Federal Reserve Issues Guidance on Credit Risks in Lending to Workers Without U.S. Work Authorization

The Federal Reserve has issued new supervisory guidance addressing credit risks that banking organizations may face when lending to individuals who are not legally authorized to work in the United States.

Issued on August 13 as Supervision and Regulation Letter SR 26-4, the guidance reminds Federal Reserve-supervised banking organizations of their existing obligations to identify, measure, monitor, and control credit risk through safe and sound lending practices.

The Fed said a borrower’s lack of legal authorization to work in the U.S. may create additional uncertainty around employment, income, and financial stability. The guidance directs banks to account for those risks when evaluating a borrower’s capacity and willingness to repay.

Guidance Focuses on Existing Credit Risk Practices

The Federal Reserve’s guidance does not establish a blanket restriction on lending to individuals without work authorization. Rather, it explains how existing credit risk management principles apply when a borrower’s ability to earn income may be affected by their authorization to work in the country.

According to the guidance, banks should use underwriting and risk-management practices appropriate to the nature and complexity of their lending activities.

The Fed identifies four primary areas for consideration: source of repayment, collateral, documentation and verification, and portfolio and concentration risk.

Source of Repayment

A borrower’s ability to repay is a central consideration in credit underwriting.

The Fed noted that income derived from employment that is not legally authorized may present additional uncertainty. Employment could be terminated or suspended, potentially affecting the borrower’s ability to continue making payments.

A borrower’s potential removal from the United States may also affect the reliability of anticipated repayment sources.

The guidance therefore directs supervised banking organizations to appropriately assess the sustainability and reliability of income and other repayment sources when evaluating credit risk.

Collateral Could Present Additional Challenges

The Federal Reserve also identified potential risks associated with collateral securing a loan.

If a borrower leaves or is removed from the United States, a lender could face difficulties locating or repossessing certain assets. These challenges may be particularly relevant when collateral is movable rather than attached to real property.

Banks are therefore expected to consider whether collateral provides adequate protection and whether their security interests can be effectively enforced if a loan becomes distressed.

Documentation and Verification

Documentation and verification represent another area highlighted by the Fed.

Banks should maintain appropriate processes for evaluating information used in underwriting and determining a borrower’s capacity to repay.

The guidance places these considerations within banks’ broader responsibility to maintain safe and sound underwriting practices rather than treating work authorization as an isolated credit risk factor.

Portfolio-Level Risks May Also Emerge

The Federal Reserve cautioned that the potential risk may extend beyond individual borrowers.

Banking organizations may develop concentrations of exposure in particular geographic areas, industries, or employers that are disproportionately affected by changes in immigration enforcement or employment verification practices.

Changes affecting one of these areas could therefore result in credit deterioration across multiple borrowers simultaneously.

This type of correlated deterioration could create a portfolio-level risk rather than isolated repayment problems involving individual accounts.

Banks are expected to identify and monitor concentrations that could materially affect their credit portfolios.

Fed Guidance Follows Other Federal Agencies

The Federal Reserve’s action follows similar guidance from other federal financial regulators.

In July, the Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), and National Credit Union Administration (NCUA) issued interagency guidance addressing obligations and credit risks associated with lending to individuals who are not legally authorized to work in the United States.

The Consumer Financial Protection Bureau (CFPB) had also addressed immigration status and ability-to-repay requirements in guidance issued in June.

The Fed’s August letter brings similar credit-risk considerations to banking organizations under its supervision.

What Comes Next

Federal Reserve-supervised banks may need to review how their existing underwriting and portfolio monitoring frameworks account for risks associated with uncertain employment and repayment sources.

The guidance specifically directs attention to repayment capacity, collateral, documentation, and potential concentrations across industries, employers, and geographic markets.

Rather than establishing a new lending restriction, SR 26-4 reinforces the Federal Reserve’s expectation that supervised institutions incorporate these factors into their existing credit risk management practices.