Agricultural Lending: Information on Credit and Outreach to Socially Disadvantaged Farmers and Ranchers Is Limited

In 2017, there were about 2 million farm and ranch operations nationwide. Farmers and ranchers often require loans to buy agricultural real estate, make capital improvements, and purchase supplies and equipment. However, minorities and women comprise a disproportionately small share of agricultural producers, and certain minority groups have alleged discrimination in obtaining agricultural credit. Most agricultural lending is done by either commercial banks or the Farm Credit System, a network of lenders regulated by the Farm Credit Administration. USDA accounts for a small share of agricultural credit, but it makes direct loans and guarantees loans made by private lenders. USDA and Farm Credit System lenders have responsibilities to expand credit access.

Congress included a provision in statute for GAO to study agricultural credit services provided to SDFRs. USDA direct loans were outside the scope of GAO's review. This report examines (1) what is known about the amount and types of agricultural credit to SDFRs, (2) challenges SDFRs reportedly face in obtaining agricultural credit, and (3) outreach efforts to SDFRs regarding agricultural credit and related services.

GAO analyzed survey, census, and other USDA data; reviewed statutes and regulations governing collection of personal data on borrowers; and reviewed Farm Credit Administration and USDA documentation on outreach to SDFRs. GAO also interviewed SDFR advocacy groups, lending industry groups, and officials from the Farm Credit Administration, USDA, and the federal depository institution regulators.

Information on the amount and types of agricultural credit to socially disadvantaged farmers and ranchers (SDFR)—which the U.S. Department of Agriculture (USDA) defines as members of certain racial and ethnic minority groups and women—is limited. Comprehensive data on SDFRs' outstanding agricultural debt are not available because regulations generally prohibit lenders from collecting data on the personal characteristics of applicants for loans other than certain mortgages. A Consumer Financial Protection Bureau rulemaking pursuant to a provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act that requires collection of such data in certain circumstances would modify this prohibition for certain loans, possibly including some agricultural loans. The bureau delayed the rulemaking in 2018 due to stated resource constraints and other priorities, but reported that it plans to resume work on the rule later in 2019. An annual USDA survey of farmers provides some insights into agricultural lending to SDFRs but, according to USDA, may underrepresent SDFRs compared to more inclusive estimates from the 2017 Census of Agriculture. In the 2015–2017 surveys, SDFRs represented an average of 17 percent of primary producers in the survey, but they accounted for 8 percent of outstanding total agricultural debt. Loans to purchase agricultural real estate accounted for most of SDFRs' outstanding debt (67 percent).

SDFRs reportedly face a number of challenges that hamper their ability to obtain private agricultural credit. According to SDFR advocacy groups, lending industry representatives, and federal officials, SDFRs are more likely to operate smaller, lower-revenue farms, have weaker credit histories, or lack clear title to their agricultural land, which can make it difficult for them to qualify for loans. SDFR advocacy groups also said some SFDRs face actual or perceived unfair treatment in lending or may be dissuaded from applying for credit because of past instances of alleged discrimination. Additionally, they noted that some SDFRs may not be fully aware of credit options and lending requirements, especially if they are recent immigrants or new to agriculture.

Private lenders and federal agencies conduct outreach to SDFRs, but the effectiveness of these efforts in increasing lending is unknown. For example, lenders have sponsored educational events targeted to SDFRs and translated marketing materials for non-English speakers. Farm Credit Administration regulations require Farm Credit System lenders to prepare marketing plans that include specific outreach actions for diversity and inclusion. The Farm Credit Administration examines these plans and indicated that it has prescribed corrective actions in some cases. However, the Farm Credit Administration does not require lenders to meet specific lending goals, and the regulatory data restrictions noted previously constrain the Farm Credit Administration's ability to assess the effect of outreach efforts. USDA conducts outreach to SDFRs and lenders about its loan programs and collects data on the personal characteristics of loan applicants. However, USDA officials said they face challenges evaluating the impact of their outreach efforts, in part because outreach participants are reluctant to provide their demographic information.

According to the 2017 Census of Agriculture (2017 Census), there are  about 2 million farm and ranch operations nationwide (which we refer to  as farms). Farmers and ranchers often require loans to, among other  things, buy agricultural real estate, make capital improvements, and  purchase supplies and equipment. The U.S. Department of Agriculture  (USDA) estimates that total outstanding agricultural debt was about $242  billion in 2017. However, some demographic groups have alleged  discrimination in obtaining agricultural loans or are considered  underserved by the credit market. In addition, according to USDA data,  minorities and women comprise a disproportionately small share of  agricultural producers relative to their numbers in the general population.

Congress has recognized some of the challenges these groups face by  requiring USDA to target “socially disadvantaged farmers and ranchers”  (SDFR) in programs that make direct loans or that guarantee loans made  by private lenders. The Consolidated Farm and Rural Development Act,  as amended, defines a socially disadvantaged group as one whose  members have been subject to racial, ethnic, or gender prejudice  because of their identity as members of a group without regard to their  individual qualities. USDA regulations further 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. In this report, we use USDA’s definition to identify  SDFRs both in USDA’s farm loan programs and in the broader population  of agricultural producers.

Several types of private lenders make loans to farmers and ranchers.  These include, but are not limited to, Farm Credit System associations,  commercial banks and credit unions, farm implement dealers, and  individuals. (We describe each of these in more detail in the background  section of this report.) USDA guarantees some of the agricultural loans  made by Farm Credit System associations and commercial banks.

The Agriculture Improvement Act of 2018 included a provision for us to  study agricultural credit services provided to SDFRs. Based on the  language of the provision, we excluded USDA direct loans from the scope  of our review and focused on lending by private entities. This report  examines (1) what is known about the amount and types of agricultural  credit to SDFRs, (2) challenges SDFRs reportedly face in obtaining  agricultural credit, and (3) outreach efforts to SDFRs regarding  agricultural credit and related services.

For all objectives, we interviewed officials from USDA (including the Farm  Service Agency, National Agricultural Statistics Service, and Economic  Research Service), the Farm Credit Administration (which regulates Farm  Credit System associations), and the federal depository institution regulators. We also interviewed representatives from lending industry  groups we selected to cover the major types of private institutional  lenders that make agricultural loans. Additionally, we interviewed  representatives from national advocacy or research groups that focus on  one or more socially disadvantaged populations and on agricultural credit  or finance issues. We selected these groups based on referrals obtained  during prior GAO studies and recommendations from experts in the field.  Because the group of organizations we interviewed is a nonprobability  sample, the information they provided is not generalizable. In this report,  we refer collectively to the federal officials, lending industry group  representatives, and advocacy and research group representatives we  interviewed as stakeholders.

To address the first objective, we reviewed statutes and regulations  governing the collection of data on the personal characteristics of loan  applicants. We interviewed officials from the federal depository institution  regulators and the Consumer Financial Protection Bureau (CFPB) about  these requirements and the status of a related ongoing rulemaking. We  also analyzed USDA data from the Censuses of Agriculture for 2012 and  2017 and Agricultural Resource Management Surveys for 2015, 2016,  and 2017. USDA’s National Agricultural Statistics Service and Economic  Research Service provided us customized summary statistics from these  data sources to facilitate our analysis. Additionally, we analyzed USDA  data on farm ownership and farm operating loans guaranteed by the  Farm Service Agency in fiscal years 2014 through 2018. We focused on  guarantees issued by the Farm Service Agency because it operates the  primary federal agricultural credit programs. To assess the reliability of  data from USDA, we reviewed agency documentation on how the data  were collected and analyzed. We also interviewed USDA officials about  interpretations of data fields and robustness of estimated values, among  other things. We concluded that the data were sufficiently reliable for  describing the size and characteristics of the SDFR population and the  amount and types of agricultural credit SDFRs received.

