Consideration of Immigration Status in Lending Decisions

By Alex Wade

April 2, 2024

The Equal Credit Opportunity Act (“ECOA”) and its implementing regulation, Regulation B, prohibit discrimination in any aspect of a credit transaction, including when evaluating an application and making a credit decision.  Specifically, the ECOA prohibits discrimination based on the following factors:

• Age
• Color
• Sex (including gender)
• Marital status
• National origin
• Race
• Religion
• Exercising rights under the Consumer Credit Protection Act
• Receipt of public assistance

Importantly, courts have recognized three types of proof of lending discrimination under the ECOA: (1) Overt evidence of discrimination, when a lender blatantly discriminates on a prohibited basis; (2) Evidence of disparate treatment, when a lender treats applicants differently based on one of the prohibited factors; and (3) Evidence of disparate impact, when a lender applies a practice uniformly to all applicants but the practice has a discriminatory effect on a prohibited basis and is not justified by business necessity.

 As such, financial institutions must be careful not to discriminate based on any of the above-referenced factors, including national origin.  Overt evidence of discrimination and treating applicants differently based on the aforementioned prohibited factors are easier to track and avoid; however, financial institutions must also be mindful of any discriminatory disparate impact even when applying a lending practice uniformly to all applicants.  In the event there is a discriminatory disparate impact, financial institutions must be prepared to explain the business necessity for such treatment and provide documentation in support of its business necessity analysis.  As such, financial institutions should take proactive measures to ensure that their lending practices are not discriminatory on a prohibited basis, which could include, for example, conducting routine audits and statistical comparative file reviews to determine whether there is any evidence of disparate treatment in the Credit Union’s lending decisions.

Additionally, for financial institutions that conduct business in California, please note the potential for disparate discriminatory impact discussed above is equally actionable under California’s Unruh Act.  California Civil Code Section 51 (where the California Unruh Act is codified) states that “[a]ll persons within the jurisdiction of this state are free and equal, and no matter what their sex, race, color, religion, ancestry, national origin, disability, medical condition, genetic information, marital status, sexual orientation, citizenship, primary language, or immigration status are entitled to the full and equal accommodations, advantages, facilities, privileges, or services in all business establishments of every kind whatsoever.”

Thus, California financial institutions will also need to monitor any potential discriminatory disparate impact under the Unruh Act.  However, under the Unruh Act, a financial institution’s ability to avoid liability for a disparate discriminatory impact claim will likely be easier than a claim brought under ECOA and Regulation B.  The Unruh Act requires a showing of a compelling societal interest to justify the business practice, whereas ECOA and Regulation B require a showing that the legitimate needs of the financial institution could not be reasonably achieved by alternatives less disparate in their impact.  The latter standard for ECOA and Regulation B is a higher burden of proof.

With the above legal background in mind, please note that although ECOA and Regulation B prohibit discrimination against a credit applicant on the basis of race, color, and national origin, among other protected characteristics, it expressly permits consideration of immigration status to ascertain the creditor’s rights regarding repayment.  Notably, the CFPB and DOJ issued a joint statement cautioning lenders about considering immigration status in lending decisions in a discriminatory manner.  The joint statement serves as a caution to financial institutions that they must not rely on immigration status unnecessarily in a manner that can potentially violate ECOA and other laws (e.g., California’s Unruh Act).  The joint statement emphasizes limiting such reliance on no other reason other than determining rights or remedies for repayment to avoid running afoul of ECOA’s prohibitions.  It provides various examples including having an overbroad policy to refuse applicants from certain groups or noncitizens irrespective of their creditworthiness which could put the creditor at risk of using such policy as a pretext for unlawful discrimination (e.g., on the basis of race or national origin).

In light of the foregoing, as well as the litigation financial institutions have faced for implementing policies that restrict lending to individuals based on immigration status, financial institutions should review their lending policies and procedures regarding the consideration of immigration status and ensure that they are narrowly tailored to ascertaining the financial institution’s rights and remedies regarding repayment.  Of course, the experts at SW&M can assist in this regard.

Lastly, please note that there have been recent troubling class action lawsuits based on violations of an old federal civil rights statute prohibiting discrimination due to alienage and state laws that prohibit discrimination based on immigration status brought by plaintiffs who have DACA status.  As such, financial institutions must tread carefully if they consider DACA status in their lending decisions as that could open the door for potential litigation exposure.  That said, and as discussed above, federal regulations and guidance recognize that an applicant’s immigration status could adversely impact the creditor’s rights and remedies regarding loan repayment.  These lawsuits further confirm the importance of ensuring that any consideration of immigration status is tied to a financial institution’s rights and remedies regarding repayment.

About the Author

Alex Wade

Alex Wade is a Senior Associate Attorney at SW&M and is part of the firm’s Regulatory Compliance and Litigation Management practice groups. Using his experience in consumer defense, complex business litigation, governmental liability, insurance entity defense and personal injury law, […]

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