On August 13, the Fed issued SR 26-4, reminding supervised banking organizations of their “existing” credit risk management obligations when lending to individuals not legally authorized to work in the United States. As previously covered by InfoBytes, the OCC, FDIC and NCUA issued analogous interagency guidance in July, following similar guidance issued by the CFPB in June (covered by InfoBytes here). The Fed’s guidance explains that lending to such borrowers may present heightened credit risk because their ability to generate income, maintain employment, and remain financially stable may be subject to greater uncertainty. The letter directs banking organizations to identify, measure, monitor and control these risks through safe and sound underwriting practices that assess borrowers’ willingness and capacity to repay.

The guidance identifies four key underwriting considerations: source of repayment, collateral, documentation and verification, and portfolio and concentration risk. With respect to repayment sources, the Fed noted that income derived from unauthorized employment may be less reliable due to potential employment termination, suspension or removal from the country. Regarding collateral, the guidance warned that banking organizations may face challenges enforcing security interests or locating and repossessing collateral that is not affixed to real property. The Fed also flagged concentration risk arising from exposures to geographic markets, employers or industries disproportionately affected by changes in immigration enforcement or employment verification practices. Such changes, the Fed notes, could produce correlated credit deterioration across affected portfolio segments rather than isolated stress at the individual-borrower level.