The Consumer Financial Protection Bureau (CFPB), which has a track record of lawlessness, is teaming up with the Justice Department to punish lenders/financial institutions for denying applications based on immigration status.
At face value, this seems to be a violation of the Constitution’s guarantee of freedom of association. If this initiative proceeds, it could be challenged and will likely lose in court, adding to the Biden administration’s long track record of regulatory overreach corrected in the courts.
“The CFPB has received consumer complaints about loan denials due to immigration status,” the CFPB said in a news release about the move. “Consumers submitting complaints have described getting positive feedback from lenders about their credit scores, income, and other aspects of their financial history, but ultimately being denied a loan because of their immigration status, instead of their ability to repay the loan.”
Logically, the CFPB’s claim doesn’t make sense. Immigration status can have a massive impact on whether a person can repay a loan. If there is any uncertainty or sudden changes around the would-be borrower’s employment and residential status, this could potentially have a massive impact on a borrower’s ability to repay a loan.
The CFPB’s announcement does not specify if their initiative applies to both legal and illegal immigrants, though it specifically mentions “those protected under the Deferred Action for Childhood Arrivals (DACA) program.”
A 2021 report from Cato Institute’s David J. Bier found that “U.S. consulates deny a large majority (61 percent) of employer‐sponsored immigrant visas for prospective legal permanent residents because it claims to have found a problem with their job offers.”
This type of immigration uncertainty could inject considerable uncertainty into an applicant’s ability to repay. Revenue streams for loan repayment could dry up in rapid order. The CFPB’s assertion that applicants are denied or delayed in their application “because of their immigration status, instead of their ability to repay the loan” is not a bug, it’s a feature of sound risk analysis.
If financial institutions choose to lend to an individual who is a legal or illegal immigrant, that is their choice based on the principles of free exchange. But to remove this vital data point contributes to a dangerous information asymmetry that punishes lenders.
This latest CFPB move could create more risk in the financial system and raise prices for everyone. Borrowers and lenders deserve better.
More broadly, the CFPB’s new initiatives and regulations could be invalidated if the agency itself is declared unconstitutional by the U.S. Supreme Court in a pending case under concerns that the CFPB sits outside the appropriations process. This prospect doesn’t seem to phase CFPB chief Rohit Chopra, who just brazenly announced he is going to massively expand CFPB enforcement and support staff by 50%. Sounds like a risky investment of the public purse.