More Than a Number: Credit Unions Find Ways to Lend to Immigrants

Serving immigrants and other financially-vulnerable populations is not just part of credit unions’ DNA, it is essential for those wishing to grow and compete against larger banks and online lenders, according to the Filene Research Institute.

The view is shared by executives of Point West Credit Union of Portland, Ore., Illiana Financial Credit Union near Chicago, Ill., and others that participated in the credit union think tank’s incubator project to test a variety of loans to benefit minorities.

The most consistent success in the study that ended this year came out of ITIN lending: Loans to Hispanics and other immigrants who lack Social Security numbers, but have an Individual Taxpayer Identification Number from the IRS.

On Oct. 23, the Madison, Wis., non-profit will release a “toolkit” to show credit unions how to launch a program. It includes directions for building a business case to convince a board, and steps and best practices for managers to implement it.

ITIN lending has been done for years by a few credit unions, including Point West ($105.6 million in assets, 11,418 members) and Illiana Financial ($229.7 million in assets, 23,428 members). Filene chose the two credit unions to recruit others to participate in the study.

Steven Pagenstecher, Point West’s vice president for member experience, said credit unions are familiar with the argument for the “moral imperative” of lending to the disadvantaged. The bigger challenge was showing executives how to make the business case that the risks of an ITIN program were manageable, and provide detailed guidance on how to implement a program.

“More credit unions should be engaged in this,” Pagenstecher said. “It’s not only the right thing for us to do to be engaged with our communities, but it’s the right thing to do from a credit union bottom line perspective.”

The argument rests on two facts on the ground: Credit unions need to grow to survive and immigrants are some of the biggest sources of population growth. According to the Pew Research Center, Hispanics have been the main driver of U.S. population growth since the turn of the century:

• In 2016, the United States was home to 58 million Latinos. Their increase from 35.7 million in 2000 accounted for half the nation’s population growth in those 16 years.
• Hispanics are the nation’s second-largest population behind only non-Hispanic whites.
• Just over 34% of Latinos are immigrants, down from a peak of 40% in 2000.

“People are starting to realize the Hispanic population is the booming population in the United States right now,” Illiana Financial President/CEO Jim Henmueller said.

This presents a perfect opportunity for both credit unions, which have a tradition of serving members with fairly-priced financial services, and Hispanics, who desperately need them, he said. “Right now they get taken advantage of.”

People with low incomes already have difficulty getting access to affordable financial services. The task is harder for many immigrants without Social Security numbers because their payment records often don’t show up in credit bureau reports.

Illiana Financial has created policies that allow those who don’t have typical tax returns or W-2 forms to have loan officers consider other documentation, including letters from employers and bank statements showing cash deposits.

“People need to think outside the box, and make the box a little bigger,” Henmueller said. And sometimes, he added, “You’ve got to get rid of the box.”

The Bank Secrecy Act requires financial institutions to verify who they’re doing business with. Credit unions can meet those due diligence requirements without a Social Security number, instead relying on a combination of ITINs, a driver’s license or other valid photo ID, and documentation of their home address and place of work.

“That Social Security number is not the only identifier,” Point West President/CEO Amy Nelson said. “It’s not one number.”

Getting an ITIN number demonstrates commitment to “bettering their life and being part of the social fabric,” Nelson said. “They’re investing a lot of time, money and resources.”

Many credit union boards worry about the risk of loans being unpaid because of borrowers being deported or leaving the country voluntarily.

Illiana Financial and Point West’s experience has been that those occasions are rare. The risk is not much different than the risk of a citizen member being sent to jail. In either case, the lender can look to other people on the loan, its collateral and additional contact information.

Point West is lending in an area that has some of the nation’s highest home prices. Most of its ITIN loans are for cars, and only this year did it originate its first ITIN mortgage.

But mortgages are at the heart of ITIN lending at Illiana Financial, based in Calumet City, Ill., between southside Chicago and Gary, Ind.

“There’s a tremendous need in the community for housing,” Henmueller said. “If it’s not done by the credit unions, it’s going to be done by somebody else.”

Neighborhoods around Illiana Financial are ripe for first-time homebuyers willing to invest both sweat and equity into buying a home. Homes in the area sell for $40,000 to $100,000. Most of Illiana’s ITIN mortgages are for about $70,000.

Illiana Financial began making ITIN mortgages about seven years ago and now holds about $10 million in ITIN mortgages, or about 25% of its portfolio. It originated about $2 million last year, and it expects about $2 million or $4 million this year.

“There isn’t a whole lot of increased risk,” Henmueller said. “When you get a 20% or 30% down payment on a house, you’re in the same position as if you’re making a conventional mortgage loan to somebody who could lose their job, get divorced or have some kind of tragic health issue. We see more foreclosures in our standard, Social Security-bearing American citizen mortgages than we do in our ITIN program.”

Point West’s start in ITIN lending came through its acquisition of Hacienda Community Credit Union in early 2005. That program ended when it ran into troubles in the Great Recession, but was restarted in 2014.

The portfolio has grown from $1.6 million in June 2015 to nearly $15 million in June 2018. Pagenstecher said ITIN loans perform as well or better than other loans in Point West’s portfolio. The average loan is $14,000, with most borrowing for a used car.

Point West uses risk-based pricing, so an ITIN borrower with an A+ credit score might get a loan for 3.25% for a used car, while the rate would be as high as 17.49% for someone with a low credit score or no credit history. That compares with rates around 30% from some lenders.

“We don’t advertise the program at all. The word of mouth drives the volume,” Pagenstecher said.

ITIN lending has faced a new challenge from the political environment created by President Trump, who campaigned on promises to build a wall on the Mexican border and deport immigrants.

Point West employees and members were frightened by Trump’s election, and worried what it would mean for the credit union’s legacy of commitment to the Hispanic community. About three weeks after Trump was elected president in November 2016, Point West chose to publicize its intent to continue serving immigrants. Its website started bearing banners like the one on its current homepage saying “YOU are a Citizen of Point West” with a photo showing a Hispanic mother and child. Point West’s “Non-Citizen Guide” web page states its position plainly: “Not a citizen? You’re a citizen of Point West. We’re here to help, no matter where you’re from.”

The threats against immigrants gave Point West the opportunity to state why it existed and who it serves, Pagenstecher said. “It’s not just banking: We’re here for the scary stuff too. This organization cares for them regardless of their citizenship status,” Pagenstecher said. “It’s not part of our strategy; it is our strategy.”