To address the second objective, we conducted a review of government  and academic literature and identified additional articles and reports  through citations in literature we reviewed and from expert  recommendations. To address the third objective, we reviewed USDA,  Farm Credit System, and federal depository institution regulator  documents on agricultural credit-related services for SDFRs, including  marketing, outreach, and education activities. We collected information on  how federal agencies and regulators oversee and evaluate these  activities. We reviewed statistics from the Farm Credit Administration on  its examinations of Farm Credit System association marketing plans,  which are required to contain specific actions for diversity and inclusion.  To supplement this work, we conducted a review of marketing plans from  a nongeneralizable sample of Farm Credit System associations in areas  with relatively high proportions of SDFRs. We also reviewed materials on  the activities of USDA’s Outreach and Technical Assistance for Socially  Disadvantaged and Veteran Farmers and Ranchers Program.  Additionally, we interviewed officials from the Farm Service Agency’s  Outreach Office and documented their procedures for targeting outreach  to SDFRs about USDA-guaranteed agricultural loans. For both the  second and third objectives, we also drew upon information and analysis  from our May 2019 report on agricultural lending on tribal lands.  Appendix I describes our scope and methodology in greater detail.

We conducted this performance audit from January 2019 to July 2019 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

The Agricultural Census and Socially Disadvantaged Farmers and Ranchers

USDA conducts the Census of Agriculture every 5 years, most recently in  2012 and 2017. The census provides a detailed picture of farms and the  people who operate them. The census identifies several categories of  farmers, including the following:

Producers. Producers are individuals involved in farm decision- making. A single farm may have more than one producer.

Primary producers. The primary producer is the individual on a farm  who is responsible for the most decisions. Each farm has only one  primary producer.

The 2017 Census questionnaire substantially revised the way it collected  certain data in order to better capture the contributions of all persons  involved in farm decision-making. For example, the 2017 questionnaire  asked for the names and demographic information of up to four producers  per farm (compared to three in 2012) and used a series of questions on  specific types of farm decisions to determine the primary producer (the  2012 questionnaire did not include these questions). Therefore,  comparisons between the two censuses regarding the number and  personal characteristics of producers and primary producers should be  considered with the 2017 revisions in mind. While some changes may be  the result of actual changes in the population of farmers and ranchers,  other changes may be the result of changes in census methodology.

USDA’s 2017 Census counted about 3.4 million producers across the  roughly 2 million farms nationwide, compared to 3.2 million in 2012. This represents an approximately 7 percent increase over 2012 in the number  of reported producers, despite a slight drop in the number of farms  reported. Many of these additional producers were SDFRs. In 2017,  SDFRs accounted for 41 percent (1,390,449) of all producers, compared  to 36 percent (1,133,163) in 2012. The number of reported SDFR primary  producers also grew between 2012 and 2017. Among SDFR subgroups,  women accounted for the largest increase in producers and primary  producers.

In the 2017 Census, women also made up the largest group of SDFR  producers and primary producers (see table 1). Women accounted for  88.3 percent of all SDFR producers and 81.0 percent of SDFR primary  producers. Hispanic, Latino, or Spanish-origin producers were the next  largest group, accounting for 8.1 percent of all SDFR producers and 11.0  percent of SDFR primary producers.

On average, farms for which an SDFR was the primary producer (SDFR  farms) were smaller and brought in less revenue than non-SDFR farms in  2017. While representing 30 percent of all farms, SDFR farms operated  21 percent of total farm land and accounted for 13 percent of the market  value of agricultural products sold in 2017 (see table 2). About 55 percent  of SDFR farms had fewer than 50 acres, and 88 percent had less than  $50,000 in total sales and government payments. Additionally, a lower  proportion of SDFR-operated farms (21 percent) received government  payments compared to non-SDFR farms (36 percent).

Types and Sources of Agricultural Credit

Agricultural producers generally require financing to acquire, maintain, or  expand their farms, ranches, or agribusinesses. Agricultural loans  generally fall into two categories:

Farm ownership loans. These loans are used to acquire, construct,  and develop land and buildings and have terms longer than 10 years.  They are secured by real estate and are sometimes referred to as real  estate loans.

Farm operating loans. These loans are generally short-term or  intermediate-term loans that finance costs associated with operating a  farm. Short-term loans are used for operating expenses and match  the length and anticipated production value of the operating or  production cycle. Intermediate-term loans are typically used to finance  depreciable assets such as equipment and usually range from 18  months to 10 years. These loans may also be referred to as non- real-estate loans.

Several types of lenders provide credit to agricultural producers,  including, but not limited to, the following:

Farm Credit System. The Farm Credit System is a government- sponsored enterprise, established, in part, to provide sound,  adequate, and constructive credit to American farmers and ranchers.  The Farm Credit System includes a national network of 73 banks and  associations. The Farm Credit System lends money to eligible  agricultural producers primarily through its 69 lending associations,  which are funded by its four banks. All are cooperatives, meaning that  Farm Credit System borrowers have ownership and control over the  organizations. The Farm Credit System is regulated by the Farm  Credit Administration, an independent federal agency.

The Farm Credit System’s statutory objectives include being  responsive to the needs of all types of creditworthy agricultural  producers having a basis for credit, with additional requirements to  serve young, beginning, and small farmers and ranchers. According  to the Farm Credit Administration, the Farm Credit System is not  statutorily mandated to focus on providing financial opportunities to  any other group.

Commercial banks. Commercial banks are regulated by the federal  depository institution regulators. They vary in size and the type of  credit they provide. In a January 2013 report, we found that large  banks were more likely to engage in transactional banking, which  focuses on highly standardized products that require little human input  to manage and are underwritten using statistical information. We  also found that small banks were more likely to consider not only data  models but information acquired by working with the customer over  time. Additionally, we found that by using this banking model, small  banks may be able to extend credit to customers who might not  receive a loan from a larger bank. The American Bankers Association  reported that in 2017, the majority of farm banks—those that made  more agricultural loans than the industry average—were small  institutions with a median asset size of $125 million.

USDA Farm Service Agency. USDA’s Farm Service Agency makes  direct loans to farmers and ranchers and guarantees loans made by  commercial lenders and Farm Credit System associations. The Farm  Service Agency is a lender that focuses on assistance to beginning  and underserved farmers and ranchers who are unable to obtain  credit elsewhere. For its guaranteed loans, the agency typically  guarantees 90 percent of losses the lender might incur in the event  that a borrower defaults, although the agency may guarantee up to 95  percent for qualifying loans to certain groups, including SDFRs.  Guaranteed loan terms and interest rates are set by the lender,  though USDA has established maximum rates and terms. Agricultural  loans guaranteed by the Farm Service Agency generally account for  about 4–5 percent of outstanding loans made by the Farm Credit  System and commercial banks and credit unions.

Other lenders. A variety of other businesses and individuals provide  agricultural credit to farmers and ranchers, including credit unions, life  insurance companies, farm implement dealers, and family members.  According to the National Credit Union Administration, agricultural  lending represents a small portion (less than several basis points) of  credit union lending. Historically, life insurance companies have  used agricultural real estate mortgages as part of their investment  portfolios. Farm implement dealers sell machinery, parts, and  services and offer financing for those products. According to USDA  survey data, implement dealers currently provide almost one-third of  the agricultural sector’s farm operating debt with terms longer than 1  year and are an increasing source of agricultural credit.

According to USDA’s Economic Research Service, in 2017, the Farm  Credit System and commercial banks accounted for the bulk of  agricultural lending in the United States, comprising about 80 percent of  the total outstanding farm debt. The remaining debt was USDA Farm  Service Agency direct loans and loans made by other lenders.

