The Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC) and National Credit Union Administration (NCUA) recently jointly issued guidance reminding supervised financial institutions of their existing credit risk management obligations to borrowers who are not legally authorized to work in the United States (non-work-authorized borrowers).
The guidance follows a recent White House executive order directing financial regulators to address risks “posed by the extension of credit or financial services to the inadmissible and removable alien population.” The order specifically directed the regulators to issue guidance on managing the potential credit risks posed by this population of borrowers.
The Consumer Financial Protection Bureau (CFPB) previously issued its own guidance following the order, reminding creditors that assessing a consumer’s ability to pay debt obligations under the Truth in Lending Act (TILA) may warrant or require consideration of immigration status when assessing an individual’s employment income.
Guidance
In the guidance, the agencies state that lending to non-work-authorized borrowers may pose heightened credit risk given the uncertainty such borrowers may face in generating income and maintaining employment. The agencies urge financial institutions to “identify, measure, monitor, and control these risks through safe and sound underwriting practices” that assess a borrower’s ability to pay the credit obligation. In particular, the agencies encourage financial institutions to review certain key underwriting considerations related to the following:
- Source of repayment. Financial institutions may consider whether borrowers will continue to satisfy their payment obligations under various scenarios, including potential interruptions in employment or income for failure to maintain lawful work authorization.
- Collateral. Enforcing security interests on collateralized loans to non-work-authorized borrowers may be challenging if the borrower becomes difficult to contact or locate.
- Documentation and verification. Financial institutions may consider whether employment income is current, verifiable, stable and likely to continue, and may require paystubs, W-2s or other evidence of continuing work authorization.
- Portfolio and concentration considerations. Financial institutions may face more widespread risk if borrowers are concentrated in geographic markets, employers, or industries that are disproportionately affected by changes in immigration enforcement and resultant workforce disruptions.
The agencies also direct supervised financial institutions to the CFPB’s recent “Statement on Ability to Repay and Immigration Status,” which addresses compliance obligations under TILA (implemented by Regulation Z) and the Equal Credit Opportunity Act (implemented by Regulation B). The guidance reminds institutions that TILA requires creditors to assess a borrower’s ability to repay before extending mortgages and credit cards, and that assessment may require consideration of immigration status, while Regulation B expressly permits creditors to consider immigration status and additional information necessary to ascertain rights and remedies regarding repayment.
Looking ahead
While the guidance does not impose new legal prohibitions on lending to non-work-authorized borrowers – federal law does not prohibit banks from serving this population – it signals the agencies’ heightened supervisory expectations around credit risk identification, measurement, monitoring and control. Financial institutions may consider reviewing underwriting policies and procedures to confirm they adequately identify and mitigate credit risk associated with non-work authorized borrowers and monitor further regulatory developments that may impact their supervisory or compliance programs.