[Federal Register Volume 72, Number 177 (Thursday, September 13, 2007)]
[Proposed Rules]
[Pages 52301-52309]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-18014]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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 

  Federal Register / Vol. 72, No. 177 / Thursday, September 13, 2007 / 
Proposed Rules  

[[Page 52301]]


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FARM CREDIT ADMINISTRATION

12 CFR Part 652

RIN 3052-AC36


Federal Agricultural Mortgage Corporation Funding and Fiscal 
Affairs; Risk-Based Capital Requirements

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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SUMMARY: The Farm Credit Administration (FCA, Agency, us, or we) adopts 
a proposed rule that would amend regulations governing the Federal 
Agricultural Mortgage Corporation (Farmer Mac or the Corporation). We 
propose to update the model in response to recent additions to Farmer 
Mac's program operations that are not addressed in the current version 
of the model. We propose to amend the current model's assumption 
regarding the carrying cost of nonperforming loans to better reflect 
Farmer Mac's actual business practices. We further propose to add a new 
component to the model to recognize counterparty risk on nonprogram 
investments through application of discounts or ``haircuts'' to the 
yields of those investments and to make technical amendments to the 
layout of the model's Credit Loss Module. The effect of the rule is to 
update the model so that it continues to appropriately reflect risk in 
a manner consistent with statutory requirements for calculating Farmer 
Mac's regulatory minimum capital level.

DATES: You may send us comments by October 29, 2007.

ADDRESSES: We offer several methods for the public to submit comments. 
For accuracy and efficiency reasons, commenters are encouraged to 
submit comments by e-mail or through the Agency's Web site or the 
Federal eRulemaking Portal. Regardless of the method you use, please do 
not submit your comment multiple times via different methods. You may 
submit comments by any of the following methods:
     E-mail: Send us an e-mail at [email protected].
     Agency Web site: http://www.fca.gov. Select ``Legal 
Info,'' then ``Pending Regulations and Notices.''
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Robert Coleman, Director, Office of Secondary Market 
Oversight, Farm Credit Administration, 1501 Farm Credit Drive, McLean, 
VA 22102-5090.
     FAX: (703) 883-4477. Posting and processing of faxes may 
be delayed, as faxes are difficult for us to process and achieve 
compliance with section 508 of the Rehabilitation Act. Please consider 
another means to comment, if possible.
    You may review copies of comments we receive at our office in 
McLean, Virginia, or on our Web site at http://www.fca.gov. Once you 
are in the Web site, select ``Legal Info,'' and then select ``Public 
Comments.'' We will show your comments as submitted, but for technical 
reasons we may omit items such as logos and special characters. 
Identifying information that you provide, such as phone numbers and 
addresses, will be publicly available. However, we will attempt to 
remove e-mail addresses to help reduce Internet spam.

FOR FURTHER INFORMATION CONTACT: Joseph T. Connor, Associate Director 
for Policy and Analysis, Office of Secondary Market Oversight, Farm 
Credit Administration, McLean, VA 22102-5090, (703) 883-4280, TTY (703) 
883-4434; or Rebecca Orlich, Senior Counsel, Office of the General 
Counsel, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-
4420, TTY (703) 883-4020.

SUPPLEMENTARY INFORMATION: 

I. Purpose

    It is the Agency's objective that the risk-based capital stress 
test (RBCST) continue to determine regulatory capital requirements 
consistent with statutory requirements and constraints. The purpose of 
this proposed rule is to revise the risk-based capital (RBC) 
regulations that apply to Farmer Mac to more accurately reflect changes 
in Farmer Mac's operations or business practices. The substantive 
issues addressed in this proposed rule are treatment of program loan 
volume with certain credit enhancement features (e.g., Off-Balance 
Sheet AgVantage volume, subordinated interests, and program loan 
collateral pledged in excess of Farmer Mac's guarantee obligation 
(hereafter, ``overcollateral'')), counterparty risk on nonprogram 
investments, and the resolution timing for nonperforming loans and 
associated carrying costs. We also propose minor formatting changes to 
the structure of the Credit Loss Module that are in the nature of 
technical changes.

