2022 Ketchum Prize: Advancing Financial Inclusion and Alleviating Racial and Gender Bias in Agricultural Lending

Rural America faces financial capability and vulnerability challenges that are often difficult to address. And that is especially true for America's minority and women farmers.

On this episode, we hear from  Dr. Cesar Escalante, the 2022 recipient of the FINRA Foundation Ketchum Prize, about his pioneering research into the racial and gender biases in agricultural lending, his commitment to mentoring and more.

Resources mentioned in this episode:

Announcement: 2022 Ketchum Prize

Cesar Escalante University of Georgia Bio

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FULL TRANSCRIPT

Kaitlyn Kiernan: Rural America faces financial capability and vulnerability challenges that are often difficult to address. And that is especially true for America's minority and women farmers. On this episode, we talk to Dr. Cesar Escalante, the 2022 recipient of the FINRA Foundation Ketchum Prize, about his pioneering research into the racial and gender biases in agricultural lending, his commitment to mentoring, and more.

00:26-00:34

Intro Music

00:34 - 00:54

Kaitlyn Kiernan: Welcome to FINRA Unscripted. I'm your host, Kaitlyn Kiernan. I'm pleased to welcome to the show a very special guest today with us is the 2022 recipient of the Ketchum Prize, Dr. Cesar Escalante, professor of Agricultural and Applied Economics at the University of Georgia. Cesar, welcome to the show and congratulations.

00:54 - 00:56

Cesar Escalante: Thank you. And good morning, everyone.

00:56 - 01:24

Kaitlyn Kiernan: We have had the past three Ketchum Prize winners on the show, and these are always among my favorite episodes as they give us an opportunity to step back from the intricacies of financial regulation and compliance, to focus on the great work being done to advance investor protection, financial capability, and financial inclusion through research in the U.S. Cesar, to kick us off, can you start by introducing yourself and sharing a bit about your background and your life leading up to becoming the most recent Ketchum Prize recipient?

01:24 - 02:15

Cesar Escalante: I'm originally from the Philippines, and it was there where I had the opportunity to work in a bank for nine years, and then an opportunity came for me to embark on my graduate studies in North America. I started with my master's studies in Canada and after that moved to Illinois for my Ph.D. studies. And now we're here in Georgia, and I've been here for 21 years now as a faculty member of the University. I was originally appointed as a research and extension faculty and my areas of specialization when I came in here and until now are agricultural finance and agribusiness management. Currently, I have transitioned from a research extension appointment to a teaching, research, and extension - a three way appointment.

02:15 - 02:20

Kaitlyn Kiernan: A lot of our listeners aren't in the academic realm. What does extension really mean?

02:20 - 03:00

Cesar Escalante: Extension is a teaching service, but your students are not the ones that you have in the classroom. You teach to people in the industry outside the university. So it entails a lot of traveling, going to where the farmers are, instead of holding classes in the classroom. You hold workshops, seminars, one on one consultations with clients in the industry. And our clients are not just farmers. We also hold workshops for lenders, for other people in the industry. So it's a way of teaching, but it's just that your students are not the regular students that you have in the university - they are outside the university.

03:01 - 03:20

Kaitlyn Kiernan: Well, that sounds really interesting because then when we talk about your research, your research is not just looking and crunching numbers. There's also an element of talking to farmers, talking to lenders, talking to the people involved, not just the economic perspective of just looking at the information.

03:21 - 03:34

Cesar Escalante: That's why I consider myself lucky, because a land grant service model brings me in direct interaction with real people who actually will feed me the issues that I need to tackle in my research.

03:35 - 03:45

Kaitlyn Kiernan: You mentioned your area of specialization is agricultural finance and agricultural business management - that is very specialized. What led you to focus in that area?

03:45 - 06:46

Cesar Escalante: In my undergrad studies I was an economics major, but then when I went to graduate school, I decided to pursue studies in a more applied area and I found the field of agricultural economics, being employed in a land grant university where there's an extension component of service, that was the thing that led me to this type of research that we're going to be talking about today. And I was doing a lot of extension work in the early to mid 2000s, and so I had a lot of interactions and discussions with my extension clientele, which were mainly farmers. And at that time the topic of discrimination in lending was a very hot topic.

