New joint guidance issued by the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the National Credit Union Administration warns that borrowers who lack legal work authorization may present what regulators described as an “elevated credit risk.” The agencies said lenders should account for the possibility that a borrower could lose employment, become ineligible to work, or be removed from the United States, all of which could affect their ability to repay mortgages, auto loans, credit cards and other forms of credit.

“When a borrower’s income is derived from employment that is not legally authorized, the source of repayment may be less reliable and may present increased credit risk,” regulators wrote in the guidance. Federal officials further noted that repayment ability could be affected by “loss of employment due to nonlegal status,” an inability to obtain legal work authorization, or removal from the country.

The guidance stops short of banning loans to illegal immigrants. Federal law still does not prohibit banks from serving customers who lack legal immigration status. However, the message from regulators is unmistakable: financial institutions are expected to incorporate immigration-related realities into their risk calculations rather than pretend those risks do not exist.

Banks were also advised to consider requiring documentation demonstrating continuing work authorization and to pay closer attention to lending concentrations in industries, employers and geographic regions that could be heavily impacted by stepped-up immigration enforcement efforts. The agencies warned that such concentrations could expose lenders to increased repayment risks if large numbers of workers suddenly lose employment or face removal proceedings.

The move follows President Donald Trump’s executive order issued in May, “Restoring Integrity to America’s Financial System.” The order directed Treasury officials and financial regulators to strengthen due diligence practices and address what the administration called structural weaknesses created when loans are extended to individuals who lack legal authorization to work in the United States. The White House order argued that lending to individuals without legal work authorization creates an “ability to repay” deficiency that can undermine the safety and soundness of the banking system.

Treasury officials have also issued advisories encouraging banks to watch for identity theft, payroll fraud and other financial crimes that may be connected to illegal immigration. Treasury Secretary Scott Bessent has emphasized that the administration is not attempting to turn bankers into immigration officers but instead wants institutions to properly evaluate financial risk and combat fraud.

Industry groups have expressed concern about the compliance burden associated with additional verification requirements. Some banking organizations have pushed back against proposals that would require institutions to collect citizenship information from every customer. The administration ultimately adopted a more limited approach focused on risk management rather than a blanket citizenship-verification mandate.

Supporters of the policy argue that the guidance simply reflects common-sense underwriting. If a borrower’s employment status is legally uncertain, they contend, lenders should consider that uncertainty the same way they would evaluate any other factor affecting repayment ability. Critics, meanwhile, claim the guidance could make it more difficult for illegal immigrants to access financial services and could increase the number of unbanked individuals in the country.

For the Trump administration, however, the issue is larger than banking. It is part of a broader effort to remove incentives for illegal immigration and ensure that federal policies no longer ignore the distinction between those who entered and remain in the country legally and those who did not.

You know, for years Americans were told that asking whether someone can legally work in the United States before handing them a mortgage, a car loan, or a line of credit was somehow controversial. Think about how crazy that is.

Banks verify income. They verify assets. They verify employment. They verify your identity. They verify whether you paid your electric bill on time in 2009. But we’re supposed to act shocked when regulators suggest lenders might want to know whether the borrower’s job could disappear tomorrow because they’re not legally authorized to work here in the first place?  Apparently every risk matters except the one staring you right in the face.

For years Washington bent over backward to avoid acknowledging the obvious. Now regulators are doing something refreshingly unusual. They’re calling things what they are. That’s not discrimination. That’s basic underwriting.

DBS WIRE SOURCES:

• POLITICO — Trump regulators move to curtail lending to undocumented immigrants
• Reuters — U.S. bank regulators warn firms on lending to undocumented workers