Do farm service agency borrowers' double minority labels lead to more unfavorable loan packaging terms?

Abstract

PurposeThis study adds a new dimension in the study of racial and gender bias in farm lending. Most previous studies analyzed the separate effects of race and gender attributes on loan approval decisions. The analysis focuses on the stipulation of loan terms (loan amount, interest rate and maturity) among approved farm loan applications. The time period analyzed spans from 2004 until 2014 during which the government has undertaken reforms to improve delivery of loan services to its clientele of minority farmers. Thus, this study's findings could help validate the effectivity of such institutional reforms affecting Farm Service Agency (FSA) lending operations.Design/methodology/approachThis study utilizes a national direct loan origination data from the FSA of the U.S. Department of Agriculture (USDA) collected from 2004 to 2014. The analysis begins by identifying significant differences in cross-tabulations of loan terms among different racial and gender classes. Seemingly unrelated regression (SUR) regression techniques are then applied for a system of equations involving the three loan packaging components. The combined effects of the prescribed loan packaging terms are subsequently analyzed under a simulation-optimization framework.FindingsRegression results validate that indeed, relative to White American borrowers, certain minority borrowers are accommodated with lower loan amounts at higher interest rates and with shorter maturities. However, these decisions seem to be prompted by credit risk management considerations. The most compelling findings include the insignificance of all double minority labeling variables, except for the interest rate equation that even produced favorable results for Hispanic American females. Simulation-optimization results further reinforce that even when one or two unfavorable loan terms are included in the packaging, double minority borrowers end up with better profitability and liquidity positions.Practical implicationsThis study provides a different perspective in dealing with the controversial minority bias in lending by presenting evidence gathered from a government farm lending institution. The USDA-FSA has been sued in numerous occasions by minority borrowers. Since then, however, it has deliberately implemented institutional reforms to rectify previous errors. This study provides empirical evidence strengthening FSA's claim of its intention to improve its delivery of loan services, especially for its socially disadvantaged borrowers with double minority classification.Originality/valueThis study pioneers the analysis of the double minority labeling effect on farm lending decisions. Its contributions to literature are further enhanced by its goal to validate the effectiveness of FSA institutional reforms undertaken since the early 2000s in order to improve credit access of and delivery of credit services to minority farm borrowers, especially those that belong to more than one minority classification.

Loan packaging decisions for beginning African American and other socially disadvantaged farmers

“…Beyond loan approval decisions, some studies also validate potential lenders' biases in loan packaging decisions (Dhakal et al, 2019; Escalante et al, 2018; Ghimire et al, 2020). Using varied statistical modeling techniques, these studies confirm clear disparities in FSA loan packaging terms for White and minority farmer borrowers.…”

“…Evidence from housing credit transactions indicate that African American and Hispanic borrowers pay an additional 20.63 and 11.80 basis points, respectively, on top of the rate that White borrowers pay for loan refinancing transactions (Boehm et al, 2006). When both racial/ethnic and gender minority attributes are factored in, the discrepancy in loan pricing is even more glaring, especially among African American female borrowers (Cheng et al, 2015; Ghimire et al, 2020).…”

The State of US Farm Operator Livelihoods

“…Third, the structure of the data seldom allows for exploration of intersectionality across indicators of demographics, management, and livelihood. Structural racial (Gilbert et al, 2002;Horst and Marion, 2019;Minkoff-Zern, 2019) and gendered (Sachs, 1983;Allen and Sachs, 2007;Keller, 2014) inequities in access to farmland, capital (Ghimire et al, 2020), federal support (EWG, 2021), and professional respect (Snipes et al, 2017) have long characterized the US agricultural sector, these barriers have systematically limited the diversity of people and perspectives in US food production. This is reflected in data availability.…”

Analysis of the payments from the coronavirus food assistance program and the market facilitation program to minority producers

“…There was no evidence of racial discrimination in loan approval (Escalante et al, 2006 ) and loan amounts and maturities (Escalante et al, 2018 ) from the USDA's Farm Service Agency (FSA). Ghimire et al ( 2020 ) provide evidence in support of reforms made by the USDA's FSA to lend without bias, especially to socially disadvantaged producers and ranchers. They found certain minority borrowers with lower loan amounts at higher interest rates and with shorter maturities.…”

“…They found certain minority borrowers with lower loan amounts at higher interest rates and with shorter maturities. However, this was not because of discrimination but because of credit risk management considerations (Ghimire et al, 2020 ). While the lending practice of the USDA has been investigated thoroughly, there are not as many studies that examine the payments made to producers from the USDA.…”