Information Is Limited, but Survey Data Provide Some Insights into Credit to Socially Disadvantaged Farmers and Ranchers

Regulatory Data Collection Restrictions Limit What Is Known about Agricultural Credit to Socially Disadvantaged Farmers and Ranchers

Information on the types and amount of agricultural credit to SDFRs is  limited. Regulation B, which implements the Equal Credit Opportunity Act  (ECOA), generally prohibits lenders from collecting data on the personal  characteristics (such as sex, race, and national origin) of applicants for  loans other than certain mortgages. Therefore, financial institutions and  their regulators generally do not have information on the types or amount  of agricultural lending to SDFRs. In contrast, USDA collects and  maintains personal characteristic data on applicants for the farm loans it  makes or guarantees in order to target loans to traditionally underserved  populations and fulfill statutorily mandated reporting requirements.

The lack of personal characteristic data on a large portion of agricultural  loan applications limits the ability of regulators, researchers, and  stakeholders to assess potential risks for discrimination. In a July 2009  report, we found that federal enforcement agencies and depository  institution regulators faced challenges in consistently, efficiently, and  effectively overseeing and enforcing fair lending laws due in part to data  limitations. Additionally, we found that such data would enhance  transparency by helping researchers and others better assess the  potential risk for discrimination. For our current review, some federal  depository institution regulators we spoke with said that additional data on  nonmortgage lending would allow them to perform additional  assessments of financial institutions’ compliance with fair lending laws.  Some SDFR advocates we spoke with also expressed concern about the  lack of accurate public information on lending to SDFRs, which they said  forces them to rely on anecdotal evidence in attempts to monitor potential  discrimination.

A rulemaking pursuant to Section 1071 of the Dodd-Frank Wall Street  Reform and Consumer Protection Act (Dodd-Frank Act) would modify the  Regulation B prohibition for certain loans, including possibly some  agricultural loans. Section 1071 amended ECOA, requiring financial  institutions to report information on credit applications made by women- owned, minority-owned, and small businesses. However, in April 2011,  CFPB issued a letter stating that the requirements under Section 1071 do  not go into effect until CFPB issues implementing regulations. The  purpose of Section 1071 is “to facilitate enforcement of fair lending laws  and enable communities, governmental entities, and creditors to identify  business and community development needs and opportunities of  women-owned, minority-owned, and small businesses.” Section 1071 is  consistent with our 2009 report on fair lending issues, which said  Congress should consider requiring additional data collection and  reporting for nonmortgage loans. Section 1071 did not specify a time  frame for CFPB to complete its rulemaking.

As of June 2019, CFPB had not yet completed a rulemaking  implementing Section 1071 of the Dodd-Frank Act. In 2017, CFPB  issued a request for information seeking public comment on topics related  to the collection of data on small business lending. However, in  November 2018, CFPB announced that it was delaying the rulemaking  due to resource constraints and other priorities. CFPB reported in the  Spring 2019 Unified Agenda of Federal Regulatory and Deregulatory  Actions that it plans to resume pre-rulemaking activities later in 2019.

Survey Data Have Limitations but Provide Information on the Farm Debt and Credit Providers of Socially Disadvantaged Groups

USDA’s annual survey of farm producers, the Agricultural Resource  Management Survey, provides some insights into agricultural lending to  SDFRs but has limitations when used for this purpose. The limitations  fall into two main categories, as follows:

First, the sample size used in the survey does not allow for capturing  potential differences in the credit needs and challenges of specific  socially disadvantaged subgroups. The relatively small proportion of  SDFRs in the survey’s sample population renders estimates of SDFR  farm debt less precise. To increase the precision of its estimates,  USDA averaged 3 years of survey data (2015–2017) to increase the  sample size of SDFRs available for analysis. Due to the small size of  several SDFR subgroups, we analyzed SDFRs as a single combined  group.

Second, the survey may underrepresent the total outstanding farm  debt of socially disadvantaged groups and should be interpreted with  caution, according to USDA officials. As previously discussed, the  2017 Census questionnaire included revisions that better captured the  role of SDFRs in farm operations, and its results suggest that the  2012 Census and the 2015–2017 surveys (which used similar  methodologies) may have underreported the number of SDFRs  designated as primary producers, particularly women. Specifically,  in the 2015–2017 surveys, SDFRs represented 17 percent of  primary producers, whereas in the 2017 Census, SDFRs accounted  for 30 percent of primary producers. However, the potential  underrepresentation issue should not affect the statistical significance  of comparisons between the SDFR and non-SDFR subgroups within  the survey.

With these caveats in mind, the 2015–2017 survey data suggest that  SDFR primary producers had annual average outstanding farm debt of  $20.0 billion ($17.5–$22.6 billion at the 90 percent confidence level).  This estimate represents debt used specifically for farm purposes. Farm  ownership debt was a larger share of SDFR outstanding farm debt than it  was for all other farmers and ranchers. Among SDFR primary  producers, farm ownership debt was estimated to account for 67  percent of outstanding farm debt, compared to an estimated 59  percent for non-SDFR primary producers (see fig. 1). Farm operating  debt accounted for the remaining 33 percent and 41 percent of  outstanding SDFR and non-SDFR farm debt, respectively.

SDFRs received proportionately fewer loans and less agricultural credit  overall than non-SDFRs. Specifically, SDFRs accounted for an estimated  17 percent of primary producers in the survey but only 13 percent of  farms with loans and 8 percent of total outstanding farm debt. SDFR  debt represented an estimated 9 percent of total farm ownership debt  and 7 percent of total farm operating debt (see table 3). Therefore, even  though farm ownership debt comprised most outstanding SDFR farm debt  (67 percent), SDFR primary producers were still less likely to have  outstanding farm ownership debt than all other farmers and ranchers.

While the survey data show that SDFRs had proportionately less  agricultural credit than non-SDFRs, the survey does not provide  information on the reasons why. However, a number of factors may help  explain these differences. For example, the 2017 Census shows that  SDFRs are more likely than non-SDFRs to operate smaller farms with  less market value, and smaller farms may require less credit to operate.  In addition, as discussed later in this report, SDFRs may have greater  difficulty qualifying for agricultural loans or may be dissuaded from  applying for credit.

SDFR primary producers generally borrowed from the same type of  lenders as non-SDFRs and reported using a range of agricultural credit  providers. The distribution of SDFR and non-SDFR farm debt by lender  type in the survey was roughly similar, with all differences within the  margin of error (at the 90 percent confidence level). According to the  survey data, an estimated 51 percent of SDFRs’ outstanding farm debt  was lent by commercial banks and savings associations. Lending by  Farm Credit System institutions (28 percent), USDA’s Farm Service  Agency (6 percent), and other lenders, such as individuals and  equipment dealers (15 percent), comprised the remainder. SDFRs  received a larger share of their operating credit, compared to ownership  credit, from lenders in the “other” category. This was true for non-SDFR  operating debt as well.

These results should be interpreted cautiously because the information is  self-reported and respondents may not have known the specific types of  lenders they used. The survey results for all farms appear to  overrepresent debt from commercial banks and savings associations  when compared with data collected by USDA’s Economic Research  Service on farm-sector balance sheets. It is possible some respondents  mischaracterized some debt from Farm Credit System institutions as debt  from commercial banks.

About 11 Percent of Lending Guaranteed by the Farm Service Agency Went to Socially Disadvantaged Farmers and Ranchers

While loans guaranteed by USDA’s Farm Service Agency make up a  small percentage of overall agricultural lending, the agency tracks how  much of this lending goes to SDFRs and the purpose of the loans  (ownership or operating). In fiscal year 2018, the Farm Service Agency  guaranteed $3.2 billion in new agricultural loans. About $340 million (10.8  percent) of this amount went to SDFRs (see fig. 2). By dollar volume,  farm ownership loans accounted for about 71 percent of the guaranteed  loans to SDFRs. Farm operating loans accounted for the remaining 29  percent. Guaranteed farm ownership loans to SDFRs averaged about  $519,000, while farm operating loans averaged about $279,000.