In the late nineties there were a lot of lawsuits filed against the U.S. Department of Agriculture, primarily targeting the Farm Service Agency, which is the lending arm of the government to the farm sector. African-American farmers succeeded in elevating their lawsuits into class action status. So it was really a very hot topic at the time. After the African-American farmers, Hispanic farmers followed, the Native Americans, the women farmers filed lawsuits as well. And so when I was doing my extension work in the early to mid 2000s, this was just one of the dominant issues that we talked about. Farmers shared with me their borrowing experiences, and I gathered from them that they were complaining of biased lending decisions that lending officers at the Farm Service Agency made. They were complaining about the rejected loan applications, alleging that there were different standards applied to their loan applications when their applications were being evaluated. And then they also alleged that the discrimination also went even beyond the loan application stage. There was some discrimination that they felt even before they filed the application. There were stories about farmers making a phone call and while they were talking on the phone with lending officers, their accent actually gave them away. And because of their accents and maybe their names, they were already discouraged to apply. There were also some stories where some farmers even went to the lending officers place and brought their materials, and then they alleged that their materials did not actually make it through the evaluation process, they were just thrown into the wastebasket.

Beyond the loan application stage, there were also complaints about when they have succeeded in getting loans. They felt that the terms of their loans were unfair or unfavorable. I used the extension part of my work as a feeder for those issues, and then I come back to Athens, my home base, and then I had to engage in research. I started to try to validate the veracity of those issues, of those claims. And so you see how extension and research are complementing each other.

06:47 - 06:58

Kaitlyn Kiernan: Can we just lay the groundwork a little bit before we dig into your research and talk about what are some of the unique challenges that face minority and women farmers?

06:58 - 09:49

Cesar Escalante: Minority and women farmers are usually operators of small businesses. They're usually relatively smaller than the rest of the farms in the industry. They have issues with profitability, liquidity, solvency. And so this are the ones who really need help. The Farm Service Agency, the lending arm of the government to the farm sector, they implement their lending programs in a unique way that is very much differentiated from the way a regular lender does. The small farmers operated by minority and women farmers, if they go and compete for loans, they probably will not fare well. They will not be given adequate consideration. But the FSA has some special provisions for ensuring that these farmers are accommodated.

They have special definitions for delinquency. The FSA says that we are going to reconsider delinquency if delinquency or non-payment of loans is due to the fact that there was an emergency in the family or there was an external event that affected a lot of farms, or it's caused by things that are beyond the borrower's control, then the FSA will have special consideration. It also gives special consideration of the definition of track record. The existence of previous business experiences does not constitute, for FSA, a lack of track record. In other words, FSA can lend based on potential. A regular lender does not lambaste a potential.

FSA, having all these special considerations, becomes the only reliable lender for minority and women farmers. The problem is when this lender that they're supposed to rely on is being complained for discrimination. So that was the main concern of minority and women farmers for the time that I was interacting with them was that this is the lending institution that's supposed to help us, but our loan applications, are they being given proper and fair consideration? And then when they notice that race and gender would figure in the loan decision making process, then that's when they start suing the government. And as I mentioned before, since small minority and women farmers often have profitability, liquidity, and solvency issues in their business operations, then they really need external assistance for their businesses. So the idea is that they would have fair, equitable access to these external funds that are being made available to them by FSA, which is supposed to serve them.

09:50 - 10:11

Kaitlyn Kiernan: It's an interesting situation because farms are not like a house and a mortgage. On a farm, one year of drought could decimate your ability to make payments on your loan, but at the same time, there's a public interest to these farms surviving because they're feeding us as a country. So it's an interesting situation these farmers are in.

10:12 - 10:25

Cesar Escalante: You mentioned drought. The FSA would look at that with consideration, whereas if you have a loan with a regular lender, not the FSA, if there's a drought, then they don't care. They just look at whether you can make the payments on time or not.

10:26 - 10:28

Kaitlyn Kiernan: So what did your research find?

10:29 - 13:27

Cesar Escalante: I did my research in the period when FSA needed to implement some reforms, and then a majority of my research also captured the period when reforms were already being made. So I was able to look at those two periods. Naturally, in the period before the reforms were made, you'd see that race factored into the loan decision making process. There was indeed some indication of racial preference, but I also had to qualify that when I do my research and I work with a set of data that's available for me, it can only capture so much. I needed to be careful about making generalizations about discrimination. Because, for example, I mentioned that there are other forms of discrimination bias in the phone call or bias when a farmer visits the lending office, those things cannot be captured in my analysis. In the loan approval or rejection analysis that I did, where I was able to find that race was a factor, it was only a conclusion that was made based on the parameters that I had.