II. Background and Summary of Revisions

    In 2006, Farmer Mac initiated a program to guarantee timely 
repayment of principal and interest on notes that are collateralized by 
Farmer Mac-eligible agricultural real estate mortgage assets and are 
also secured by an obligation of the mortgage lender. We will refer to 
this product as Off-Balance Sheet AgVantage. The first such transaction 
was a guarantee of $500 million in guaranteed notes announced by Farmer 
Mac on January 23, 2006. Subsequently, Farmer Mac announced similarly 
structured transactions for $1 billion each on July 13, 2006, and April 
11, 2007. The current version of the RBCST lacks a component to 
recognize the credit enhancement provided by the lender's obligation 
and, consequently, this volume is excluded from the modeled loan 
portfolio. We propose to begin including this product in the RBCST 
model. Further, in the event that Farmer Mac introduces products that 
include a subordinated interest retained by the primary lender, we 
propose a modeling treatment of such structures.
    We proposed revisions to the treatment of nonprogram investments 
and the carrying cost of nonperforming loans in our rule published in 
November 2005.\1\ We did not adopt those proposed revisions in the 
final rule that amended other parts of the model.\2\ We now propose 
revisions to these two components that differ somewhat from those 
proposed in November 2005. We propose to account for counterparty risk 
on nonprogram investments by applying a discount (or ``haircut'') to 
the yields of nonprogram investments scaled according to credit 
ratings, with a 10-year phase-in. We propose a method of calculating 
the

[[Page 52302]]

carrying cost of nonperforming loans over a period we refer to as the 
Loan Loss Resolution Time period, or ``LLRT'', that will include a 
quarterly update of the LLRT estimate.
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    \1\ 70 FR 69692 (November 17, 2005).
    \2\ 71 FR 77247 (December 26, 2006).
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    Finally, we propose other technical changes to improve formatting 
and clarity of labeling in certain cells of the Credit Loss Module 
worksheets.

III. Issues, Options Considered, and Proposed Revisions

A. Treatment of Off-Balance Sheet AgVantage Program Volume

    In 2006, Farmer Mac initiated a program to guarantee the timely 
repayment of principal and interest on notes that, in addition to being 
collateralized by Farmer Mac-eligible agricultural real estate 
mortgages, are also secured by an obligation of the primary lender of 
those mortgages. The current version of the model lacks a component to 
recognize the credit enhancement provided by the issuer's general 
obligation and any contractually required loan collateral in excess of 
the face value of the guaranteed notes.
    We propose to revise the model to include this program volume by 
modeling all loans in guaranteed note portfolios in the same manner as 
all other program volume, with two differences. The first difference 
would recognize the risk mitigation provided by the general obligation 
by reducing the age-adjusted dollar losses estimated on the subject 
loans by an adjustment factor derived from historical default rates by 
the whole letter credit ratings of corporate bond issuers as reported 
by a nationally recognized statistical rating organization (NRSRO). The 
second difference would address the risk-reducing effects of 
contractually required overcollaterization of the subject portfolio, if 
any.
    The derivation and application of the general obligation adjustment 
factor would be as follows. We would define five levels of credit 
ratings from ``AAA'' to ``below BBB and unrated.'' We would assign each 
of the NRSRO-rating categories to one of the five general whole-letter 
rating categories we define. The adjustment factors applied would be 
equal to the average cumulative issuer-weighted, 10-year corporate 
default rates from 1920 through the most recent year as published by 
Moody's Investor Services.\3\ For issuers that are rated below BBB or 
are unrated, the model would apply a factor equal to the 10-year 
corporate default rates on Speculative-Grade bonds published in the 
same report. This rate would then be further adjusted to obtain an 
estimated loss rate related only to a general obligation of the 
corporate issuer/Off-Balance Sheet AgVantage counterparty with a given 
credit rating by considering the loss-severity rate as implied by 
recovery rates published in the same annual Moody's report (i.e., 1 
minus recovery rate). In this case, because recovery rates are not 
published by whole-letter credit rating categories in the Moody's 
report, we would apply a loss severity implied by Moody's average 
Defaulted Bond Recovery Rates by Lien Position for as long a period as 
the Moody's report provides. Moody's 2006 report includes a table of 
data on recovery rates from 1982 to 2006. We propose to adopt a 
severity rate adjustment to historical corporate default rates based on 
the published long-term recovery rate for senior unsecured bonds. We 
considered using the recovery rates of the ``All Bonds'' category to 
calculate implied loss-severity rate factors but rejected that approach 
because we believe that the senior unsecured category is likely to 
reflect a more accurate analog of a general obligation than a ``catch-
all'' category like ``All Bonds'' that would include senior secured 
bond and subordinated bond categories in addition to the senior 
unsecured category. We believe that neither of these bond lien position 
categories reflects the nature of a general obligation as accurately as 
the senior unsecured category.
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    \3\ Hamilton, D., Ou S., Kim R., Cantor R., ``Corporate Default 
and Recovery Rates, 1920--2006,'' published by Moody's Investors 
Service, February 2007--the most recent edition as of April 2007.
---------------------------------------------------------------------------

