Financial Pitfalls Trap Undocumented Immigrants

By Kenneth Quihuis
June 4, 2007 9:25 AM

Angel de Jesus Escalante straddles two cultures -- Mexican and American. He's a guardian angel of sorts, anguishing over the financial pitfalls that affect undocumented immigrants, especially credit card debt and high-interest mortgages. He knows they're preventable.

Escalente was born in Phoenix, but his wife, parents and grandparents are from Mexico. He's fluent in English and Spanish. With his keen math skills, high school education and self-study in personal finance and real estate, Escalante explains the perils of American financial products to immigrant friends and also helps them file for tax refunds.

Credit card debt
"They just don't know. The 'average Juan' doesn't understand the negative effects of using those credit cards sent in the mail," Escalante said.

The average immigrant knows how to feed his family, he added. He goes to work and pays the bills, but can get easily get trapped in credit card debt.

Many immigrants do not understand why banks keep sending those cards, he said. Temptation and inexperience invariably lead to financial trouble. Escalante warns immigrants about the real costs of paying only the minimum amount on monthly credit card bills. He explains that they are paying mostly interest, not principle. Over time, they still owe essentially the same amount.

Banks view their programs as a way that immigrants can build credit. Escalante says this may be so, but he sees banks as predatory, citing the minimum payments and making it easy to succumb to the temptation to spend.

Instead of saving money to buy assets that will appreciate, many immigrants will purchase the latest fashions or go out to dinner, Escalante says.

He knows that immigrants aren't the only group offered credit cards, but they're targeted.

In a 2007 North County Times article, Edward Sifuentes wrote about a Bank of America pilot program offering credit cards to undocumented immigrants. He cited estimates that immigrants send $45 billion home to Latin America via wire services like Western Union. Sifuentes wrote that by opening a checking account and establishing a credit history, immigrants can avoid steep fees for things like cashing paychecks, taking out car loans and sending money home.

Under the Bank of America program, anyone can apply for a credit card using an Individual Tax Identification Number (ITIN). The IRS created the ITIN in 1996 for tax filers who don't qualify for Social Security numbers, including undocumented immigrants as well as foreign nationals, such as foreign investors and the foreign-born spouses and dependents of U.S. citizens.

Bank of America customers who've had a checking account for three months (without overdrafts) can qualify for a $500 credit line. A $99 security payment is refundable within six months if they don't exceed the credit limit.

Opponents of the Bank of America program have called for boycotts, claiming it's illegal to support undocumented immigrants. Bank of America defends its program as legal and in compliance with the Patriot Act, which allows foreigners to open bank accounts and take out loans so long as they have identification documents, such as ITINs.

In a 2007 Wall Street Journal article about "Big Banks' Loan Push: Illegal Immigrants," Robin Sidel reported an increase in the number of big banks experimenting with programs that target undocumented immigrants with an ITIN. Sidel wrote that Citigroup Inc., Wells Fargo & Co. and Fifth Third Bancorp joined with J.P. Morgan Chase & Co. to develop a Building a Dream program for Maricopa County, Arizona.

Escalante opposes these programs because banks don't educate cardholders about the pitfalls of credit card debt. Especially vulnerable are immigrants not fluent in English and lacking financial savvy.

High-interest home loans
Escalante knows that home loans also require caution. He wishes he could warn more immigrants about the downside of mortgages where the interest is adjusted periodically, thereby resulting in an increase in monthly payments, possibly beyond their means. He knows people who signed interest-only adjustable rate mortgages (ARMs) without being aware of the balloon payment required at the end of the loan term.

Shaking his head, Escalante repeats, "They just don't know." They just don't know the subtleties of what they're signing. He's quick to malign the entire financial industry when he thinks of a Spanish-speaking loan officer playing on immigrants' trust yet not explaining the downside of different types of loans.

All the immigrant knows is that a loan officer, who's not an immigrant himself but someone of Hispanic descent, presents himself as one of their kind. He's giving them a chance to own a home. Until Escalante took the time to explain the mortgage contracts to his immigrant friends, "they just didn't know."

Tax refunds
With his friends' best interest at heart, Jesus also encourages them to file for tax refunds. After all, he reminds them, it's their money.

Escalante has helped many people obtain ITINs by assuring them that the IRS keeps tax information confidential. The IRS won't share information with other government agencies except in special circumstances, such as national security.

Even though the IRS suspected that stolen or fraudulent Social Security numbers were being used to secure employment, it created the ITIN to clear up mismatches between the names on W-2 forms and Social Security numbers. The IRS couldn't distribute refunds when a mismatch existed, resulting in an increase in a pool of money slotted for refund. The ITIN provided a mechanism for matching a name with a number, thereby allowing distribution of tax refunds.

In a New York Times article on how "Tax Returns Rise for Immigrants in U.S. Illegally," Nina Bernstein reported that 1.9 million undocumented workers filed tax refunds in 2005. About 1.5 million applications for new ITINs were filed in 2006.

This increase might reflect the hope of many immigrants. They want to secure a path to citizenship by demonstrating employment and compliance with federal law requiring declaration of income -- that is, paying taxes.

According to Lawrence Quihuis, a retired IRS agent, low-income earners generally get back all the taxes withheld in a year. People using the ITIN receive only the money that's owed them. They can't receive the Earned Income Credit that goes to low-income earners with children.

The IRS has seen fraudulent claims filed with ITINs. According to a 2004 U.S. Government Accounting Office report, between 1999 and 2003 the IRS discovered 12,241 tax returns with false W-2 forms claiming refunds of more than $22 million. The IRS stopped $18 million of these payouts. About 10,000 of those false claims came from California.

Without charging a fee, Escalante takes friends to the IRS office in Phoenix and helps them fill out the ITIN forms. Escalante recently encouraged a friend to file his taxes. He has an ITIN but was afraid to use it. While filling out the forms for him, Escalante discovered that his friend could file an adjustment for 1999. His friend ended up receiving an extra $506 with his 2007 tax refund.

Such is the work of a guardian angel.

Copyright © 2008 Donald W. Reynolds National Center for Business Journalism