Putting the Risk Model to Work
SR 26-4 becomes most useful when its four risk surfaces are examined together rather than as separate topics. The following review is explicitly hypothetical: a borrower has a retail automobile loan, relies primarily on employment wages, and works for an employer connected to a wider local industry. The purpose is not to predict what will happen to that borrower or to prescribe a bank policy. It is to show how a lender can identify the relevant assumptions, test their resilience, and recognize when an individual question becomes a portfolio question.
Start with facts that can change repayment
The review begins with the source of repayment. The borrower is making payments from employment wages, so the lender first asks whether that income is current, verifiable, stable, and likely to continue. Those are not four ways to say the same thing. They describe four different dimensions of the premise supporting the loan.
Current income addresses what is happening at the time of the review. Verifiable income addresses whether the lender can support the claim through information that can be examined. Stable income addresses whether the source has the reliability needed for the relevant period. Income likely to continue addresses whether the available facts justify relying on the source through the obligation's term. SR 26-4 identifies all four because a current and genuine income stream can still leave a question about future continuity.
The lender also considers repayment capacity, overall financial condition, resources, and willingness to repay as agreed. The hypothetical borrower may have resources beyond wages, but the review should not assume that those resources exist or that they are sufficient. Their relevance is a factual question. Likewise, a current payment record may support the conclusion that the borrower is meeting the obligation now, but it does not answer every question about what would happen if the primary source of income were interrupted.
This first step is deliberately narrower than a conclusion about the borrower. The fact that the borrower is not legally authorized to work in the United States is relevant to the uncertainty identified by SR 26-4, but it is not the complete credit analysis. The lender must ask how that uncertainty could affect the source of repayment and what evidence supports the resulting assessment. The letter does not say that every borrower in this population has the same capacity, resources, willingness, or likely outcome.
Test the repayment premise under changed conditions
The next step is to make the employment assumption visible. One scenario holds employment income constant. The lender asks whether projected repayment capacity remains adequate if the current source continues. A second scenario interrupts the employment income. The lender asks what changes in the borrower's projected capacity. A third scenario considers that lawful reemployment may not be immediate. It tests the duration of the gap rather than assuming that a new source appears at once.
These scenarios correspond to the employment pathways identified by SR 26-4. Employment may be terminated because the borrower lacks legal work authorization. It may be suspended or terminated after an expired authorization is discovered. The borrower may be unable to become lawfully reemployed, or may be removed from the United States. The pathways should remain distinct because they change different assumptions about the source, duration, and location of repayment income.
The exercise is not a forecast. SR 26-4 says banking organizations may consider whether projected repayment capacity remains adequate under various scenarios, including employment or income interruptions resulting from the borrower's inability to maintain lawful employment.