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Heterogeneity of farm loan packaging term decisions: a finite mixture approach

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  • Chandra K. Dhakal
  • Cesar L. Escalante
  • Charles Dodson

Abstract

This article revisits the minority borrowers’ discrimination issue in farm lending by departing from traditional loan approval-rejection or default rate-based analytical models to focus on loan packaging decisions. This study analyses such decisions using a Finite Mixture Model that optimally separates the borrowers into two sub-classes allowing for a priori unspecified heterogeneity in borrowers’ data, which has not been accounted for in previous loan discrimination analyses. Results show that non-white farm borrowers tend to receive larger loans among those in the lower loan latent class, but receive relatively lower loans in the larger loans borrower category. These farmers are also charged higher interest rates vis-à-vis their peers in both the low and high interest rate latent classes. This study’s results also indicate that male borrowers are accommodated with larger loans and longer maturities in all loan amount and maturity latent classes. This study validates the interplay among significant trends in loan packaging terms for racial and gender minority borrowers that seems logical from the lenders’ credit risk management perspective.

Suggested Citation

  • Chandra K. Dhakal & Cesar L. Escalante & Charles Dodson, 2019. "Heterogeneity of farm loan packaging term decisions: a finite mixture approach," Applied Economics Letters, Taylor & Francis Journals, vol. 26(18), pages 1528-1532, October.
    • Handle: RePEc:taf:apeclt:v:26:y:2019:i:18:p:1528-1532
    DOI: 10.1080/13504851.2019.1584360
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    Cited by:

    1. Ashok K. Mishra & Gianna Short & Charles B. Dodson, 2024. "Racial disparities in farm loan application processing: Are Black farmers disadvantaged?," Applied Economic Perspectives and Policy, John Wiley & Sons, vol. 46(1), pages 111-136, March.
    2. Ana Claudia Sant'Anna & Kevin N. Kim & Iryna Demko, 2024. "Limits to capital: Assessing the role of race on the Paycheck Protection Program for African American farmers in America," Applied Economic Perspectives and Policy, John Wiley & Sons, vol. 46(1), pages 217-233, March.
    3. Cesar L. Escalante & Penghui Gao & William Secor, 2024. "Loan packaging decisions for beginning African American and other socially disadvantaged farmers," American Journal of Economics and Sociology, Wiley Blackwell, vol. 83(1), pages 109-126, January.

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