The Northern District of California's recent decision in Perez v. Wells Fargo Bank, N.A. (hereinafter "Perez") has potentially created a new "fair contracting" concern for banks and other financial institutions that consider applicants' citizenship or immigration status when deciding whether to extend credit or open an account.
On August 3, 2017, the Northern District of California denied a motion to dismiss claims that Wells Fargo Bank, N.A. (the "Bank") engaged in discrimination on the basis of immigration status by refusing to extend loans and other financial products to individuals who are not U.S. citizens or permanent residents. According to the plaintiffs in Perez, such discrimination violates a provision of federal law that provides "[a]ll persons within . . . the United States . . . the same right . . . to make and enforce contracts." However, banks often consider an applicant's immigration status when underwriting a loan, and the authority to do so is well established under federal consumer financial laws.
Perez was commenced in January by, and on behalf of, immigrants who received work authorization and relief from deportation under the federal program known as Deferred Action for Childhood Arrivals (DACA). According to the plaintiffs, some of whom had previously opened checking or savings accounts with the Bank, the Bank denied their student loan and credit card applications because they were not permanent U.S. residents. Plaintiffs claim that the Bank's policy of not extending credit to persons who are neither United States citizens nor permanent residents violated a federal equal rights law, codified at 42 U.S.C. § 1981, that prohibits discrimination on the basis of alienage in the making and enforcement of contracts, as well as certain provisions of California's Unfair Competition Law (UCL) and the Unruh Civil Rights Act (Unruh Act).
The lawsuit does not allege, however, that the Bank's actions constituted a violation of the Equal Credit Opportunity Act (ECOA), which prohibits discrimination by a creditor on a protected basis in any aspect of a credit transaction. The ECOA and other fair lending laws are the primary bases for claims asserting unlawful discrimination by lenders such as the Bank, but while attributes such as ethnicity and national origin are protected classes under the ECOA, citizenship and immigration status are not. As noted by the Bank in its motion to dismiss, the ECOA does not prohibit creditors from making a distinction based on citizenship or immigration status. Instead, the ECOA's implementing Regulation B explicitly recognizes that citizenship or immigration status may have bearing on the likelihood of loan repayment. Accordingly, citizenship and immigration status may be, and typically are, used as an underwriting factor in evaluating whether to extend credit to prospective borrowers.
Arguments for Dismissal
According to the Bank, the plaintiffs' immigration status under DACA is temporary and subject to change, thereby posing a particularly acute repayment risk with respect to unsecured extensions of credit, and thus may substantiate a decision to deny a loan application without running afoul of the ECOA. The Bank's motion to dismiss, however, was based primarily on the argument that ECOA preempts the plaintiffs' claims under 42 U.S.C. § 1981. In particular, the Bank asserted that the ECOA exempts claims alleging discrimination with respect to credit transactions from the scope of 42 U.S.C. § 1981 because statutory interpretation requires that "a specific statute governs a general one."
Although the court noted that there is no dispute 42 U.S.C. § 1981 is the general statute that prohibits discrimination in the making of any type of contract, while the ECOA prohibits discrimination in the making of a contract for credit, it nevertheless disagreed with the Bank's argument. The court held that both statutes could be given effect because "§ 1981 precludes a creditor from discriminating on the basis of race or alienage, whereas the ECOA precludes a creditor from discriminating on additional grounds, such as religion and national origin."
Furthermore, the court disagreed with the Bank's argument that the plaintiffs' state law claims must fail because the repayment risk posed by plaintiffs' immigration status was a legitimate business reason for the Bank to deny plaintiffs' loan applications, and thus the Bank's actions did not constitute "unreasonable, arbitrary, or invidious discrimination" in violation of the Unruh Act. Rejecting the Bank's interpretation of the Unruh Act, the court held that any differential treatment, even if justified by a legitimate business reason, constitutes a violation of the Unruh Act, unless such differential treatment is warranted by public policy. Although the court recognized that requiring creditors to extend credit under circumstances where they have little or no realistic ability to collect unpaid debts would undermine policy favoring a stable economy, the court found that such considerations did not warrant the Bank's "alleged categorical ban on considering any credit application submitted by an alien non-permanent resident." According to the court, this is particularly true where the non-permanent resident has a citizen cosigner who would be responsible for any non-payment.
The court's decision in Perez puts banks and other financial institutions in the difficult position of having to balance credit risk posed by prospective borrowers who do not have permanent residence status with the potential for legal liability created by Perez.
Ultimately, federal regulators require banks to base credit decisions primarily on the strength of the prospective borrower's repayment capacity, namely his or her ability and willingness to repay. Furthermore, federal regulations and guidance explicitly recognize that an applicant's immigration status, and particularly lack of permanent residency, could adversely impact the creditor's rights and remedies regarding loan repayment. Accordingly, banks and other financial institutions should carefully evaluate and, to the extent possible, mitigate inherent credit risk posed by lending to non-permanent immigrants before changing their lending practices.