A 1988 amendment to the Consolidated Farm and Rural Development  Act states that USDA should establish annual target participation rates for  SDFRs on a county-wide basis for farm ownership loans and, to the  greatest extent practicable, reserve funds for certain loans it makes or  insures under these targets. However, in August 2007, USDA’s Office of  General Counsel provided a legal opinion that stated that the statute  could be read to apply only to the direct loan program. As a result,  officials at the Farm Service Agency told us it does not set annual target  participation rates by county or reserve funds for guaranteed loans.

Over the last 5 fiscal years (2014–2018), the Farm Service Agency  guaranteed an increasing number of loans to SDFRs each year. The  agency guaranteed 489 loans to SDFRs in fiscal year 2014 and 817 loans  in fiscal year 2018—a 5-year high. Over that period, the total dollar  amount of guaranteed loans to SDFRs increased by 69.6 percent when  adjusted for inflation. The increase was similar for farm ownership and  farm operating loans (see fig. 3).

While the total dollar amount of guaranteed loans to SDFRs increased  each year, the percentage of guaranteed loans that went to SDFRs, by  dollar volume, decreased from fiscal years 2014 through 2016 (see fig. 4).  This percentage started increasing in fiscal year 2017, when SDFRs  accounted for 8.7 percent of guaranteed loans by dollar volume.  However, guaranteed loans to SDFRs still accounted for a slightly smaller  portion of all guaranteed loans in fiscal year 2018 (10.8 percent) than in  fiscal year 2014 (11.0 percent).

In fiscal year 2018, the dollar amount and percentage of guaranteed loan  funds that went to SDFRs differed substantially by state (see table 4).  Hawaii and Puerto Rico were the only two states or territories where  SDFRs received more than one-half of all guaranteed loans (farm  ownership and operating loans combined). However, Hawaii and Puerto  Rico received 0.1 percent of all guaranteed loans. For several states  where SDFRs received a large dollar amount of guaranteed loans, these  loans represented less than 20 percent of the state’s guaranteed loan  funds (for example, Arkansas, Missouri, and South Dakota). In contrast,  several states with the largest proportions of guaranteed loans to SDFRs  had less guaranteed loan funds overall (for example, Florida, Wyoming,  and Maryland). The Farm Service Agency did not guarantee any loans to  SDFRs in Alaska, Connecticut, New Hampshire, or Rhode Island in fiscal  year 2018.

Stakeholders Identified Multiple Challenges That Socially Disadvantaged Farmers and Ranchers Face in Obtaining Private Agricultural Credit

Smaller Operations, Weaker Credit Histories, and Land Ownership Issues Reportedly Present Hurdles to Obtaining Agricultural Credit

According to representatives from some SDFR advocacy groups, federal  depository institution regulators, and lending industry associations we  interviewed, SDFRs can have difficulty obtaining agricultural credit from  private-sector lenders because they operate smaller farms and in some  cases do not meet standards for farm revenue, applicant credit history,  and collateral.

Farm size. As previously discussed, SDFRs are more likely than other  farmers and ranchers to operate small farms, which can make it difficult  for them to qualify for private credit. According to data from the 2017  Census of Agriculture, SDFRs represented 30 percent of primary  producers but operated 39 percent of farms smaller than 50 acres and 16  percent of farms 500 acres or larger. Some SDFR advocates and  lending industry association representatives we interviewed said lenders  have several incentives to lend to larger farms. First, one advocate noted  that operators of smaller farms typically need smaller loans, and making  many small loans is more time- and resource-intensive than making  fewer, larger loans. Second, one industry association and one SDFR  advocate noted that large farms often produce major commodities such  as corn, soybeans, and beef cattle, while small farms often produce  specialty crops. The SDFR advocate said underwriting loans to large  farms that produce major commodities is easier and less risky because  more data are available on the market for those products. Third,  representatives of one SDFR advocacy group and one industry  association noted that programs such as crop insurance are geared  toward large, major-commodity farmers. They said these programs  mitigate repayment risk and make lenders more likely to approve a loan  or provide more favorable terms, such as lower interest rates. In contrast,  representatives from the Office of the Comptroller of the Currency noted  that the Community Reinvestment Act can provide incentives for banks to  lend to smaller farms.

Farm revenue. Consistent with their smaller size, SDFR farms also  generate less revenue on average than non-SDFR farms. As previously  noted, SDFR primary producers accounted for a disproportionally small  portion (13 percent) of total agricultural product sales in 2017 relative to  their overall representation among primary producers (30 percent).  Additionally, according to one SDFR advocate, SDFRs may have more  difficulty than other farmers and ranchers in documenting their revenue  because they are more likely to sell their products through informal cash  transactions.

Operating a lower-revenue farm and having limited documentation of  revenue can be hurdles to obtaining private credit because these factors  may negatively affect a lender’s assessment of the applicant’s repayment  ability. Federal depository institution regulators have noted that farm  revenue is critical to demonstrating a borrower’s capacity to repay an  agricultural loan. For example, in its risk management expectations for  agricultural credit, the Board of Governors of the Federal Reserve System  says banks should review borrower-prepared cash-flow statements to  identify potential repayment-ability problems. Lenders consider farm  revenue when calculating an applicant’s debt-to-income ratio (the  percentage of income that goes to recurring debt payments), which is a  central underwriting criterion. In general, having lower income relative to  recurring debt payments indicates weaker repayment ability. Consistent  with this principle, Farm Credit Administration regulations require Farm  Credit System associations to have written policies and procedures that  include underwriting standards that demonstrate an applicant’s  repayment capacity when approving a loan. Additionally,  representatives of one industry lending association said that revenue is  the most important factor that banks consider in underwriting agricultural  loans.

Credit history. Some SDFRs may have relatively low credit scores or  limited credit histories, which can make it difficult to obtain agricultural  credit. Some SDFR advocates and lending industry association  representatives we interviewed said that some SDFR subgroups are  more likely than members of nondisadvantaged groups to have difficulty  meeting credit score standards for agricultural loans. Prior research  provides some evidence to support this view. For example, the Board of  Governors of the Federal Reserve System reported in 2007 that African  Americans and Hispanics had lower credit scores on average than non- Hispanic whites and Asians, although the study did not specifically  examine farmers and ranchers.

While private agricultural lenders are not subject to federal statutory or  regulatory credit score requirements for approving agricultural loans,  federal depository institution regulators emphasize the importance of  evaluating applicants’ creditworthiness in their lending guidelines. For  example, the Office of the Comptroller of the Currency’s handbook on  agricultural lending states that current credit information is essential to a  bank’s ability to evaluate borrowers’ creditworthiness. Lending industry  association representatives we interviewed also noted that underwriting  for agricultural lending is increasingly standardized and reliant on credit  scores. For example, representatives from the Farm Credit Council (the  trade association for the Farm Credit System) said approval decisions for  about one-half of the loans that Farm Credit System associations make  each year are made using credit scorecards. Credit scorecards are  algorithms that statistically quantify a borrower’s probability of repayment  using inputs such as the borrower’s credit score. Additionally, participation in the secondary market for agricultural loans may require  lenders to comply with credit score criteria. For example, the Federal  Agricultural Mortgage Corporation (commonly known as Farmer Mac)—a  federal government-sponsored enterprise that purchases and securitizes  agricultural loans—has minimum credit score standards that range from  660 to 720.

