is meant to be applied not only to loan
officers but also to owners, directors, senior officers, and managers. Indeed,
character and fitness assessment should be a mainstay of virtually all
employees directly or indirectly involved in the loan flow process. Many
banking departments already screen for character and fitness of individual
licensees in their licensing and renewal processes.
We have had clients that merged or were
acquired. In each instance, our guidance has been the same: upon consummation
of the transaction, each affected individual should be screened in the onboarding
review. The continuing or surviving entity should not rely on previous vetting
or due diligence. Each such entity is responsible for fully vetting its
affected individuals in the onboarding and ongoing relationship of the
individual with the institution.
Screening procedures should have ways,
means, and methods to denote sensitive issues, warning signs, and other indicia
of character and fitness. If there are concerns, the affected individual should
not be permitted to commence, carry out, or continue fulfilling the
responsibilities of their position, at least until such time as an enhanced
review has resolved any perceived risk-based issues.
Remedial efforts are required if a
review vets through to materially adverse findings. Possible remedies include removing
an individual from a position, revising the individual’s responsibilities, terminating
the individual’s employment, or not hiring the individual in the first place.
Where materially adverse findings are established, the banking department
should be notified. Due to materially adverse findings, removal from a
position, revising position responsibilities, terminating employment or not
hiring, and notifying the banking department, should be undertaken with the advice
of legal counsel.
There are many tools to evaluate
character and fitness. There is one that I find particularly well-conceived. It
is provided by New York State’s Department of Financial Services (DFS). The DFS
has long had an examination methodology that embraces a financial institution’s
program to assess character and fitness.[i] It is entitled Suggested
Questions to Facilitate Initial and Ongoing Assessment of Designated Persons’
Character and Fitness.[ii] I emphasize the word “suggested”
because each institution must ratify policies and procedures that are
appropriate to its risk profile and complexity as well as consistent with state
and, where applicable, federal law.
The DFS lists twenty questions. Our
experience is that many more questions could be asked. These, however, are essential
and basic. The questions are not minimum requirements, prescriptive, or meant to be comprehensive.
We provide a free Character and Fitness Checklist.
Get the free Character and Fitness Checklist.
Suggested Questions to Evaluate
Character and Fitness[iii]
1.
Acknowledge
that you have reviewed and understood the following policies of the company and
provide evidence of any documented exceptions to compliance with certain
specified policies in a separate attachment.
2.
For
ongoing assessment, to the best of your knowledge, have you complied with all
above-listed policies [during [year(s)], and made all disclosures required,
including seeking exceptions from these policies as appropriate, and being
granted such exceptions?
3.
During
[year(s)], have you been charged with, indicted for, or convicted of a crime
and/or pleaded nolo contendere in any criminal matter (including, but not
limited to, driving under the influence, reckless driving, and/or disorderly
conduct)?
4.
Have
you or any financial institution with which you are or were associated been
sanctioned and/or censured in any way by a banking or securities regulator
during [year(s)], including any regulatory sanction, consent order, enforcement
order, supervisory agreement, civil monetary penalty, or other administrative
penalties?
5.
Have
you been the subject of any professional disciplinary actions, denied a
license, and/or had a license suspended or revoked during [year(s)] (i.e., a
governmental or professional licensing organization), excepting banking and
securities regulators referenced in Question 4?
6.
Please
describe in a separate attachment any civil litigation, investigation, or
sanction – including but not limited to any regulatory sanction, consent
order/agreement, enforcement order/agreement, or other administrative findings
or penalties – in which you have, to your knowledge, been named or have
otherwise become involved in your professional capacity, or which have been
initiated against a prior employer in connection with your responsibilities in
that position, in the preceding ten (10) years.
7.
Have
you ever been dismissed or asked to resign from past employment, including a
less-than-honorable discharge from military service?
8.
Have
you been involved in certain filings where the filing was denied, disapproved,
withdrawn, or otherwise returned without favorable action by a federal or state
regulatory authority or a self-regulatory organization?
9.
Has
anyone in your immediate family or an individual in your household worked for
the institution or an affiliate in [year(s)]? If so, please state their name
and their relationship to you. “Immediate family” means the individual’s
children, parents, siblings, spouse, or partner.
10. Have you or an immediate family member
started or continued an outside business relationship with an auditor of the institution
during [year(s)]?
11. Please describe in a separate attachment
all indebtedness to the institution or an affiliate that you have incurred
[during the past year / since your previous report] (excluding indebtedness
associated with a general-purpose credit card) and the balance outstanding of
all such indebtedness to the institution or an affiliate at the end of [year].
12. Please describe in a separate attachment
any lobbying activities in which you have been engaged in your personal
capacity during [year(s)] and whether you were registered as a lobbyist in any
jurisdiction during [year(s)].
13. Please describe in a separate attachment
any litigation (unless described above) or bankruptcy proceedings of which you
have been a part during [year(s)] and provide copies of all relevant documents.
14. Do you owe outstanding child support in
connection with any unemancipated child(ren)?
15. Please describe in a separate attachment
all settlements of litigation (threatened or actual) brought against you in
your personal or professional capacity during [year(s)] and provide copies of
all relevant documents.
16. Have you or any company with which you
are associated or were associated during [year(s)]:
o
Filed
a petition under any chapter of the Bankruptcy Code or had an involuntary
bankruptcy petition filed against you or the company?
o
Defaulted
on a loan or financial obligation of any sort, whether as obligor, cosigner, or
guarantor?
o
Forfeited
property in full or partial satisfaction of any financial obligation?
o
Had
any liens or other judgments filed against you?
o
Had
wages or income garnished for any reason?
o
Failed
or refused to pay any outstanding judgments?
17. Have you filed/paid all of your required
income and other taxes for [year(s)]?
18. Please list in a separate attachment all
companies (whether publicly traded or not) and any organizations (including
not-for-profit and/or charitable) of which you have been a member of the board
of directors or an executive officer during [year(s)].
19. Have you been a senior officer or a
board member at a financial institution that filed for reorganization or
bankruptcy; became subject to a receivership or conservatorship proceeding;
became subject to a resolution or liquidation proceeding; had its license,
charter, or registration surrendered or revoked; received financial assistance
from a federal or state agency or instrumentality (i.e., FDIC); merged with or
been acquired by an institution that received financial assistance from a
federal or state agency or instrumentality in connection with the transaction;
or otherwise failed or ended business operations?
20. Please disclose all compensation
received during [year(s)] beyond the amounts paid to you as compensation by the
institution.
Character and fitness can be tested and
monitored, whether you think so or not. A risk-based approach should also be
proportionate to an institution’s risk profile. Risk-based testing means a
layered evaluation attuned to ongoing assessments, monitoring frequency, and
continuity.
We provide a free Character and Fitness Checklist.
Get the free Character and Fitness Checklist.
Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group
[i] See
New York Banking Law § 599-e et seq.
[ii] Suggested
Questions to Facilitate Initial and Ongoing Assessment of Designated Persons’
Character and Fitness, Appendix, Industry Letter: Guidance on Assessment of
the Character and Fitness of Directors, Senior Officers, and Managers, January
22, 2024, Department of Financial Services, New York State
[iii]
Ibid. Condensed and edited for the sake of brevity.