The alarming thing that I found was that the findings that I had in the pre reform era were the same findings that I found in the post reform era. Now, that doesn't mean that FSA did not make reforms. FSA indeed implemented reforms, and these reforms were directed towards increasing the objectivity of their loan decision making process so that everything will be transparent. They will have all these models, loan application assessment models. There will be formulas. And so you just get the borrower information. You input that into the models, and that will be the basis of the loan approval or rejection decision.

It turned out that minority farmers would still not fare well in these objective models. So that leads us to a more important conclusion that because of these farmer's inherent financial conditions, which would be their smaller farms, less profitable farms, businesses with liquidity and solvency problems, then they would naturally score lower in those models. So that calls everyone's attention to the fact that addressing the bias in lending decisions is only the tip of the iceberg. It's only a small part of the problem. There's an even larger problem for minority and women farmers, which is to really help them, to really provide support beyond loans, so that their businesses will thrive and will become viable, sustainable, and competitive with all the other businesses in the industry.

13:28 - 13:46

Kaitlyn Kiernan: And it's a self-perpetuating cycle where generations of not being able to get loans made it so that years later they're not deemed credit worthy because they didn't have the loans from generations past to grow and build their business. So it compounds and is self-fulfilling in a way.

13:46 - 13:50

Cesar Escalante: There needs to be a lot of support, and lending is just one area.

13:52 - 14:10

Kaitlyn Kiernan: You did a lot of research into the bias in the initial approval and rejection process, but then you followed that up. And more recently you've also been looking at bias after the approval process in terms of the actual loan packaging terms. So what did you find there?

14:11 - 16:52

Cesar Escalante: So I moved forward and said, what if minority and women farmers successfully get their loans approved? What happens? So I looked at the combination of loan terms, which would be a combination of the loan amount that was given to them eventually, the interest rate, and the maturity or how long the repayment period should be. Ideally, if you want to help a business, the favorable combination, setting aside the loan amount, because that loan amount will be different for each borrower, the ideal combination is you want this business to grow and to help this business would be lower interest rate and longer repayment. So I worked on trying to figure out whether, again, race and gender would factor into this decision, and I pushed that further by looking at combinations of labels, double minority labels.

The findings that I got were actually very interesting. In terms of just looking at race and gender separately, non-White farmers, especially African-Americans and Hispanics, would usually receive higher interest rates and shorter maturities. I said the ideal would be lower interest rates and longer maturity. But then when I combined race and gender, I found that there's a specific group of borrowers with the double minority labor, specifically African-American women farmers, who actually would receive the highest interest rates and the shortest loan repayment period. I also qualify the fact that these findings cannot just be taken as they are, because you also have to interpret these findings in relation to the lenders perspective.

So we have to understand why did the lenders prescribe the specific terms to the specific borrowers. So you relate these findings to the financial conditions of this farm and you realize that these decisions can actually be a form of a credit risk management tool for lenders. So when you put them together, that's when I said that the credit issue is just part of the problem. Lenders, when they evaluate loan applications and they see all this financial credentials of these borrowers and then they use these financial credentials and they input that into their models, and their models would actually tell them this would be the resulting loan packaging terms that these borrowers would get, from the borrowers point of view, they would think that is discrimination. But from the lenders point of view, they would assert that that's a form of credit risk management.

16:53 - 17:06

Kaitlyn Kiernan: Speaking of finding that balance with your extension, you have worked with the Farm Service Agency and with farmers. How do you uphold the impartiality in your research when you are working with both groups?

17:07 - 18:40

Cesar Escalante: Well, as a university faculty member, I need to be impartial. I need to be fair to both parties. My extension clients are not just the farmers, but they're also the lenders. So I need to make sure that I look at the issue from both perspectives. And so I collaborated with State Farm Service Agency Office and the National Farm Service Agency office to make this analysis to look at these issues. That is why, as I said, whenever I talk about results, I always make sure that I interpret these results from both perspectives.

And then when I finish my research and I do some more outreach work, then I make sure that my outreach work will help clarify a lot of things. If I do outreach work to the farmers, I make sure that they understand how lenders make decisions. On the lenders side, I also do some outreach work by making sure that lenders understand farming situations when lenders develop their own credit or loan appraisal models, we need to make sure that they're developing those models with an adequate understanding of to whom they're going to apply those models to. I do research, I generate findings, and then I follow it up with outreach to make sure that people understand I cannot just present things in black and white, because if you just present it in one version, or in black and white, then there's always room for misunderstanding or misconceptions.