Collateral. Some SDFRs face challenges using their agricultural land as  collateral. Many long-term agricultural loans require the borrower to  pledge land as collateral to secure the transaction. For example, long- term loans (up to 40 years) made by Farm Credit System associations  must be secured by a first-position lien on interests in real estate,  generally enabling the Farm Credit System to obtain ownership or control  of the land in the event of default. Federal regulators, lending industry  association representatives, and SDFR advocates we spoke with  identified several reasons why SDFRs, especially African Americans and  American Indians on tribal lands, have difficulty using agricultural land as  loan collateral.

Some SDFRs do not have a clear title to their agricultural land because  the land was passed down informally from generation to generation  without a will. In addition, land passed down in this manner can result in  numerous heirs—thousands in some cases—owning the land in common  (that is, not physically divided among them). These circumstances can  limit use of the land as collateral because of lending requirements or  conventions that require formal proof of ownership or that disallow the  use of a partial ownership interest as security for a loan. SDFR  advocates and officials from the Farm Credit Administration told us these  issues have particularly affected African American farmers due to  historical factors that limited their access to legal services. In our May  2019 report about lending on tribal lands, we discussed how these issues  also have posed problems for American Indian farmers.

As we also reported in May 2019, American Indian farmers on tribal lands  face additional challenges in using tribal land as collateral for agricultural  loans because of statutory restrictions and some lenders’ concerns about  their ability to enforce a foreclosure.

Farmer Advocates Report Additional Challenges for Socially Disadvantaged Farmers and Ranchers Seeking Agricultural Credit

SDFR advocates we spoke with said that in addition to difficulty meeting  loan underwriting standards, SDFRs face challenges related to historical  discrimination, ongoing unfair treatment by lenders, and a lack of  familiarity with some programs and technologies when trying to obtain  private agricultural credit.

As the Congressional Research Service reported in 2013, allegations of  unlawful discrimination against SDFRs in the management of USDA  programs are long-standing and well-documented. For example, in  1965, the U.S. Commission on Civil Rights found evidence of  discrimination in the delivery of USDA farm programs, including loan  programs. A subsequent report by the commission in 1982 and a report  by the USDA Civil Rights Action Team in 1997 found continuing problems  with the experience or treatment of SDFRs in USDA programs. USDA  has also settled several class action lawsuits that SDFRs filed for, among  other things, discrimination in the agency’s farm assistance programs.  The allegations in these lawsuits included that USDA systematically  denied SDFRs agricultural credit and other program benefits in violation  of ECOA and failed to investigate complaints of discrimination, as  required by USDA regulations. The settlements made more than $4  billion in awards available to farmers and ranchers whose claims were  approved through administrative procedures.

Some SDFR advocates told us that historical discrimination in agricultural  lending adversely affects SDFRs’ current ability to obtain private credit in  several ways. First, they said SDFRs who were unfairly denied USDA  loans and other program benefits in the past have not been able to  develop their farms in the same ways as farmers and ranchers who did  receive loans, thus reducing their ability to obtain private credit today. The  advocates elaborated that USDA agricultural credit allows recipients to  expand operations and to purchase land and equipment that can later be  used as collateral, making it easier to get subsequent and larger loans.  Some SDFR advocates also stated that historical exclusion from credit  markets and farm programs has limited SDFRs’ familiarity with lending  standards and resulted in less formal recordkeeping, which impairs their  ability to obtain private-sector credit. Finally, advocates said that historical  discrimination has led generations of SDFRs to distrust institutional  lenders, making them less likely to apply for credit.

Some SDFR advocates we spoke with said that unfair treatment by  private lenders is also a barrier to SDFRs obtaining private agricultural  credit. One SDFR advocate said some lenders discriminate against  SDFRs in loan approval decisions but that they more frequently treat  SDFRs unfairly with respect to loan terms and conditions (for example,  interest rates, fees, and collateral requirements) and loan servicing (for  example, restructuring and foreclosure mitigation actions). Another noted  that adverse loan terms and conditions and servicing practices can  increase the risk that borrowers will lose their farm, house, and other  property by making the loan unaffordable or reducing the chances that  borrowers will catch up on payments if they fall behind. For example, this  SDFR advocate said they were aware of cases in which (1) lenders  required SDFRs to pledge potentially excessive collateral for loans, such  as the borrower’s home in addition to the farm land, and (2) loan servicers  moved more quickly to foreclose on SDFR borrowers who were behind on  loan payments than on other borrowers and did not provide repayment  options that may have allowed them to continue their operations. One  SDFR advocate also stated that some SDFRs report not feeling welcome  at lending institutions based on the perception of having been repeatedly  dismissed by lender staff, while another said that in some cases, SDFRs  have not been provided timely or helpful information on the loan  application process. One SDFR advocate we spoke with said these  practices are prevalent in some agricultural credit markets and that they  had been or were currently involved in litigation related to these types of  practices.

However, banking industry association representatives said they did not  believe that SDFRs are being treated unfairly and that denying loans to  qualified applicants would cause lenders to decrease profits in a  competitive market. They noted that lenders face significant competition,  which incentivizes them to make loans to all qualified borrowers, and that  lending decisions and loan terms are based only on the applicant’s ability  to repay a loan and other underwriting criteria. We did not attempt to  independently verify claims of unfair treatment of SDFRs by private-sector  lenders, in part because data limitations discussed earlier limit the  identification and analysis of possible discriminatory practices.

Some SDFR advocates also said that some SDFRs may not be obtaining  private agricultural credit because they are not aware of all potential credit  options and related programs and are not always familiar with the  technology needed to access them. For example, one advocate told us  some SDFRs may not be aware that they could qualify for private  agricultural loans, especially if they are recent immigrants or new to  agriculture. This problem may be particularly true for loans from the Farm  Credit System associations. Two advocates said SDFRs are not familiar  with these lenders, and representatives of the Farm Credit Council told us  people who did not grow up in farming tended not to know about the Farm  Credit System. SDFR advocates we spoke with said this issue is  exacerbated by limited outreach by private lenders to SDFRs, as  discussed in more detail later in this report. Advocates also noted that  historically disadvantaged groups are less likely to have access to or be  familiar with computer technology and the internet, and that credit  applications and related financial education programs are now provided  online.

Lenders and Federal Agencies Conduct Some Outreach to Socially Disadvantaged Farmers and Ranchers, but the Effectiveness of These Efforts Is Unknown

Farm Credit System Outreach Is Not Specifically Targeted to Socially Disadvantaged Groups, and Data Collection Restrictions Prevent Assessment of Impact

The Farm Credit System does not have a specific mandate to serve  SDFRs, but its associations conduct some outreach to SDFRs in  implementing the following statutory requirements and Farm Credit  Administration regulations.

The Farm Credit Act of 1971 was amended in 1980 to require the  Farm Credit System to serve young, beginning, and small farmers.  Related Farm Credit Administration regulations require the  associations to implement effective outreach programs to these  groups. While these requirements do not mandate outreach to SDFRs  specifically, Farm Credit Administration officials said that many  SDFRs qualify as young, beginning, or small farmers and, therefore,  that Farm Credit System outreach efforts reach SDFRs to some  extent.

In 2012, the Farm Credit Administration amended its regulations on  business planning to help ensure the Farm Credit System is  responsive to the credit needs of all eligible and creditworthy  persons. The regulations, which first applied to 2013 business  plans, require Farm Credit System associations to develop marketing  plans describing, among other things, (1) the demographic groups in  their service areas, (2) ways to market their services to all qualified  farmers and ranchers, and (3) specific outreach toward diversity and  inclusion in each market segment. The supplementary information  included with the publication of the final rule cites the perception of  some SDFR advocates that Farm Credit System associations are not  accessible to underserved farmers and have not conducted sufficient  outreach to those populations about programs and services.

