Undocumented secondary borrowers pose risks to Wall Street

(Bloomberg) – Marcelo Rodriguez is in the middle of a series of loans that connect Wall Street to New York’s Spanish-speaking communities and provide a lifeline for vulnerable borrowers, including undocumented. The lifeline is now beginning to get into trouble.

For years, his company InQmatic has linked small business owners to companies willing to fund risk loans, some of whom then bundled them into securities and sold by big banks. Rodriguez said lenders seem to have seldom put in a lot of effort to review applicants’ immigration status.

“Now, they’re clearly showing that their preference is that borrowers become citizens,” he said.

This shift is a byproduct of the byproduct that President Donald Trump repeatedly vowed, who carried out the “largest deportation operation in American history.” It reveals how the cold effects triggered by the program spread quickly (much faster than actually picking up in deportation) and threatens the financial situation of many undocumented immigrants.

It also highlights the growing dilemma of companies that specialize in providing loans to people with checkered or without credit history – including many of the 14 million undocumented nationwide – now facing a key priority that even many fintechs have made unpopular in recent years. The problem is twofold: First, these lenders do not want to risk administrative actions, and the government makes illegal immigration a key goal. Second, they do not want to have to write off unpaid loans when the borrower is deported.

By leveraging credit unions, nonprofits, fintech and payday lender networks, foreign-born undocumented immigrants account for $800 million in interest payments and other financial transactions that exclude mortgage loans in 2023, the estimate is a nonprofit that studies the financial stability of consumers. Its estimates are based on a nationally representative survey it conducted and information from other organizations, including Pew Research Center findings that one in four foreign-born people in the United States are undocumented.

Automatic loans, in particular, stand out from this category. Many undocumented immigrants work in departments such as hotels, agriculture and construction and require cars to get to work. Unlike mortgages or consumer loans, these loans tend to be underwritten by banks such as the Bank Secrecy Act, instead automated loans to clients with lower or no credit scores are often underwritten by financial companies and require fewer documents.

Some lenders raise cash by turning to banks like JPMorgan Chase & Co. and Deutsche Bank, which bundle their loans into asset-backed securities, which in turn sell it to investment companies representing retirement accounts, pensions and even saving accounts for millions of Americans.

It should be clear that undocumented immigrants can legally obtain loans. Even if the borrower does not have a Social Security number, it may be necessary to provide proof of identity for tax purposes. While Trump’s push could make the status of these loans more volatile, analysts suspect there is enough assets to have a wide range of impacts on asset-backed securities in a market of over $700 billion, whether deportation accelerates or not.

Nevertheless, it increases the risk. What happens if only the borrower is deported from the country? Will they continue to pay the loan?

“There are some substantial exposures, especially for some auto lenders,” said Boris Persechensky, portfolio manager at Orange Investment Advisors. “Given the limited visibility of the borrower’s background, it’s hard to say how much the risk might be.”

Disclosure documents have marked the risks of at least six companies launching loan-backed specific securities. These include people associated with auto lenders who first help finance and tricolor auto groups, each suitable for customers with below average or medium credit scores and explicitly focused on extending loans to immigration.

First, help says that it focuses on funding working-class immigrants in Central and South America. According to the bond rating documents, it makes these loans available through a network of more than 2,400 dealers across the United States, providing about $800 million in auto financing each year as of last year. More than a quarter of the $240 million in automotive-backed bonds sold this month have social insurance numbers of about 4,150 borrowers funded, according to the bond evaluation report.

The company’s borrowers include people like 46-year-old Adriana, who moved out of Ecuador a decade ago without a document. She and her husband live in New Jersey with two children and own a construction business, and they worked to help fund their Toyota Tundra pickup truck in 2021.

Like many other auto companies, first use asset-backed securities to effectively sell car loan programs such as Adriana to end investors on Wall Street. In October, for example, it issued $281 million in bonds backed by moderate or no credit score customers, a small portion of which were purchased by dozens of investment companies including Columbia Leads and Fidelity Investments.

First help warn their investors that if the country’s immigration policies are to change, they face risks. Customers like Adriana prove this risk in real time. If she is deported, she will worry about something bigger than paying off her auto loan debt. From a broader perspective, experts are threatening economic, financial and social destruction caused by mass deportation.

“I was overwhelmed,” said Adriana, who refused to share her last name. “But this is a time to be strong.”

First Help is owned by the Treacy family and run by a former consultant at Boston consulting group Pushan Sen Gupta. The company did not respond to a request for comment.

Another lender is Texas-based auto dealer and financial company Tricolor. It is partly owned by BlackRock Inc., which has sold asset-backed securities worth at least $1.6 billion since its first transaction in 2018, according to data compiled by Bloomberg. Texas-based Tricolor focuses most of its operations on low-income Hispanic communities in states such as Texas, California and Nevada, with more than two-thirds of its borrowers not having Social Security. According to a KBRA report, its loans soar to about $1 billion in auto loans each year, nearly five times the number in 2020.

“Nearly 10% of the entire workforce in California and Texas in our two major markets is unproven,” Tricolor CEO Daniel Chu said in an emailed statement. “Our aim is to provide them with high-quality, reliable vehicles and put them on the road to improving their financial situation.”

Auto loans aren’t the only loan product facing new risks under Trump’s leadership. During the campaign, the current president has also pledged to ban mortgages from undocumented immigrants, which are often provided nationwide by lenders, including mortgage providers, credit unions and community development financial institutions. However, according to City Institute estimates, the regulation of mortgages is more stringent than auto loans or other types of debt, and the market is ultimately small, with only 5,000 to 6,000 mortgages being offered to holders of individual tax identification numbers in 2023, according to City Institute estimates.

So far, the Trump administration seems to have not met its target. Last month, the first two deportation officials of U.S. immigration and customs law enforcement officials were demoted and transferred when the agency failed to meet daily arrest quotas.

Tricolor’s Chu said he suspected the government’s deportation would be broad enough to have a significant impact on its loan risks. He said most of his clients have been working in the country for years, making them less likely to be affected by officials with a priority criminal record.

“Our borrowers have had a positive impact on the U.S. economy, have lived in the country for 15 years and have closed the employment gap in agriculture and other key industries that emphasize manual labor,” he said.

However, the topic of drag-out expansion is uneasy for people like Adriana. If deported, she will offer the children a plan: She and her husband transfer their legal authority to their U.S. citizens.

“I don’t want my kids to go to shelter,” she said.

As for Rodriguez in InQmatic, he shifted his attention to his work with borrowers who do have documents. Up to one-third of potential borrowers do not have certificates – up to half of construction borrowers do not have certificates. Recently, his success rate in search of willing lenders has dropped to zero.

“We used to work with some big lenders often,” Rodriguez said. “Now, it’s getting them to agree.”

– Assistance with Alicia A. Caldwell.

(Update details on the source of financial services expenditure estimates for undocumented immigrants in paragraph 6.)

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