USCIS Changes Policy on the Use of Loan Proceeds as a Source of Funds
During the past two USCIS Stakeholder’s Meetings on EB-5 issues, EB-5 stakeholders, have questioned USCIS on its policy of allowing loans to be a source of an investor’s lawful capital. For many years, USCIS has allowed investors to secure a loan by a relative’s property, so long as that relative gifted the use of the real property as collateral for the loan.
USCIS, however, has recently changed its policy through the course of adjudicating I-526 Petitions and many stakeholders have reported that I-526 Petitions are being denied when the investor does not wholly own the real property used to collateralize a loan. Following its April 22, 2015, stakeholders call, USCIS issued a written summary of the Immigrant Investor Program Office’s (IPO) Deputy Chief’s remarks on the issue. USCIS now is stating that proceeds from a loan may qualify as capital of the investor provided that: (1) the investor is personally and primarily liable for the loan and (2) the value of the collateralized asset actually owned by the investor must meet or exceed the value of the loan. In practice, many stakeholders are reporting Requests for Evidence (RFEs), Notices of Intent to Deny (NOIDs) and denials of petitions stating that where the investor does not personally own the entire property, it cannot be used as the collateral for a loan. In other words, USCIS seems to be stating that the investor may only use loan proceeds as a source of funds if the loan is collateralized by the investor’s property and the investor solely owns the property, i.e. not jointly with a third party such as a parent, sibling or child. USCIS seems to be continuing to approve cases where investor owns the property with his or her spouse.
Unfortunately, not only does this shift in policy change more than a decade of adjudications allowing for these loans to be secured by assets of other individuals, but it also does not square with the statute, the regulations, or immigration precedent decisions, all of which allow such a scenario. The Immigration and Nationality Act does not require cash invested in an enterprise to be secured by assets of an investor. In the fact scenario described above, the investor is investing cash, as there is no debt arrangement between the investor and the new commercial enterprise. The Code of Federal Regulations only requires promissory notes contributed as “capital” to the new commercial enterprise to be secured by the assets of the investor. Binding case precedent, particularly Matter of Izummi, also does not require cash invested to be secured by assets of an investor and define “indebtedness” as a “promise to pay,” i.e. a promissory note between the investor and the new commercial enterprise. Additionally, the EB-5 Policy Memorandum only requires promissory notes to be secured by assets of the investor. So long as the investor has demonstrated a lawful loan secured by assets that were lawfully obtained, either by the investor himself or from a giftor, investor should have satisfied the burden of proof that the funds were lawfully obtained capital.
USCIS, however, disagrees with this interpretation. As a practical matter, it may be best to refrain from filing an I-526 petition where the source of funds is a loan that is secured by an asset that is not owned by the investor until this matter is resolved at a policy level or through litigation with USCIS.
Additionally, USCIS warned that loan agreements that are used as the source of funds often contain a provision that state the loan cannot be used for the purchase of investments or securities. The IPO Deputy Chief stated that a restriction on the use of proceeds contained in a loan agreement is relevant evidence and will be considered in determining whether the investor/petitioner has demonstrated, by the preponderance of evidence, a lawful source of funds. The Deputy Director further stated that where the petitioner obtains a loan from a lawful source (such as a reputable bank), the loan proceeds may, nevertheless, be unlawful if the capital was obtained by unlawful means (such as fraud on a loan application). Accordingly, if a loan contains any restrictions on the use of funds, it is best for the investor to deal with the bank ahead of time to remove any such restriction that may conflict with the stated use of funds of the loan. Additionally, the investor may get a letter from the bank that issued the loan confirming that the bank knew the investor was using the loan for EB-5 purposes when the loan was extended to the investor.
With this policy change, it is important to carefully examine investor strategy with source of funds documentation. If an investor chooses to take out a loan for the source of the EB-5 investment, it is important to examine the collateral and its ownership carefully. Equally important is having the bank’s permission to use the loan as the source of an EB-5 investment.