The full extent of the Farm Credit System associations’ outreach to  SDFRs is unknown. Neither the Farm Credit Administration nor the Farm  Credit Council maintains aggregated information on the number or type of  completed outreach activities involving SDFR participants. However, our  nongeneralizable review of recent marketing plans from six Farm Credit  System associations in areas with relatively high proportions of SDFRs  identified some examples of outreach to SDFRs. For instance, some  associations have partnered with a nonprofit organization to provide  educational programs designed to strengthen women’s roles in the  modern farm enterprise. Associations have also participated in  agricultural conferences at historically black colleges and universities and  translated marketing materials for non-English speakers.

Despite some outreach, some SDFR advocates we spoke with said that  Farm Credit System associations’ outreach has had limited effects on the  amount of credit provided to SDFRs and SDFRs’ familiarity with the  system. One SDFR advocate we spoke with said that while some Farm  Credit System associations engage with socially disadvantaged  communities, the outreach has not increased the diversity of the system’s  borrowers. Others said that Farm Credit System outreach to SDFR  communities has been insufficient and that some SDFRs are still not  aware of the Farm Credit System. However, one SDFR advocate noted  that the Farm Credit System’s outreach to young, beginning, and small  farmers has been beneficial for those populations.

The impact of Farm Credit System associations’ outreach to SDFRs is  also not known. The marketing plan requirement does not oblige Farm  Credit System associations to meet specific lending goals or favor any  type or group of agricultural producers in their underwriting. Accordingly,  the associations are not expected to quantify the extent to which they are  meeting their diversity and inclusion outreach plans in the information  they provide to their boards of directors. Moreover, Farm Credit  Administration officials said Regulation B, discussed earlier, prevents the  associations from collecting data on the race, ethnicity, and sex of loan  applicants that would be needed to assess the effects of outreach efforts  on lending to socially disadvantaged groups. In contrast, the officials  noted that Farm Credit System associations are required to set lending  targets for young, beginning, and small farmers; monitor outreach to  those groups; and report on performance results of their young,  beginning, and small farmer programs. In 2018, the Farm Credit System  reported that all direct-lender institutions with young, beginning, and small  farmer programs within the system were in compliance with these  requirements.

While the Farm Credit Administration has not evaluated the impact of  outreach by Farm Credit System associations, its reviews of association  marketing plans have found that most of the plans comply with  requirements for outreach toward diversity and inclusion but that some  lack specificity. The Farm Credit Administration told us it examines all of  the associations’ marketing plans for regulatory compliance every 3  years. Farm Credit Administration officials reviewed their examinations  from 2014 and 2017, the two scheduled examination cycles after the new  requirements were implemented in 2012. They found that 85 percent of  the 78 Farm Credit System associations examined in 2014 complied with  the marketing and outreach requirements, and 94 percent of the 71  associations examined in 2017 complied. In cases where examiners  identified deficiencies in marketing plans, the agency said it prescribed  corrective actions, including requiring associations to do the following: obtain sufficiently detailed information to analyze and understand develop specific action plans and outreach strategies to market the  institution’s products and services to potentially underserved markets;  and ensure appropriate reporting on progress in accomplishing marketing  plan strategies and actions.

Farm Credit Administration officials said they hold periodic discussions  with managers of Farm Credit System associations to monitor the status  of corrective actions and conduct follow-up examinations to determine the  adequacy of the corrective actions and, if applicable, the need for  additional enhancements.

The results of our review of a nongeneralizable sample of association  marketing plans were broadly consistent with the Farm Credit  Administration’s findings. We reviewed the most recent available plans of  the six Farm Credit System associations noted previously for evidence of  demographic information on the institution’s service area and for diversity  and inclusion outreach efforts. Among the plans we reviewed, five  included demographic information, but one did not. Farm Credit  Administration officials said they also had identified that deficiency in their  examination of that marketing plan. Additionally, five of the plans had  examples of planned outreach efforts to SDFRs, but another one did not.

Other Lenders Conduct Little Outreach to Socially Disadvantaged Farmers and Ranchers and Are Not Required to Do So

According to representatives of lending industry associations we  interviewed, commercial banks generally do not target outreach for  agricultural lending to specific demographic groups. Officials from the  federal depository institution regulators noted that commercial banks and  credit unions are not required to conduct outreach on agricultural lending,  and that the extent to which any lender conducts outreach is a private  business decision. However, officials from one federal depository  institution regulator noted that some lenders have participated in  conferences organized by SDFR groups. They also said that in fulfilling  responsibilities under the Community Reinvestment Act, lenders engage  with community groups in their assessment areas to help identify credit  needs. The officials said these efforts would likely engage SDFRs in  areas where agriculture was prevalent and where agricultural lending was  part of a bank’s business model.

Some SDFR advocates we interviewed said that outreach and  engagement by commercial banks was insufficient. For example, despite  their familiarity with agricultural lending, some noted that they did not  know of any specific outreach to SDFRs by private-sector lenders. They  also noted that additional outreach is needed because some SDFRs are  not familiar with agricultural lending products offered by commercial  banks.

Federal depository institution regulators do not monitor outreach to  SDFRs by the institutions they supervise but have conducted some  additional outreach themselves. Officials from the regulatory agencies  told us they do not collect data on the amount of, types of, participation in,  or impact of outreach conducted by their regulated institutions. However,  as part of their efforts to promote the availability of credit and other  services, the federal depository institution regulators have engaged in  some outreach to SDFRs, as shown in the following examples.

The Office of the Comptroller of the Currency has established an  Office of Minority and Women Inclusion and an Office of External  Outreach and Minority Affairs, which help to address fair credit access  issues affecting minority communities and have worked with some  national SDFR groups to coordinate, facilitate, and implement  conferences, roundtables, and seminars.

The Federal Deposit Insurance Corporation’s Community Affairs  Branch has engaged bankers, nonprofits, and other stakeholders to  provide small business training for SDFRs. This training provides  examples of small business lending and has highlighted programs for  which participants may qualify.

In 2017, the Federal Reserve Bank of St. Louis and the Board of  Governors of the Federal Reserve System engaged with federal  agencies, businesses, and groups representing SDFRs to develop  and publish a guide titled Harvesting Opportunity, which focuses on  how credit can provide greater support for local food-related  businesses and farmers.

USDA Conducts Outreach to Socially Disadvantaged Groups on Its Lending Programs, but Data- Collection Challenges Hamper Evaluation of Outcomes

USDA facilitates and provides outreach to SDFRs that some SDFR  advocates say has been beneficial, but outreach on USDA-guaranteed  farm loans is just one component of this broad-based effort. USDA’s  Office of Partnerships and Public Engagement implements the Outreach  and Technical Assistance for Socially Disadvantaged and Veteran  Farmers and Ranchers Program, referred to as the Section 2501  program. The program is designed to enhance coordination of outreach,  technical assistance, and education efforts authorized under agricultural  programs to improve SDFR and veteran farmer and rancher participation  in the full range of USDA programs, including guaranteed farm loans.  USDA officials said this program primarily provides grants and technical  assistance to community-based organizations and develops materials  describing best practices for national, state, and local outreach efforts.  Two SDFR advocates we interviewed said outreach programs  coordinated through the Section 2501 program have improved SDFRs’  understanding of USDA’s farm lending programs, and that the program’s  efforts to engage SDFRs in programs and services are better now than  they have been historically. USDA officials said they track these outreach  activities but do not maintain data on activities that specifically address  guaranteed loans because the outreach is generally intended to connect  socially disadvantaged groups with any USDA program that may be  appropriate.