18:41 - 18:54

Kaitlyn Kiernan: We've talked a lot about your research into bias and lending in the United States, but you've also done some research around micro-lending in the developing world. Can you tell us more about that research?

18:55 - 20:48

Cesar Escalante: As I mentioned earlier, I was originally from the Philippines, so I thought that I should conduct some research that would benefit not just the Philippines, but other developing countries. And that's how I got into microfinance. Microfinance is a lending movement that originated in South Asia, trying to rectify the failures of the banking system or the lending industry. The target of microfinance would be the poorest households in developing countries, and it arose because of the reality that poor households were written off by banks. Microfinance came in and went to the rural areas and targeted the really poor households.

There are two types of approaches that were very, very effective in making microfinance work, and these two schemes or strategies were to target women and also to implement a group lending scheme whereby borrowers do not need to put up physical properties as collateral but will use their social capital or their reputation as loan security. And it worked. Microfinance paradigm has been generating more than 90%, maybe 95% repayment rate. And there's a lot of evidence that points to the fact that microfinance has effectively addressed poverty alleviation, that a lot of households were really able to improve their economic status because of microfinance. So that actually inspired me a lot, motivated me a lot. And so I engage in a lot of research in microfinance. In fact, just to give you some examples, I have done a lot of work focusing on borrower repayment issues and the balancing of the outreach versus financial sustainability goals of the microfinance institutions.

20:48 - 21:09

Kaitlyn Kiernan: That's so interesting. So just to look at another part of your work, beyond your research, you're also an active mentor and you won the national level Agricultural and Applied Economics Association Outstanding Mentor Award in 2020. So on top of everything else you're doing, why is mentoring so important to you?

21:10 - 23:37

Cesar Escalante: Well, it's important to me for three things. First, I do not forget the experiences I had when I myself was a foreign student. I had a family to support when I was in graduate school, and we had to overcome all sorts of challenges, socio, cultural and especially financial. So now that I am in a privileged position as a faculty member, I always have empathy and sympathy and willingness to help students, not just foreign students, but anybody who needed help. When I see a student that has potential and is willing to really work, but is encountering some difficulties similar to what I encountered and the student approached me for help, then I am deeply committed to really help this student succeed. So I work hand in hand with the student to make sure that he or she would be able to realize his or her goal.

Second, since I have been conducting a lot of socially relevant research, a lot of students come to me because they like the research I do. They identify with the issues that I am working on, that I am addressing, and they also become equally passionate about these issues.

The third reason is the multiplier effect, and this is the one that really inspires me so much. After successfully collaborating with my students on research long after they graduate from the University, they actually continue to do the work. So that's actually very inspiring. I have a former student who became a Peace Corps volunteer in Cameroon. I had another student who as of now is still working for an NGO committed to helping women in Africa to understand and to fight and to assert their rights in the area of land ownership. And then I have a student who works for the U.S. Postal Service who was given a special assignment to validate whether there are minority and gender bias issues in the delivery of the postal services. And then I have students, not just one, but several students are working as agricultural lending officers in several lending institutions, including Farm Service Agency, the Farm Credit Association, and regular lenders. And so I am sure that these students, having worked with me, will make sure that they will uphold all this ideals that we have addressed in our research.

23:38 - 23:48

Kaitlyn Kiernan: That's great. There's such a diversity in terms of what your mentees are doing now. Just to wrap up, is there anything that all your research has taught you that has really stuck with you?

23:49 - 24:11

Cesar Escalante: Applied research is something that this society really needs. Research can only become very, very meaningful and very fulfilling if you use that to address real world issues, and especially if you are able to use your research activities to be able to help others understand your situation or even prescribe solutions.

24:12 - 24:33

Kaitlyn Kiernan: Well, Cesar, thank you so much for joining me to share about your research. I've really enjoyed hearing about the various components of it in your extension work and all that you have done. It's clear why you are the 2022 Ketchum Prize recipient. So congratulations once again on that award and thank you so much for joining us.

24:34 - 24:37

Cesar Escalante: It's been a great pleasure and thank you so much for all your kind words.

24:39 - 25:02

Kaitlyn Kiernan: And listeners, if you don't already, be sure to subscribe to FINRA Unscripted wherever you listen to podcasts, to stay up to date on all our new episodes. And if you have comments on today's episode or ideas for future episodes, you can email us at [email protected]. Today's episode was produced by me Kaitlyn Kiernan, and engineered by John Williams. Until next time.

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