Q What adverse action reason should a bank use when denying a mortgage loan application from an individual who cannot establish legal residency and/or work authorization?
In my bank’s case, a non-permanent resident applied for a home loan and has a strong credit score, stable employment, and consistent income. However, after underwriting and considering the CFPB’s recent guidance on ability to repay and immigration status, the bank denied the loan due to concerns about income continuity. Should the bank use “insufficient income” as the denial reason on the adverse action notice, even though the applicant’s current income is sufficient? Should the bank list “immigration status”?
A The bank should not cite “insufficient income” or “immigration status” if these are not the actual reasons for denial.
Under Regulation B (Equal Credit Opportunity Act), the adverse action notice must reflect the specific principal reason(s) for denial. 12 CFR 1002.9(b)(2). Here, the reason is not the sufficiency of current income, but rather the bank’s inability to reasonably determine that income would continue. Therefore, using “insufficient income” would be inaccurate under Regulation B.
It would also be incorrect to cite “immigration status” if that is not the reason for denial. As noted above, the reason for denial relates to the continuity of income to repay the loan. Note that banks’ consideration of income continuity is not unique to the context of an applicant’s immigration status. For example, when banks deny a loan because a consumer has only temporary or seasonal income, many banks frame the reason for the adverse action around income stability or continuity.
In addition, listing immigration status as the reason might lead an applicant to believe that the denial was based on unlawful considerations. Regulation B permits a creditor to consider immigration status when determining rights and remedies for repayment (12 CFR 1002.6(b)(7)), but the information cannot be used to discriminate on the basis of race or national origin. Moreover, some states prohibit discrimination based on immigration status.
A more supportable approach is to use the reason from the creditor’s underwriting and its ability-to-repay (ATR) determination under Regulation Z (Truth in Lending Act). For example, the notice could state “unable to determine continuation or stability of income” or something similar. Because creditors may—and in some cases must—consider whether income is likely to continue when assessing ATR, a denial based on a lack of reliable, ongoing income is consistent with the bank’s underwriting and with Regulation Z’s ATR requirements.
Under Regulation Z’s ATR framework, creditors must make a “reasonable and good faith” determination of a consumer’s ATR based on, among other things, the consumer’s “current or reasonably expected income.” 12 CFR 1026.43(c)(2)(i). Regulation Z clarifies that a creditor need not consider a change in the consumer’s circumstances after a loan is made if the change cannot be “reasonably anticipated.” However, if the application or records the creditor considers before or at the time it makes the loan indicate there will be a change in a consumer’s repayment ability after consummation, the creditor must consider that information. Comment 43(c)(1)-2.
As a reminder, the underlying policy should be clearly grounded in income stability and repayment capacity, be consistently applied, and be well documented in the file. The stated adverse action reason should align with the documented rationale and include a clear link to legitimate credit risk, not to any prohibited or proxy basis.
For more information, contact ABA’s Leslie Callaway.
Please note that this section is not a substitute for professional legal advice.