In addition to department-level outreach activities, USDA’s Farm Service  Agency conducts outreach to increase SDFR participation in its programs  through activities targeted to underserved populations. Farm Service  Agency outreach efforts are conducted by the agency’s field offices and  overseen by the Outreach Office. The outreach includes lender trainings  and partnerships with community-based and tribal organizations to  engage socially disadvantaged communities. Farm Service Agency  officials said that they have partnered with private-sector lenders to  conduct some outreach events specifically related to the guaranteed farm  loan program but that most of the outreach is more general.

Farm Service Agency officials told us they use data on guaranteed loans  to SDFRs to target outreach to underserved communities. As previously  discussed, unlike other providers of agricultural credit, USDA generally  collects data on the personal characteristics of guaranteed loan  applicants and borrowers. Farm Service Agency officials told us that state  executive directors, farm loan chiefs, and outreach coordinators plan their  outreach in annual strategy sessions. As part of this planning, state  offices review the state’s lending goals for SDFRs, Census of Agriculture  data on the state’s farmer population, and data on Farm Service Agency  direct and guaranteed loans made to farmers belonging to different  socially disadvantaged groups to target outreach to underserved  communities. While the outreach is planned by state offices, the Farm  Service Agency’s Director of Outreach said the Outreach Office has  emphasized the use of lending goals and loan data in targeting outreach  efforts.

Although it 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. Farm Service Agency  officials said that they track outreach activities at the national level by  monitoring the number of activities, the groups engaged, and the number  of participants, but that they face challenges evaluating the impact of  outreach efforts. The officials said any personal or demographic  information on outreach participants must be voluntarily provided by the  participants, but that many of them are reluctant to do so. As a result,  data on the characteristics of outreach participants are limited. The lack of  data, in turn, makes it difficult to assess how effectively the outreach was  targeted and whether it could be expected to increase lending to socially  disadvantaged groups. Representatives from one SDFR advocacy  organization said that while outreach programs may increase SDFRs’  understanding of USDA’s loan programs, it is unclear how much outreach  programs help SDFRs obtain credit because USDA does not track  participant outcomes. Farm Service Agency officials said that some of  their state offices have begun trying to track the progress of individual  outreach participants in obtaining loans through Farm Service Agency  programs (using voluntarily provided information), but that these efforts  were in the early stages.

We provided a draft of this report to USDA, the Farm Credit  Administration, the Consumer Financial Protection Bureau, the Office of  the Comptroller of the Currency, the Federal Deposit Insurance  Corporation, the Board of Governors of the Federal Reserve System, and  the National Credit Union Administration for their review and comment.  The Board of Governors of the Federal Reserve System and the National  Credit Union Administration did not provide comments. USDA, the Farm  Credit Administration, the Consumer Financial Protection Bureau, the  Office of the Comptroller of the Currency, and the Federal Deposit  Insurance Corporation provided technical comments, which we  incorporated as appropriate.

We are sending copies of this report to the appropriate congressional  committees, the Secretary of Agriculture, the Acting Chairman and Chief  Executive Officer of the Farm Credit Administration, and other interested  parties. In addition, the report is available at no charge on the GAO  website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact  me at (202) 512-8678 or ortiza@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made major contributions to this report are  listed in appendix II.

Appendix I: Objectives, Scope, and Methodology

The objectives of this report were to examine (1) what is known about the  amount and types of agricultural credit to socially disadvantaged farmers  and ranchers (SDFR), (2) challenges SDFRs reportedly face in obtaining  agricultural credit, and (3) outreach efforts to SDFRs regarding  agricultural credit and related services.

In this report, we use the term SDFR as defined in the Consolidated Farm  and Rural Development Act, as amended, and related U.S. Department of  Agriculture (USDA) regulations. The act defines a socially disadvantaged  group as one whose members have been subject to racial, ethnic, or  gender prejudice because of their identity as members of a group without  regard to their individual qualities. USDA regulations further 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. Although the act and  USDA regulations defined SDFR for purposes of classifying participants  in USDA programs, in this report, we use USDA’s definition to identify  SDFRs both in USDA programs and in the broader population of  agricultural producers, consistent with the statutory provision this report  responds to.

Additionally, based on the language of the statutory provision, we  excluded USDA direct loans from the scope of our review and focused on  lending by private entities. The provision defines an agricultural credit  provider as a Farm Credit System institution, a commercial bank, the  Federal Agricultural Mortgage Corporation, a life insurance company, and  any other individual or entity as determined by the Comptroller General of  the United States.

Estimates of the Numbers of Farms and Socially Disadvantaged Farmers and Ranchers

For the background section of this report, USDA’s National Agricultural  Statistics Service provided estimates from the 2012 and 2017 Censuses  of Agriculture on the number of farm and ranch operations (which we  refer to as farms) whose primary producer—that is, main decision  maker—qualified as an SDFR, broken down by different SDFR  subgroups. The service also provided estimates on the characteristics of  farms whose primary producer was an SDFR, including the total acreage and market value of products sold. We compared the 2017 Census  estimates of SDFR primary producers to analogous estimates from the  2012 Census and calculated numerical and percentage differences. We  reviewed documentation on the methodologies used by the 2012 and  2017 Censuses to identify the main decision maker on a farm. We also  interviewed National Agricultural Statistics Service officials about  methodological differences between the two censuses and their likely  effects on the number of reported SDFR primary producers. The 2012  Census used the term “principal operator” rather than “primary producer”  to identify the main farm decision maker, but for ease of presentation we  use the term primary producer in reference to both the 2012 and 2017  Censuses because the terms generally have the same meaning.

Amount and Types of Credit to Socially Disadvantaged Farmers and Ranchers

To examine what is known about the amount and types of agricultural  credit to SDFRs, we reviewed requirements in the Equal Credit  Opportunity Act and its implementing regulation (Regulation B) governing  the collection of data on the personal characteristics of loan applicants.  We interviewed officials from the Consumer Financial Protection Bureau  (CFPB), which has primary responsibility for issuing Equal Credit  Opportunity Act regulations, about these requirements and the status of a  related rulemaking pursuant to a provision in the Dodd-Frank Wall Street  Reform and Consumer Protection Act. We also interviewed officials from  the federal depository institution regulators—the Board of Governors of  the Federal Reserve System, Federal Deposit Insurance Corporation,  Office of the Comptroller of the Currency, and National Credit Union  Administration—about the extent of information available on agricultural  lending to SDFRs and about data restrictions stemming from Regulation  B. We also drew upon information and analysis from our June 2008 and  July 2009 reports on data limitations in nonmortage lending.

Additionally, we analyzed data from USDA’s Agricultural Resource  Management Survey. The survey is a multiphase series of interviews that  uses a multiframe, stratified, probability-weighted sampling design. The  survey does not include Hawaii or Alaska. USDA’s Economic Research  Service provided us customized summary statistics from the 2015, 2016,  and 2017 surveys combined. Specifically, the service averaged survey  data for those 3 years to provide a robust sample size of surveyed  SDFRs. The service provided estimates and associated confidence  intervals on the proportion of primary producers who were and were not  SDFRs; the annual average amount of outstanding farm debt each group  had over the 3-year period, by type of debt (ownership or operating); and  the lending source for this debt (USDA Farm Service Agency, Farm  Credit System institution, commercial bank and savings associations, or  other). The service adjusted debt information for inflation. Specifically, to  create standard errors for the 3-year averages, the service adjusted  outstanding debt to 2017 dollars using the chain-type gross domestic  product deflator. We compared and contrasted survey statistics for  SDFRs and non-SDFRs, focusing on the volume and percentage of total  outstanding farm debt, farm ownership and operating debt, and lender  type. We interviewed Economic Research Service officials about  limitations of the survey data. The limitations include the small size of  several SDFR subgroups (which prevented more detailed analysis of  different demographic groups), the potential underrepresentation of  SDFRs in the survey, and potential overreporting of debt from commercial  lenders. With regard to lender type, respondents may not have known the  specific types of lenders they used. The survey results for all farms  appear to overrepresent debt from commercial banks and savings  associations when compared with data collected by the service on farm- sector balance sheets. It is possible some survey respondents  mischaracterized some debt from Farm Credit System institutions as debt  from commercial banks. These issues and their implications are  discussed in the body of this report.

