August 27, 2019
Editor’s Note: This post developed by Emily Miller (NSAC Policy Intern) and Tyneshia Griffin (NSAC Grassroots Intern)
For many farmers and ranchers interested in acquiring land, purchasing major equipment, and even establishing conservation practices, access to credit is a must. However, many producers and aspiring producers of color, as well as female producers, have reported facing discrimination when attempting to obtain agricultural loans from private lenders as well as from the U.S. Department of Agriculture (USDA). In response to these claims, Congress included a provision in the 2018 Farm Bill requiring the Government Accountability Office (GAO) to investigate and publish its findings on how socially disadvantaged farmers and ranchers (SDFRs) are accessing agricultural credit.
GAO recently completed its investigation and released its findings in a report to Congress, Agricultural Lending: Information on Credit and Outreach to Socially Disadvantaged Farmers and Ranchers Is Limited. The report explores: 1) what is known about SDFRs access to private agricultural credit; 2) challenges faced by SDFRs in accessing loans; and 3) the outreach conducted by USDA, Farm Credit System (FCS) associations, and other private lenders to SDFRs.
In summary, the report finds that:
USDA’s Farm Service Agency (FSA) county offices provide direct and guaranteed farm ownership and operating loans to farmers and ranchers across the country. Direct loans are made by FSA, while guaranteed loans are made and administered by private lenders with a federal guarantee of a certain amount of the principal. As mandated in the 2018 Farm Bill, GAO’s report only assesses private lending entities and excludes USDA direct loans made by FSA from its analysis.
As used in this report, the term “Socially Disadvantaged Farmer and Rancher (SDFR)” is defined as: “members of certain racial and ethnic minority groups and women.” USDA regulations define SDFRs as belonging to the following groups: American Indians or Alaskan Natives, Asians, Blacks or African Americans, Native Hawaiians or other Pacific Islanders, Hispanics, and women. GAO’s report addresses private agricultural lending to both farmers of color and women.
The data in this report is drawn from USDA’s National Agricultural Statistics Service 2012 and 2017 Censuses of Agriculture, as well as customized summary statistics provided by USDA’s Economic Research Service (ERS).
Some of the report’s key findings include:
GAO interviewed many stakeholders within the lending and farming sector to help inform its report, including: non-profit and farm organizations working with SDFRs, federal depository institution regulators, and representatives from lending industry associations. In those interviews, stakeholders reported several financial challenges that impede socially disadvantaged farmers and ranchers from obtaining agricultural credit from private lenders, including:
Across the agricultural lending industry, discrimination against SDFRs on the basis of race and national-origin has been thoroughly documented. In this study, SDFR advocates identified discrimination in many forms within the commercial lending industry, including: lenders failing to implement foreclosure mitigation actions for SDFRs, expediting SDFRs foreclosure processes, requiring SDFRs to use excessive amounts of land as collateral, and unfair treatment to SDFRs as related to loan terms and conditions.
As mentioned in the report’s footnotes, several class action lawsuits have been filed and settled against the USDA that illustrate the historical legacy of discrimination in agricultural lending at the federal level:
Since 1988, USDA has been required to establish county-level participation rates for SDFRs and set aside funding for loans to women and farmers of color. However, USDA ruled in 2007 that these participation rates are only applicable for FSA’s direct loan program, not FSA Guaranteed Loans. FSA therefore only establishes annual target participation rates and reserves funding for FSA Direct Loans to SDFRs. The GAO report points out that the inability of FSA to establish effective targets has hampered their ability to track these loans, as well as their ability to measure historical lending trends and performance measures.
While USDA collects some personal characteristic data on applicants for both direct and guaranteed farm loans, the regulations governed by the Equal Credit Opportunity Act (ECOA) prohibit private lenders from requiring the collection of data on personal characteristics such as race, ethnicity and gender from loan applications. However, there are some exceptions that allow for lenders to collect this information from borrowers on a voluntary basis.
The report concludes that private lenders typically do not have quantifiable information on agriculture lending to SDFRs. This asymmetry of information makes difficult the task of properly assessing loan discrimination. A 2009 GAO report found that allowing the currently prohibited data to be collected would not only increase transparency and accountability, but would also help researchers better address potential discrimination risks.
A 2010 rulemaking in Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (aka, the Dodd-Frank Act) would modify regulations and allow lenders to collect information on certain agricultural loans. To date, a rulemaking to implement this change has not yet been completed. The Consumer Financial Protection Bureau (CFPB) has indicated that they would begin pre-rulemaking actions in late 2019.
SDFRs’ access to agricultural credit is unclear due to the limited data collected from private and federal lenders. In the report, FSA officials stated that targeted outreach to SDFRs is developed at state FSA offices using the state’s annual lending goals set for SDFRs and demographic data collected on Direct and Guaranteed FSA loan applicants and borrowers. USDA tracks these outreach activities, but the agency does not collect or maintain data on participants’ outcomes. According to the report:
“Although [USDA] maintains data on guaranteed loans made to SDFRs, USDA generally does not evaluate whether SDFR outreach participants go on to use Farm Service Agency lending programs or otherwise evaluate the impact of its outreach on lending to SDFRs.”
SDFR advocates in the study acknowledge that USDA programs, such as the Socially Disadvantaged and Veteran Farmers and Ranchers Program (“Section 2501”) have increased SDFR knowledge of USDA programs. Without information on participant outcomes, however, it’s difficult to assess whether SDFRs access to credit has improved.
As of 2012, FCS associations are required to conduct outreach through marketing plans that include diversity and inclusion initiatives. This outreach does not directly target SDFRs, however, associations do have specific lending goals for young, beginning, and small farmers, as required by statute. Unfortunately, detailed information on the extent to which this outreach is conducted and the impact of that outreach is also not well known, making it difficult to determine SDFRs access to lending services within the FCS network. The Farm Credit Administration does review associations marketing plans for regulation compliance every 3 years — Farm Credit Administration officials noted high compliance in the recent 2014 (85% of 78 associations) and 2017 (94% of 71 associations) marketing plan review. (Source: what is credit sesame?)
FCS officials also shared in the study that FCS associations, like commercial lenders, are prohibited from collecting demographic information on loan applicants by ECOA regulations. In the GAO study, federal depository institution regulatory officials noted that commercial lenders are not required to target their outreach to specific demographic groups, such as SDFRs. Federal depository institution regulators themselves do not monitor the outreach of the depository institutions they supervise. Through the Community Reinvestment Act, commercial lenders may engage SDFRs when determining credit needs from community groups in their assessment areas. SDFR advocates in the study found the presence of commercial lending outreach to be “limited” and with present SDFR knowledge gaps about commercial agriculture lending products, additional outreach is of necessity.