Characteristics of borrowers likely to benefit from loan modifications

The purpose of this paper is to identify the characteristics of borrowers likely to benefit from loan modifications (restructuring) which includes concessions provided to the borrower from the lender.

Data were drawn from the US Department of Agriculture Farm Service Agency (FSA) for borrowers who had received an operating loan modification during 2005-2010. A logistic regression model is estimated to identify the characteristics associated with the likelihood of a borrower paying the modified loan as agreed or receiving a subsequent loan modification within seven years. Explanatory variables included financial condition, type and year of loan modification, farm type, organizational type, borrower demographics, and region.

Loans requiring more complex loan modifications and borrowers with previous loan restructuring, larger farms, little equity in loan collateral, little or no capital, and/or little to no liquidity are less likely to perform following loan restructuring, which could suggest a possible futility in providing concessions to these types of borrowers. Many of these borrowers ended up having a subsequent restructure within a short period of time. Most of the regional variability in loan performance appears to have been a result of land values and commodity prices and not jurisdictional laws.

FSA has followed a policy of providing loan modifications to the borrowers experiencing repayment problems for more than 25 years. Though farm financial conditions have remained relatively strong through 2016, a continuation of the low farm incomes and declining farm real estate values could increase farm loan repayment problems in upcoming years and increase interest in farm loan modifications from both lenders and policymakers. FSA’s experience provides a rich data source to examine and provide a better understanding of the costs and benefits associated with loan modifications.