To assess the reliability of the survey data, we reviewed methodology and  quality review documents and compared results to other publicly available  sources, such as farm balance-sheet data and the 2017 Census. We  concluded that the data were sufficiently reliable for describing the  amount and types of agricultural credit SDFRs received, the sources of  this credit, and how SDFRs and non-SDFRs compared along these  dimensions.

We also analyzed USDA data on farm ownership and farm operating  loans guaranteed by the Farm Service Agency in fiscal years 2014  through 2018. We focused on guarantees issued by the Farm Service  Agency because it operates the primary federal agricultural credit  programs. For the 5-year period, we analyzed the annual amount and  percentage of guaranteed loans (by dollar volume and adjusted for  inflation) that went to SDFRs. We also separately examined trends in  guaranteed farm operating and farm ownership loans to SDFRs. Finally,  we analyzed the volume of guaranteed loans to SDFRs by state. We  used this analysis to identify the top 10 states (or territories) in terms of  (1) the dollar amount of guaranteed loans that went to SDFRs and (2) the proportion of guaranteed lending to the state or territory that went to  SDFRs.

To assess the reliability of data from USDA, we conducted electronic  testing—including checks for missing data and erroneous values—and  compared the data to publicly available sources. The loan guarantee data  we present are somewhat different than publicly available information on  USDA’s website because we used loan closing dates to group loans by  fiscal year, while the publicly available data used the dates on which  USDA obligated commitment authority for the loans. According to USDA  officials, the closing date is a more accurate representation of the actual  amount of loans guaranteed in a fiscal year, because some loans for  which commitment authority is obligated may close in the following fiscal  year or not close at all. We also interviewed USDA officials about  interpretations of data fields and robustness of estimated values, among  other things, and reviewed USDA internal policies and procedures for  data entry. We concluded that the data were sufficiently reliable for  describing the amount and proportion of farm lending guaranteed by the  Farm Service Agency that went to SDFRs and non-SDFRs nationwide  and by state.

Finally, we reviewed documents and interviewed officials from the Farm  Service Agency on the agency’s performance goals and target  participation rates for farm lending to SDFRs. We also reviewed a 2007  USDA Office of General Counsel legal opinion on a statutory provision  concerning establishment of target participation rates for SDFRs.  However, an evaluation of the legal opinion was outside the scope of our  study.

SDFR Credit Challenges and Outreach Efforts to SDFRs

To examine challenges SDFRs face in obtaining agricultural credit and  outreach efforts to SDFRs regarding agricultural lending, we conducted  searches of government and academic literature for research on private  agricultural lending to socially disadvantaged groups. We searched the  internet and various databases, such as AGRICOLA, EconLit, ProQuest  Newsstand Professional, and Social SciSearch. Using broad search  terms, we identified articles related to our research objectives that  provided useful context and discussion topics for interviews with  stakeholders. We did not identify any government or peer-reviewed  academic literature that directly addressed private agricultural lending to  socially disadvantaged groups, barriers those groups may face when  trying to obtain agricultural credit, or outreach to disadvantaged groups by  private agricultural lenders. We also solicited expert recommendations for  academic literature on agricultural lending to socially disadvantaged  groups. Several SDFR advocates identified the Socially Disadvantaged  Farmers and Ranchers Policy Research Center as a potential source for  academic literature on the subject. We found that the center had  conducted some potentially relevant research but that the work had yet to  be published in academic journals or government publications.

To review efforts by agricultural lenders and their regulators to provide  and oversee credit-related services to SDFRs—including marketing,  outreach, and education activities—we reviewed data and documents  from the Farm Credit System, USDA, and the federal depository  institution regulators. We reviewed summary statistics from the Farm  Credit Administration’s 2014 and 2017 examinations of Farm Credit  System association marketing plans to determine the extent to which the  associations had met requirements for outreach for diversity and  inclusion. We supplemented this effort by reviewing marketing plans from  a sample of six Farm Credit System associations in areas with substantial  proportions of SDFRs from each of the socially disadvantaged groups  identified in USDA regulations. While we included associations from  different geographic regions of the country, the sample was not intended  to be representative of all associations. We documented the extent to  which the marketing plans we reviewed contained information on the  demographic characteristics of the population in the associations’ service  areas and planned outreach activities for diversity and inclusion. We also  documented examples of outreach to SDFRs that were ongoing or that  they had completed. Further, we also reviewed illustrative examples of  outreach materials to SDFRs developed by USDA and the federal  depository institution regulators, and we interviewed officials from these  agencies about their outreach efforts.

To gain further insight into challenges faced by and outreach efforts to  SDFRs, we interviewed (1) SDFR advocacy and research organizations,  (2) industry group representatives, and (3) federal agency officials. We  refer collectively to the entities we interviewed as stakeholders. To select  SDFR advocacy and research organizations, we used a snowball  sampling technique that identified organizations based on referrals  obtained during prior GAO studies and referrals from stakeholder  interviews during this study. We limited our interviews to organizations  that are national in scope and that focus on one or more socially  disadvantaged populations and on agricultural credit or finance. Based on  the snowball sampling, we identified and interviewed representatives from  the following five groups: Socially Disadvantaged Farmers and Ranchers  Policy Research Center, National Sustainable Agriculture Coalition,  National Black Farmers Association, Rural Coalition, and Rural  Advancement Foundation International-USA. The snowball sampling did  not identify a national advocacy organization focused on women  farmers—the largest SDFR subgroup—but we identified American Agri- Women based on an internet search, and we interviewed representatives  from that organization as well. Because the group of organizations we  interviewed was a nonprobability sample, the information they provided is  not generalizable.

We also interviewed representatives from lending industry groups—the  American Bankers Association, the Independent Community Bankers of  America, and the Farm Credit Council—that we selected to cover the  major types of private institutional lenders that make agricultural loans,  including large commercial banks, community banks, and the Farm Credit  System. Additionally, we contacted industry associations representing  insurance companies and community development financial institutions— both of which provide some agricultural credit—but representatives from  these associations said they did not have information directly related to  our research topic.

Finally, we interviewed officials from USDA and its Farm Service Agency,  the Farm Credit Administration, CFPB, and the federal depository  institution regulators.

For our work on credit challenges faced by SDFRs, we also drew upon  information and analysis from our May 2019 report on agricultural lending  on tribal lands. Among other things, that report describes (1) what is  known about the agricultural credit needs of Indian tribes and their  members, (2) barriers stakeholders identified to agricultural credit on tribal  lands, and (3) Farm Credit System authority and actions to meet those  agricultural credit needs.

We conducted this performance audit from January 2019 to July 2019 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

Appendix II: GAO Contact and Staff Acknowledgments

In addition to the contact named above, Steve Westley (Assistant  Director); Jeremy Anthony (Analyst in Charge); Katherine Carter; William  Chatlos; Tom Cook; Sam Portnow; Jennifer Schwartz; Jena Sinkfield;  Tyler Spunaugle; and Farrah Stone made key contributions to this report.

Can women and minorities get the loans they need to buy and operate farms?

According to USDA survey data, these "socially disadvantaged" farmers and ranchers get a disproportionately small share of farm loans. More detailed information isn’t available on farm lending to these groups because lenders generally aren't allowed to record an applicant's race or sex.

Advocates, industry representatives, and federal officials told us socially disadvantaged farmers and ranchers may have trouble getting loans because they have lower-revenue farms and weaker credit histories on average. Some advocates also allege ongoing discrimination in farm lending.