(Bloomberg) -- Marcelo Rodriguez is in the middle of a chain of lending that has connected Wall Street to New York’s Spanish-speaking community, providing a lifeline to vulnerable borrowers including the undocumented. That lifeline is now starting to fray.
For years, his company, InQmatic, has connected small-business owners with firms that are willing to bankroll risky loans, some of which are then bundled into securities and sold off by big banks. The lenders rarely seemed to put much effort into vetting applicants’ immigration status, Rodriguez said — until recently.
“Now,” he said, “they make it clear that their preference is for borrowers to be citizens.”
The shift is a byproduct of President Donald Trump’s push to, as he’s vowed repeatedly, carry out “the largest deportation operation in American history.” And it reveals how the chilling effect triggered by that plan is spreading fast — far faster than the actual pickup in deportations — and threatening the finances of many undocumented immigrants.
It also underscores the growing dilemma that firms specializing in lending to people with checkered, or no, credit history — a group that includes many of the nation’s 14 million undocumented people — now face, even as many fintechs have made courting the unbanked a key priority in recent years. The problem is twofold: first, these lenders don’t want to risk running afoul of an administration that has made clamping down on illegal immigration a key objective. And second, they don’t want to be in the position of having to write off a loan made unpayable if a borrower is deported.
By tapping a network of credit unions, non-profits, fintechs and payday lenders, foreign-born undocumented immigrants accounted for some $10 billion in interest payments and other financial transactions excluding mortgages in 2023, according to an estimate by Financial Health Network, a nonprofit that focuses on the financial education of consumers.
Auto loans, in particular, stand out in this category. Many undocumented immigrants work in sectors such as hospitality, agriculture and construction and need cars to get to work. And unlike mortgages or consumer loans, which tend to be underwritten by banks that are subject to regulations such as the Bank Secrecy Act, auto loans to customers with lower or no credit scores are frequently underwritten by finance companies and require less documentation.
Some lenders raise cash by turning to banks like JPMorgan Chase & Co. and Deutsche Bank, which bundle their loans into asset-backed securities that in turn are sold to investment companies that manage money on behalf of millions of Americans’ retirement accounts, pensions, or even savings accounts.
To be clear, undocumented immigrants can legally obtain loans. Even if borrowers don’t have a Social Security number, they may be required to have identification for tax-paying purposes. And while Trump’s push may make the status of these loans more precarious, analysts doubt there are enough of them to have a broad effect in the more than $700 billion market for asset-backed securities, whether or not deportations accelerate as pledged.
Still, it adds to risks. What happens if borrowers are simply deported from the country? Will they continue to pay their loans?
“There are some pockets of heavy exposure, particularly for some auto lenders,” said Boris Peresechensky, a portfolio manager at Orange Investment Advisors. “And given the limited visibility into borrowers’ backgrounds, it’s hard to say how widespread the risk may be.”
Disclosure documents already flag the risks posed to particular securities backed by loans originated by at least half a dozen companies. That includes those tied to the auto lenders First Help Financial and Tricolor Auto Group, which each cater to customers with lower-than-average or middling credit scores and explicitly focus on extending loans to immigrants.
First Help says it focuses on financing working-class immigrants from Central and South America. It makes those loans through a network of over 2,400 dealers around the US, and as of last year was providing around $800 million worth of auto financing per year, according to bond rating documents. For $240 million in auto loan-backed bonds it sold this month, just over a quarter out of the roughly 4,150 borrowers it financed had Social Security numbers, according to a bond-ratings report.
The company’s borrowers include people like Adriana, 46, who moved from Ecuador over a decade ago and is undocumented. She and her husband, who live in New Jersey with their two children and own a construction business, are on the hook for a $30,000 loan they obtained from First Help in 2021 to help finance their Toyota Tundra pickup truck.
Like many other auto-loan companies, First Help uses asset-backed securities to effectively sell packages of auto loans like Adriana’s to end investors on Wall Street. For example, in October it issued $281 million of bonds backed by customers with middling or no credit scores, small pieces of which were purchased by dozens of investment firms including Columbia Threadneedle and Fidelity Investments.
First Help has warned its own investors about risks that they face if the nation’s immigration policies were to change. Customers like Adriana demonstrate that risk in real time. If she’s deported, she’d have much bigger things to worry about than repaying auto loan debt. More broadly, experts flag the threat of economic, financial and societal disruptions from large-scale deportations.
“I’m overwhelmed,” said Adriana, who declined 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 didn’t respond to requests for comment.
Lending Surge
Another lender is Texas-based auto dealer and finance company Tricolor. Partly owned by BlackRock Inc., it has sold asset-backed securities worth at least $1.6 billion since its first such deal in 2018, according to data compiled by Bloomberg. Texas-based Tricolor, which has focused much of its business on the low-income Hispanic community in states such as Texas, California and Nevada, estimates that over two-thirds of its borrowers are undocumented, based on having no Social Security number. Its lending has surged to about $1 billion of auto loans each year, close to five times its volume in 2020, according to a KBRA report.
“Nearly 10% of the entire workforce in California and Texas – our two primary markets – is undocumented,” said Tricolor Chief Executive Officer Daniel Chu in an emailed statement. “Our purpose is to provide them with high quality, reliable vehicles at affordable rates and set them on a path to better financial health.”
Auto loans aren’t the only lending product that face fresh risks under Trump. On the campaign trail, the now-president also pledged to ban mortgages for undocumented immigrants, which are generally provided by lenders in a nationwide patchwork that includes mortgage providers, credit unions and community development financial institutions. But mortgages are more heavily regulated than auto loans or other types of debt, and ultimately this market is small, with just 5,000 to 6,000 mortgages made to holders of Individual Tax Identification numbers in 2023, according to estimates from the Urban Institute.
So far, the Trump administration appears to be falling short on its goals. Last month, the top two deportation officials at US Immigration and Customs Enforcement officials were demoted and transferred amid the agency’s failure to meet daily arrest quotas.
Tricolor’s Chu said he’s doubtful that the administration’s deportations will be broad enough to have a major impact on the risks of its loans. He said the majority of his clients have been working in the country for years, making them less likely to be affected as officials prioritize those with criminal records.
“Our borrowers positively impact the US economy, having resided in the country for an average of 15 years and filling employment gaps in key industries like agriculture and other occupations emphasizing manual labor,” he said.
But the talk of a widening dragnet has been unsettling to people like Adriana. If she’s deported, she has a plan for her children: She and her husband would transfer legal authority over them to her brother-in-law, a US citizen.
“I don’t want my kids to go to a shelter,” she said.
As for Rodriguez at InQmatic, he has shifted his attention to working with borrowers who do have documentation. As many as one third of his prospective borrowers are undocumented — and as many as half of his borrowers from the construction sector are undocumented. Recently, his success rate in finding willing lenders for them has dropped nearly to zero.
“We used to work with some large lenders quite frequently,” said Rodriguez. “Now, it’s harder and harder to get them to agree.”
--With assistance from Alicia A. Caldwell.
