To what extent can a lender take immigration status into account when underwriting?
Last week, the Consumer Financial Protection Bureau (CFPB) and the Department of Justice (DOJ) issued a joint statement to clarify how lenders can consider immigration status when deciding whether or not to approve a loan for someone.
This is a very controversial issue, especially in the wake of recent trials alleging that lenders denied loans or offered less favorable terms to DACA recipients.
Here’s a look at what the CFPB and DOJ said and how lenders can respond:
The central problem: Lenders may rightly consider all sorts of criteria when assessing a consumer’s ability and willingness to repay a loan. However, when dealing with non-U.S. citizens, potential difficulties may arise: Can borrowers who are not legally authorized to work in the United States be expected to repay a loan in the same manner as a legal resident? or a citizen? What happens if a non-citizen borrower leaves the country? What happens if changes in the borrower’s immigration status affect their earning potential?
Another challenge is that many immigrants may not yet have had the opportunity to build credit with a U.S. credit reporting agency, so their credit reports are thin.
What did the regulators say?
The joint statement confirms that under the Equal Credit Opportunity Act (ECOA), lenders can consider immigration status when underwriting loans, but only to the extent necessary to assess the lender’s rights or remedies to recover funds, or as otherwise required to comply with other laws.
Although immigration status is not directly protected by the ECOA, it can often correlate with or serve as a substitute for protected characteristics such as national origin – against which the ECOA clearly prohibits discrimination.
Among other things, this means that lenders generally cannot deny a loan to a non-citizen applicant based on their immigration status, add additional steps to the loan application process, or charge them a lower interest rate. higher than what they would charge a citizen with the same creditworthiness. .
So, for example: deny someone a loan simply because they are not a US citizen? This is likely unlawful discrimination based on the applicant’s national origin. Decline the same loan because the applicant is in the United States on a tourist visa and is not legally authorized to work? More defensible.
What should lenders do?
Responsible lenders do not deny immigrants’ applications based on their visa status. Most often, lenders deny loan applications from immigrants because noncitizens typically have shallow credit histories, making these applicants harder to secure. Additionally, lenders generally do not make the loan application process more complicated than they deem necessary, although individuals without an SSN may be asked to provide additional information when applying for a loan.
Fortunately, lenders have good options for managing these challenges and complying.
Here are some best practices for lenders to consider:
- Review your loan application process: Discrimination can occur in “any aspect of a credit transaction”, including making the application process more difficult based on immigration status, and is not limited to refusing applications or imposition of higher interest rates. Lenders must ensure that loan eligibility and documentation submission requirements or other procedural aspects of the loan application process do not have a disparate impact on non-citizens, or, if is the case, that they are necessary to assess the probability of reimbursement and that there is no impact on non-citizens. less restrictive means to carry out this evaluation.
- Evaluate your fairness to non-citizens: Collect and analyze data on loan outcomes by visa type or immigration status. Equity Analysis Software can identify whether and why noncitizens are approved at disproportionately lower rates and provide an empirical basis for your lending decisions to immigrant applicants.
- Use cash flow data for underwriting: Consider using other credit data, such as applicant cash flow, for underwriting. This involves analyzing an applicant’s income and spending habits and can be especially helpful for consumers with thin or no credit records.
- Offer credit creation products: Collateralized loans and other nontraditional products can help noncitizens build credit, paving the way for more common lending options in the future. Lenders can create these offerings directly or in collaboration with companies that specialize in immigrant-focused solutions. While offering credit building solutions does not excuse discrimination based on immigration status, it demonstrates proactive support for immigrant communities by giving non-citizens the tools to establish and improve their credit history. credit in the United States.
- Be transparent about immigration status considerations: While being open about how immigration status is considered in underwriting does not legitimize unauthorized uses, it does promote understanding. By clearly communicating the decision-making process, lenders can reduce potential misconceptions, thereby decreasing the likelihood of complaints and lawsuits.
- Review and refine your credit policies: Update and clarify your underwriting policies to specifically address immigration status considerations. Make sure they match both the letter and spirit of the recent guidelines. And remember that beyond federal regulations, some states have developed broader laws against discrimination based on immigration status. A notable example is California, which expressly prohibits business establishments from discriminating based on citizenship, primary language, or immigration status. This legislation highlights the importance of being familiar with not only recent guidance, but also state-specific guidance, so that your practices align with all levels of the legal framework.
Navigating the intersection of lending and immigration status can be difficult, but it’s essential to remember that immigrant borrowers have the same rights as U.S. citizens when it comes to protections against lending discrimination. Although lenders may consider immigration status when assessing repayment risks and complying with other laws, “unnecessary or excessive” reliance on immigration information can cause problems.
By following the tips above, lenders can help ensure that non-citizen borrowers have equal access to credit and survive regulatory scrutiny.