Three Of The Federal Banking Agencies Issue Guidance On Credit Risks In Lending To Borrowers Without Work Authorization

On July 13, the Office of the Comptroller of the Currency (OCC”), Federal Deposit Insurance Corporation (“FDIC”) and National Credit Union Administration (“NCUA” and collectively, the “Agencies”) have issued guidance advising supervised institutions to consider the heightened credit risks that may arise when lending to individuals who are not legally authorized to work in the United States. Notably, the Federal Reserve Board has not joined the FDIC, OCC and NCUA in issuing this guidance.

The July 13 guidance does not prohibit such lending or purport to establish new binding requirements (NB: the Federal Banking Agencies have issued a rule stating that guidance is generally not binding, see, e.g., Federal Register :: Role of Supervisory Guidance ). Instead, the agencies characterize it as a reminder that existing safety-and-soundness obligations require institutions to identify, measure, monitor and control risks associated with a borrower's capacity and willingness to repay. Nevertheless, the guidance clearly signals that examiners may expect institutions to address work authorization—and the potential consequences of its absence—within their underwriting, account-management and portfolio-risk frameworks.

The guidance follows President Trump's May 19 Executive Order 14406, Restoring Integrity to America's Financial System. The Executive Order directed federal financial regulators to address what the Administration described as risks arising from extending financial services to the “inadmissible and removable alien population.” It instructed regulators to focus not only on potential illicit-finance concerns, but also on the possibility that removal, loss of employment or employer compliance with immigration law could impair a borrower's ability to repay mortgages, auto loans, credit cards and other obligations.

The Agencies' guidance implements that policy directive into conventional ability-to-repay and credit-risk terminology. They state that income from employment that is not legally authorized may be less reliable because employment could be suspended or terminated, the borrower might be unable to obtain lawful reemployment, or the borrower might be removed from the United States. Institutions therefore should consider whether repayment capacity would remain adequate under scenarios involving interruption or loss of employment income.

The guidance also identifies potential collateral-recovery issues, particularly for movable collateral such as automobiles, recreational vehicles and boats, where it may become more difficult to contact the borrower or locate and repossess the property. On documentation, institutions might consider reviewing paystubs, W-2s, tax returns, employer verifications, bank statements and evidence of continuing work authorization. The Agencies further suggest that loans or portfolio segments involving non-work-authorized borrowers may warrant classification or allowance consideration even before delinquency emerges if other signs of credit weakness are present.

The interagency guidance also incorporates the CFPB's June 8 Statement on Ability To Repay and Immigration Status. That statement concluded that creditors relying on U.S.-based employment income are permitted—and, in some circumstances, may be required—to consider information bearing on the borrower's continuing ability to earn that income when continued U.S. residence is necessary to the employment.

For mortgages, the CFPB tied that conclusion to Regulation Z's requirement that creditors make a reasonable and good-faith determination of repayment ability. For credit cards, it pointed to the obligation to consider the consumer's ability to make required minimum payments. The CFPB also emphasized that Regulation B permits consideration of immigration status where relevant to the creditor's rights, remedies or ability to obtain repayment.

Importantly, neither the CFPB statement nor this recent interagency guidance provides a prescribed methodology for determining immigration or employment-authorization status. Nor does either issuance categorically equate use of an Individual Taxpayer Identification Number with unlawful presence. The practical challenge for institutions will be determining what information they possess, what additional information they should request, and how to apply any resulting distinctions consistently without creating unnecessary fair-lending exposure.

The guidance is not without its critics. The National Community Reinvestment Coalition (“NCRC”) criticized the earlier CFPB statement and argued that credit decisions should turn on demonstrated repayment ability rather than hypothetical consequences associated with immigration status. It warned that the policy could exclude otherwise qualified borrowers from mainstream credit. Inclusiv and the National Association of Latino Credit Unions and Professionals similarly warned that the Executive Order could push immigrants outside the regulated financial system, increase the number of unbanked consumers and impose substantial compliance burdens—particularly on smaller credit unions required to track changing immigration or work-authorization information. While not necessarily a criticism, the American Bankers Association, discussed the practical impact of the CFPB's guidance in its compliance question of the month feature.

The immediate message for institutions is not that lending to non-work-authorized borrowers is forbidden. It is that regulators increasingly expect the associated risks to be identifiable in underwriting standards, documentation practices, stress scenarios, credit classification, allowance methodologies and concentration-risk monitoring. Institutions engaged in ITIN lending or otherwise serving immigrant communities should review those frameworks now—before examination questions convert general guidance into specific supervisory expectations.