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 to approve someone for a loan.
This is a hotly contested issue, especially in the wake of recent lawsuits alleging that lenders have denied loans or offered less favorable terms to DACA recipients.
Here’s a breakdown of what the CFPB and DOJ said, and how lenders can respond:
The Core Issue: Lenders can rightfully consider all sorts of criteria when evaluating a consumer’s ability and willingness to repay a loan. However, when it comes to non-U.S. citizens, potential complexities arise: Can borrowers who are not legally authorized to work in the U.S. be expected to repay a loan the same way a legal resident or citizen does? What if a noncitizen borrower leaves the country? What if changes in the borrower’s immigration status affect their income-earning potential?
Another challenge is that many immigrants may not yet have had the opportunity to build a credit file with a US 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 in loan underwriting, but only as necessary to assess the lender’s rights or remedies to recover funds, or if otherwise required to comply with other laws.
Though immigration status isn’t directly protected under ECOA, it can often correlate with or act as a stand-in for protected traits like national origin – which the ECOA clearly prohibits discriminating against.
Among other things, this means that lenders generally cannot deny a loan to a noncitizen applicant because of their immigration status, add extra steps to the loan application process, or charge them a higher interest rate than they would charge to a citizen with the same creditworthiness.
So, for example: Declining a loan to someone simply because they’re not a U.S. citizen? That’s probably illegal discrimination on the basis of the applicant’s national origin. Denying the same loan because the applicant is in the U.S. on a tourist visa and isn’t legally allowed to work? More defensible.
What should lenders do?
Responsible lenders aren’t denying applications from immigrants on the basis of their visa status. More commonly, lenders are denying loan applications from immigrants because non-citizens usually have shallow credit histories which makes these applicants more difficult to underwrite. Lenders also generally don’t make the loan application process more complicated than they believe is necessary, though individuals without SSNs might be asked to provide additional information when applying for a loan.
Fortunately, lenders have good options to manage these challenges and be compliant.
Here are a few Best Practices for lenders to consider:
- Review your loan application process: Discrimination can occur in “any aspect of a credit transaction”, including by making the application process more difficult based on immigration status, and is not limited only to declining applications or charging higher interest rates. Lenders should make sure that loan eligibility and document submission requirements or other procedural aspects of the loan application process do not have a disparate impact on noncitizens, or, if they do, that they are necessary to evaluate the likelihood of repayment and that there is no less burdensome means of conducting that evaluation.
- Baseline your fairness to non-citizens: Collect and analyze data on loan outcomes by visa type or immigration status. Fairness analytics software can identify if and why non-citizens are being approved at disproportionately lower rates as well as provide an empirical basis for your lending decisions for applicants who are immigrants.
- Use cash-flow data for underwriting: Consider using alternative credit data, such as applicants’ cash-flow, for underwriting. This involves analyzing an applicant’s income and spending habits and can be particularly helpful for underwriting consumers with thin or no credit files.
- Offer credit builder products: Secured loans and other non-traditional products can assist non-citizens in building credit, paving the way to more mainstream lending options in the future. Lenders can create these offerings directly or in collaboration with firms specializing in immigrant-focused solutions. While offering credit building solutions doesn’t excuse discrimination on the basis of immigration status, it does demonstrate proactive support for immigrant communities by giving non-citizens the tools to establish and improve their credit histories in the U.S.
- Be transparent about immigration status considerations: While being open about how immigration status factors into underwriting doesn’t legitimize impermissible uses, it does foster understanding. By clearly communicating the decision-making process, lenders can reduce potential misconceptions, thereby diminishing the likelihood of complaints and lawsuits.
- Review and refine your credit policies: Update and clarify your underwriting policies to specifically address considerations related to immigration status. Ensure they align with both the letter and spirit of the recent guidance. And, remember, beyond federal regulations, some states have crafted more expansive laws against discrimination based on immigration status. A notable example is California, which expressly prohibits business establishments from discriminating on the grounds of citizenship, primary language, or immigration status. This legislation underscores the importance of being well-versed not just with the recent guidance but also with state-specific guidelines, so that your practices align with all layers of the legal framework.
Navigating the intersection of lending and immigration status can be challenging, but it is crucial to remember that immigrant borrowers have the same rights as U.S. citizens when it comes to protection from discrimination in lending. While lenders can consider immigration status to assess repayment risks and comply with other laws, “unnecessary or overbroad” reliance on immigration information can spell trouble.
By following the tips above, lenders can help to ensure that noncitizen borrowers have equal access to credit and survive regulatory scrutiny.