After decades of litigation and settlements of lawsuits alleging discriminatory lending decisions, lenders have learned valuable lessons to increasingly “objectify” their loan decision-making procedures. The resulting “more objective” loan evaluation models consider borrowers’ business profitability, liquidity, solvency, and repayment capability – in addition to credit histories and collateral arrangements, among other considerations.
One may ask if these “objective, more transparent” decision models have increased minority farmers’ access to credit. The reality is that farm businesses operated by certain ethnic groups are typically smaller, less profitable, and with liquidity concerns – thus not always faring well in those lenders’ models.
Even if certain minority farmers get their loan applications approved, they must still negotiate another hurdle – the packaging of their loan terms. Table 1 presents a compilation of information on the approved loans for beginning farmer clients of the Farm Service Agency (FSA) from 2004 to 2014.
The most favorable loan package for any borrower should combine a relatively lower interest rate and longer loan maturity, which would result in lower periodic loan amortization amounts. The trends in Table 1 indicate that Hispanic and Black farmers received higher interest rates than the rest of the approved borrowers. The average loan term for Hispanic borrowers, however, was longer (and comparable to White borrowers’ terms), hence could have tempered the unfavorable high interest rate effect. In contrast, Black farmers were prescribed the shortest average repayment term, which may pose a potential liquidity concern when combined with higher interest rates.
From the lenders’ perspective, loan terms are additional tools for credit risk management. Specifically, borrowers’ credit risks are factored into loan packaging decisions, so lenders are inclined to prescribe higher interest rates and shorter loan maturities to borrowers with higher credit risk profiles. When this rationale is factored into the interpretation of lending statistics and trends, then it becomes clearer that the more urgent priority in addressing minority farming issues is to implement effective reforms geared towards helping smaller minority farms overcome persistent hurdles that threaten their economic and financial viability. Only then will these farmers gain better credit access and command the most favorable lending terms when their loan applications are approved.
Table 1. Comparative Lending Terms Packaged for Approved FSA Loans of Beginning Farm Borrowers from different racial/ethnic groups
|FSA lending terms||White||Black or African American||American Indian||Asian||Hispanic or Latino|
|Obligated loan ($’000)||104.57||52.00||97.36||69.71||76.00|
|Interest rate (%)||2.92||3.27||3.07||2.78||3.91|
|Loan maturity (year)||17.48||14.92||19.35||12.90||18.64|
Source: Ghimire, J., C.L. Escalante, R. Ghimire, and C. Dodson. “Do Farm Service Agency Borrowers’ Double Minority Labels Lead to More Unfavorable Loan Packaging Terms?” Agricultural Finance Review. 80,5 (2020): 633-646.
Escalante, Cesar L.. “Loan Packaging Terms for Beginning Minority Farmers Under More Objective Lenders’ Loan Evaluation Models“. Southern Ag Today 2(44.3). October 26, 2022. Permalink