Examining the transformative potential of an underappreciated piece of a long-awaited small business lending regulations.
NCRC anticipates that the Consumer Financial Protection Bureau (CFPB) will release its final regulation implementing Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act in the first part of 2023. The final rule will fulfill a Dodd-Frank provision requiring banks and non-depository lenders to collect and publicly release data on their small business and farm data. This data will have information on the revenue size of the borrower firms and the gender and race/ethnicity of the owners. While stakeholders often talk about how this is important to increase equity in small business lending, small farm lending also has deep implications for equity and deserves attention.
Evidence of disparities in small farm lending
A brief review of inequities in small farm lending and ownership illustrates why stakeholders need and look forward to this data. Much attention to disparities and discrimination in small farm lending has focused on African American-owned small farms. The U.S. Department of Agriculture (USDA) issues loan guarantees like those the Federal Housing Administration issues for home loans. County level offices that make loan decisions have often engaged in discriminatory practices, impeding equal access to the USDA program.
A seminal lawsuit, Pigford v. Glickman, alleging discrimination against African American farmers resulted in a 1997 settlement against the USDA. After the settlement to the lawsuit, an academic study using USDA data concluded that African American farmers received lower loan amounts at higher interest rates from 2004 to 2014. This was partly due to differences in creditworthiness among African American- and White-owned farms.
Black farm owners’ difficulties accessing credit have helped exacerbate inequalities in farm ownership between White and Black Americans. Just 1.4% of the farms in the United States are owned by African Americans, down from 14% a century ago. A recent analysis found that if profits and revenues at African American farms were comparable to White farms, an extra $5 billion in economic value would have been created. Inequalities have also held back Hispanic farmers. Hispanic owned farms are about 3.3% of the farms in the United States although about 18% of the population is Hispanic.
Women also experienced discriminatory barriers to farming. Up until 1969, daughters did not have equal inheritance rights to sons if parents owning the farm died without a will. In addition, states were allowed until 1976 to make laws that outright prohibited women from inheriting farms. Likewise, women were required to have a male co-applicant for a credit card until Congress passed the Equal Credit Opportunity Act in 1974. Although outlawed in the 1970s, this pervasive gender discrimination spanning decades certainly gave men a head start to owning farms and applying for farm loans.
Current CRA data on small farm lending can be misleading
The current Community Reinvestment Act (CRA) data on small business and small farm lending is unlikely to reflect the extent of racial and gender disparities or discrimination because it is limited to revealing the census tract or county location of the loan and only indicates if the business or farm has more or less than $1 million in annual revenues. It does not reveal the race, ethnicity or gender of the loan applicant. In order to illustrate these limitations, I pulled the small farm data in 2020 on a county level in Alabama. In that year, banks issued 911 small farm loans in the state. Given the literature on racial disparities, one’s hypothesis when starting the data analysis would be that counties that were composed of above median percentages of people of color would have fewer total small farm loans and/or fewer small farm loans per capita.
In fact, the opposite occurred. The median percentage of people of color on a county level was 27.9%. In counties with percentages lower than this, the median number of small farm loans was 7 and the median number of loans per 1,000 people was .54 or about one-half of a loan per 1,000 people. In contrast, in counties with percentages of people of color above the median of 27.9%, the median number of small farm loans was 11 and the median number of loans per 1,000 people was .98 or almost one loan per 1,000 people.
Does this mean that there are no racial disparities since there are more loans in counties with high percentages of people of color? One could conclude this if there were a relatively high number of African American farms or farms owned by other people of color. However, we do not know this in part because the CRA data does not have data on the numbers of farms applying for and receiving loans that were owned by Whites compared to people of color.
It could be that there are more loans in counties with high numbers of people of color because a disproportionate number of farms are located there, and people of color are a substantial portion of the workforce on those farms. In fact, a greater percentage of counties (62%) with above-median percentages of people of color are rural and non-metropolitan compared to those (52%) with below median percentages of people of color. Rural and non-metropolitan counties are likely to have more farms and hence receive more loans.
The publicly available CRA data on small farm lending could quite easily give the public a false picture of access to credit for people of color because of a lack of demographic characteristics of applicants. Also, the data does not provide information that can help stakeholders overcome barriers to credit for people of color or women. In contrast, home lending data contains debt-to-income ratios and reasons for loan denial such as creditworthiness that provide stakeholders with information to remediate barriers to credit.
The need for better Section 1071 data on small farm lending
The forthcoming Section 1071 data will have information such as years in business and more precise revenue size that will shed more light on whether similarly situated farms owned by people of color are receiving equitable access to loans compared to Whites. The CFPB also proposed to collect reasons for denial which would also enable data analysis to identify any widespread barriers impeding access to credit for traditionally underserved populations. Finally, pricing and interest rate information will provide information on pricing disparities in addition to disparities in access to credit.
As NCRC says, “Data drives the movement for economic justice.” In the absence of annual data submitted by individual lenders, it is difficult to hold the lending industry accountable for doing a better job reaching traditionally underserved borrowers including small farms. Periodic surveys reveal considerable racial and gender disparities, but these surveys are episodic and conducted on a national level. They do not allow for identifying sections of the country or individual lenders or groups of lenders for which disparities are a pressing problem. Therefore, the lack of regular data is itself a serious impediment to increasing access to credit. For these reasons, economic justice advocates everywhere should be excited about the imminent release of the CFPB’s final regulation for collecting small business and small farm data.
Josh Silver is a Senior Fellow at NCRC.
Photo via Jo Zimny on Flickr.