- IRC data shows successful repayment on low-income auto-loans by resettled refugees a little over 98%, significantly better than the national US average of around 88% among similarly-situated borrowers.
- IRC surveys show that resettled refugees in US want a car so they can find and keep a job.
- The IRC is intervening in low-income “subprime” lending to protect refugees and new Americans paying exorbitant rates in the subprime loan market
- Refugees' success offers lessons for US consumer finance markets facing dangerous personal debt crisis that threatens the economic recovery
San Diego, California, October 26, 2017 — The same week as the US government moves to limit refugees and weaken the resettlement program again, evidence piles up on the economic opportunity cost at risk, in addition to the grave humanitarian impact. These moves also come after the government suppressed its own report on positive economic contributions of refugees.
A new brief by the International Rescue Committee (IRC), “Escaping the subprime trap: Lessons from auto-lending to refugees on the fast track to economic integration”, reveals that refugees receiving IRC's auto-loans are dramatically outperforming comparable national average repayment rates. The IRC loans enable refugees to buy cars as they build a new life in the US, and the data is drawn from 7 years and $850,000 of auto-loan provision to over 150 refugees in California, Arizona and Utah.
As part of the IRC's research relating to over 3,000 loans to refugees since 2003, surveys of refugees in San Diego, for example, showed that after English language, access to reliable transport, or a car, was cited as the biggest barrier facing refugees seeking employment.
The loan strong repayment performance observed among low-income refugees just starting new lives in the US suggests the need for a new model of low-income lending that can undercut loan sharks preying on vulnerable communities. IRC lending points to a high likelihood of credit scoring companies under-rating refugees, holding up their progress to self-sufficiency.
Kasra Movahedi, Director of IRC's Center for Economic Opportunity, said:
"While the US government suppressed its own reports showing refugees are a net benefit to the US economy of $63bn, our lending shows that resettled refugee finances are already a safe bet and can be even better with the right support.
Refugees arriving to the US can be an easy target for loan sharks, alongside other new and vulnerable Americans in low income brackets. As US regulators, lenders, and communities, face up to the subprime personal debt crisis, the IRC has developed a lending model that shows with community level diligence, responsible non-profit loan structuring and integrated financial advice, low-income lending can be successful and we can reduce the personal debt crisis looming over the US financial recovery.
The IRC is deeply concerned that most products in the subprime auto-loan market are designed on the assumption of high default rates and repossessed and resold cars, as opposed to sustainable lending and ownership. For refugees, a car means better access to jobs, a larger network, education opportunities, and a greater ability to integrate into American communities faster than before.
These results should be a call to arms for the non-profit lending sector to get into community markets where refugees and other low-income groups are being targeted by lenders betting on their failure. That's not the America we tell refugees about as they arrive after years fleeing from war, persecution and oppression."
Lessons from IRC lending to refugees for the American personal finance crisis:
1. Due diligence matters. IRC demands income verification on all auto-loans - recent reports have revealed that one of the nation’s largest subprime auto lenders, Santander, verified income on only 8% of all of its subprime auto loans. By contrast, IRC requires not only income verification, but a meeting with an IRC Financial Coach, financial education training, and a completed family budget as part of our loan making.
2. Embedding loan products in other financial capability services yields results. All of IRC’s lending is implemented alongside financial education and other economic empowerment programs. For example, participants in financial education trainings are eligible to apply for Credit-Builder microloans, while those engaged in workforce programming are able to apply for auto or education loans. This helps to ensure that the borrowers have access to additional wealth-building services in parallel with their loan – creating a synergistic dynamic that fuels borrowers’ financial stability and enhances their ability to repay.
3. The for-profit model of subprime lending should be challenged. There is a dearth of socially-minded consumer financing in most communities. While hard data on the availability of non-profit lenders that offer consumer or auto loans is hard to come by, it is generally accepted that the vast majority of socially conscious lending capital is focused on commercial loans to small businesses. Consumer and auto loans are typically smaller amounts and come with greater regulatory constraints, and thus offer less margin for lenders. A lack of non-profit actors in the auto loan sector may, in part, have helped to fuel the surging national demand for subprime auto loans.
The International Rescue Committee responds to the world’s worst humanitarian crises, helping to restore health, safety, education, economic wellbeing, and power to people devastated by conflict and disaster. Founded in 1933 at the call of Albert Einstein, the IRC is at work in over 40 countries and 28 offices across the U.S. helping people to survive, reclaim control of their future, and strengthen their communities. Learn more at www.rescue.org and follow the IRC on Twitter & Facebook.