Financial Institutions that Deny Credit to Applicants based on U.S. Citizens Could Face Serious Consequences Under 42 USC § 1981

By David S. Brown, Attorney

Lending officers should be aware that an applicant’s national origin is one of the prohibited bases listed in the Equal Credit Opportunity Act (“ECOA”) and 12 CFR 202 (“Regulation B”).[1]  Simply put, lenders cannot consider a loan applicant’s national origin when considering whether to authorize a credit transaction.  The question that remains, though, is whether financial institutions can deny credit to an applicant based on the fact that he or she is not a U.S. Citizen.  This question focuses on the distinction between national origin and alienage – the difference between being from a particular country and being a citizen of any country other than the U.S.

To be certain, Regulation B allows lenders to consider information necessary to ascertain the lender’s rights and remedies regarding repayment of the credit line being applied for.[2]  This provides for the consideration of residency and attachment to the community.  Specifically, the Official Staff Commentary to Regulation B states that “immigration status and ties to the community (such as employment and continued residence in the area) could have a bearing on a creditor’s ability to obtain repayment”.[3]  Thus, creditors “may consider and differentiate, for example, between a non-citizen who is a long-time resident with permanent resident status and a non-citizen who is temporarily in this country on a student visa”.[4]

With respect to an applicant’s citizenship, Regulation B and the ECOA make clear that citizenship status is not a “prohibited basis”.  In fact, an Official Staff Comment to Regulation B states that “[u]nder the regulation a denial of credit on the ground that an applicant is not a United States citizen is not per se discrimination based on national origin”.[5]  The commentary supports the view that, as long as a lending institution does not single out and deny credit to non-citizens from particular nations, a policy to deny applications of all types of credit to all non-citizens would not be a per se violation of the ECOA or Regulation B.

In addition to Regulation B and the ECOA, lending institutions must consider 42 USC § 1981.  Section 1981(a) provides that “All persons within the jurisdiction of the United States shall have the same right in every State and Territory to make and enforce contracts . . . .”  In 1974, the United States Court of Appeals for the Fifth Circuit concluded that § 1981 extends to protect non-citizens from private alienage discrimination.[6]  Thirteen years later, the Fifth Circuit reversed course with a seven-to-six vote and dismissed a non-citizen’s claim for private discrimination by finding that § 1981 only protects non-citizens from state action, and not from private discrimination.[7]  The Bhandari decision is still good law today, and is particularly relevant to the topic of lending to non-citizens, as it involved a financial institution’s denial of a credit application based solely on the fact that the applicant was a non-citizen.

What’s unclear, is how subsequent amendments to 42 USC § 1981 may impact a lender’s right to deny credit applications based on the criteria of citizenship alone.  In 1991, § 1981 was amended to include subpart (c) which states, “the rights protected by this section are protected against impairment by nongovernmental discrimination and impairment under color of State Law.”  Some have interpreted this statutory amendment as superseding Bhandari and indicated that private discrimination, as well as governmental discrimination, is prohibited by § 1981.  In fact, both the Fourth Circuit and the Second Circuit have since rendered opinions in conflict with Bhandari – citing the 1991 amendment to § 1981 as proof that Congress intended to proscribe alienage discrimination by private actors, as well as through state action.[8]

To date, Bhandari remains good law as the U.S. Supreme Court has refused to consider this issue on numerous occasions.  Additionally, the ECOA and Regulation B continue to provide for the consideration of a credit applicant’s citizenship, as long as the lender’s policy does not constitute discrimination based on national origin.  In other words, policies which provide for the denial of non-citizen credit applications across-the-board continue to be valid under Bhandari, the ECOA and Regulation B.

Lenders should take note; however, of the growing body of case law which supports the idea that 42 USC § 1981(c) may prohibit private discrimination, as well as discrimination by government actors.  It may only be a matter of time before the Fifth Circuit’s holding in Bhandari is challenged.  With this in mind, lending practices that provide for the denial of credit based solely on alienage should be reviewed and strengthened as such policies could lead to litigation in federal court.

David Brown is an attorney of Commercial Collections located in the Cleveland office of Weltman, Weinberg & Reis Co., LPA (WWR) who can be reached at 216.685.1062 and dbrown@weltman.com.

 
[1] James T. Bork, Credit Decisions Regarding Non-U.S. Citizens Considered, http://business.cch.com/bankingFinance/news/10-25-jb.asp
[2] Id.
[3] Reg. B Commentary, ¶ 6(b)(7).
[4] Id.
[5] Reg. B Commentary, ¶ 6(b)(7).
[6] Guerra v. Manchester Terminal Corporation, 498 F.2d 641 (5th Cir. 1974).
[7] Bhandari v. First National Bank of Commerce, 829 F.2d 1343 (5th Cir. 1987).  The Bhandari decision is peculiar in that it was reached via reconsideration.  In fact, the Fifth Circuit originally held that “the law of this Circuit recognizes actions for private alienage discrimination under § 1981 . . .” before later reversing course and finding that no private cause of action was supported.
[8] See Duane v. Geico, 37 F.3d 1036 (4th Cir. 1994) and Anderson v. Conboy, 156 F.3d 167 (2nd Cir. 1998).

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