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Lending to Non-U.S. Citizens

July 14, 2014

by Drew M. Edwards, Esq.

Whether your credit union serves a small rural town, or the employees of a global corporation, you will sooner or later receive a loan application form someone who is not a United States citizen. While it is perfectly proper to lend to non-US-citizens, there are certain risks, and certain traps for the unwary, when designing lending policies and procedures for borrowers who are not citizens of the United States.

Can You Lend?

Can your credit union lend to individuals who are not US citizens? The answer is yes. There are no restrictions on lending to individuals based on citizenship or immigration status. An individual’s citizenship may make it more difficult to comply with certain other regulatory requirements, such as those related to the Office of Foreign Asset Control, but a person’s lack of US citizenship does not, by itself, prohibit a financial institution from making a loan to that person. In the context of mortgage lending, secondary market rules permit the sale of mortgage loans on the secondary mortgage market, even if the loan was made to a non-US-citizen. For example, Freddie Mac’s rules put it very simply: “A non-U.S. citizen who is lawfully residing in the U.S. as a permanent or nonpermanent resident alien is eligible for a Mortgage on the same terms as a U.S. citizen.” (See rule 22.10.1: Permanent and nonpermanent resident aliens.) Fannie Mae has more detailed rules (See B2-2-02, Non–U.S. Citizen Borrower Eligibility Requirements and B3-4.2-05, Verification of Assets for Non-U.S. Citizen Borrowers), but they also allow “mortgages made to non–U.S. citizens who are lawful permanent or non-permanent residents of the United States under the same terms that are available to U.S. citizens.” Both Fannie Mae and Freddie Mac require that the borrower be a legal resident of the US.

Risks of Residence

While your credit union is permitted to lend to non-US-citizens, there are certain risks to consider before you decide to lend to a particular borrower. A full treatment of the risks involved in lending to non-US-citizens is beyond the scope of this article. However, I do want to address certain legal risks and compliance issues related to the fact that a particular individual may choose to leave the United States after the loan is disbursed. If you disburse a loan with a five-year term, you will have a hard time collecting on that loan if the borrower leaves the United States after two years.

You may be wondering whether using such criteria for evaluation is prohibited as discrimination on the basis of national origin. While it is true that a lender cannot discriminate on the basis of national origin, you are allowed to take immigration status into account when considering ability to repay. In The Equal Credit Opportunity Act (Reg. B), section 202.6(b)(7) states that “A creditor may consider the applicant’s immigration status or status as a permanent resident of the United States, and any additional information that may be necessary to ascertain the creditor’s rights and remedies regarding repayment.” The staff commentary further expands on this rule:

The applicant’s immigration status and ties to the community (such as employment and continued residence in the area) could have a bearing on a creditor’s ability to obtain repayment. Accordingly, the creditor may consider immigration status and differentiate, for example, between a noncitizen who is a long-time resident with permanent resident status and a noncitizen who is temporarily in this country on a student visa… A denial of credit on the ground that an applicant is not a United States citizen is not per se discrimination based on national origin.

So, a lender is permitted to take into account the likelihood that a particular borrower may or may not remain in the USA, in terms of the lender’s ability to enforce its legal rights to repayment against that borrower in the future. That said, this is a determination that must be made on an individual, case-by-case basis. A lender may never discriminate on the basis of national origin. Thus, the permissive language in 202.6(b)(7) must be read in light of the strict prohibition in 202.6(b)(9): “a creditor shall not consider race, color, religion, national origin, or sex (or an applicant’s or other person’s decision not to provide the information) in any aspect of a credit transaction.”

Let’s say that you deny a loan to a borrower because you think that he may leave the USA and return to the Dominican Republic, his country of origin. Whether that decision violates the ECOA will depend upon your documented reasons for thinking that the borrower will leave. If you think that he will leave solely because he is from the Dominican Republic, since you think that everyone from the Dominican Republic is likely to leave the USA, that is prohibited as discrimination on the basis of national origin under 202.6(b)(9). If, however, you think that he will leave because he has only been in the country for two months, he has no ties to the local community, and he has told you verbally that he intends to return to the Dominican Republic, this is permitted under section 202.6(b)(7). Whenever you make a decision of this type, make sure that you document the individual circumstances of the borrower which lead you to believe that he or she has a high likelihood of leaving the USA during the term of his or her loan.

Even if your credit union intends to consider immigration status in a way that complies with the ECOA, this is still dangerous ground which presents a trap for your credit union. Even if your policies do not have the intent to discriminate, they can still violate the ECOA if they have a disproportionate impact on a protected class. While a full treatment of the “disproportionate impact” test is well beyond the scope of this article, the Interagency Fair Lending Examination Procedures sets out a five-point test that examiners can use to flag lenders for creating a disproportionate impact:

1. A specific policy or criterion is involved.

2. The policy or criterion on its stated terms is neutral for prohibited bases.

3. The policy or criterion falls disproportionately on applicants or borrowers in a prohibited basis group.

4. There is a causal relationship between the policy or criterion and the adverse result.

5. Either a or b:

a. The policy or criterion has no clear rationale, or appears to exist merely for convenience or to avoid a minimal expense, or is far removed from common sense or standard industry underwriting considerations or lending practices.

b. Alternatively, even if there is a sound justification for the policy, it appears that there may be an equally effective alternative for accomplishing the same objective with a smaller disproportionate adverse impact.

If your credit union considers factors such as immigration status and likelihood of remaining in the USA, you must employ procedures to guard against improper use of such criteria which could create a disparate impact on a protected class. It is all too easy for anyone to start taking shortcuts that can eventually turn into discriminatory practices. While it is perfectly proper and reasonable to consider a borrower’s immigration status in terms of the credit union’s rights and remedies regarding repayment, it is also essential to institute internal controls to ensure that your staff considers each borrower as an individual, and does not discriminate improperly. As always, ensure that you have knowledgeable legal representation and consult your credit union attorney for advice about your credit union’s specific situation.

DISCLAIMER: The foregoing is provided for informational purposes only, and does not constitute legal advice. It is not a substitute for legal or professional advice. Any legal advice should be tailored to specific clients and their specific needs. No attorney-client relationship is created by any use of this website. You should not act on the information contained in any of the materials on this website without first consulting a competent attorney licensed to practice in your jurisdiction.

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