    We considered whether the senior secured category might be more 
applicable, given the mortgage loans that collateralize this 
obligation. However, we believe our proposed application is justified 
because, in the RBCST's Credit Loss Module, we target an estimate of 
the ultimate loss rate associated with the occurrence of what are 
assumed to be independent events (a corporate default and agricultural 
mortgage loan pool defaults). For example, suppose that a counterparty 
utilizing Farmer Mac's Off-Balance Sheet AgVantage product goes 
bankrupt. We assume that the default event is uncorrelated with the 
occurrence of worst-case stress in the agricultural lending sector. 
Therefore, we treat the estimated loss rate calculation on the general 
obligation separately from the estimated loss rate calculation on the 
program loan collateral. Thus, we believe the estimation of a 
counterparty default/severity rate should be done separately from and 
without regard to the loan collateral and, therefore, that the senior 
unsecured severity rate is most appropriate.
    The following table sets forth the proposed credit loss adjustment 
factors and their components (Adjustment Factor = Default Rate x 
Severity Rate).\4\
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    \4\ Ibid; Default Rates, page 22, Recovery Rates (Severity Rate 
= 1 minus Senior Unsecured Average Recovery Rate) page 18.

----------------------------------------------------------------------------------------------------------------
                                                                                                      General
                                                                                                    obligation
                       Whole letter rating                         Default rate    Severity rate    adjustment
                                                                     (percent)       (percent)        factor
                                                                                                     (percent)
----------------------------------------------------------------------------------------------------------------
AAA.............................................................            0.89              55            0.49
AA..............................................................            2.31              55            1.26
A...............................................................            2.90              55            1.58
BBB.............................................................            7.29              55            3.98
Below BBB and Unrated...........................................           27.39              55           15.16
----------------------------------------------------------------------------------------------------------------

    The adjustment factors would be updated quarterly as the updated 
Moody's report on Default and Recovery Rates of Corporate Bond Issuers 
becomes available. In the event that there is an interruption of 
Moody's publication of this annual report, or FCA informs Farmer Mac it 
has determined that the report has changed so much that it prevents or 
calls into question the identification of suitable updated factors, the 
prior year's factors would remain in effect until FCA revises the 
process through rulemaking.
    In addition, the loan portfolio collateral underlying Off-Balance 
Sheet AgVantage volume may contain loan collateralization in excess of 
the face

[[Page 52303]]

value of the note. This overcollateral may be contractually required or 
it may be provided by the issuer of the guaranteed note to reduce 
administrative expense associated with monitoring the eligibility of 
the collateral, or both. We view overcollateral in excess of 
contractually required amounts as solely an administrative convenience 
for the lender in question. When there is excess overcollateral, any 
loan in the overcollateral can automatically be deemed to replace a 
loan that might become ineligible under the AgVantage contract without 
the need for additional action on the part of either party. However, 
when it is discretionary and not contractually required, the amount of 
excess overcollateral provided by Farmer Mac's counterparty is subject 
to change at any time. Therefore, we believe that overcollateral that 
is required by contract and is not simply an administrative convenience 
should be recognized in the model for the risk mitigation it provides, 
but that the additional collateral provided solely for administrative 
convenience should not.
    Whenever overcollateral exists, we model a portfolio that is larger 
than the dollar amount of Farmer Mac's guarantee obligation because 
there is no direct means to segregate a specific set of loans in the 
total collateral portfolio that could be considered to comprise 100 
percent of the face value of the guaranteed notes. We then need an 
adjustment to reduce the amount of submitted loan collateral for 
purposes of estimating credit losses in the Credit Loss Module (CLM) in 
order to avoid the model's recognition of the credit risk on loan 
volume that is in excess of the contractually required volume.
    Given the above considerations, we propose the following treatment. 
The Off-Balance Sheet AgVantage volume will be modeled using separate 
worksheets of the CLM with added features to:

    (1) Scale the estimated losses to be commensurate with losses 
associated with the contractually required minimum collateral. To 
achieve this, we multiply the estimated dollar losses of each loan 
after age adjustment by the ratio of the guaranteed amount to total 
submitted loan collateral; and
    (2) Recognize the risk mitigation provided by the contractually 
required overcollateralization. To do so, expected losses after the 
adjustment in ``(1)'' above are compared to the dollar amount of 
contractually required overcollateral, and any estimated credit loss 
dollars in excess of the contractually required overcollateral are 
input in the model as loss rates applied to that pool's underlying 
portfolio volume.
    (3) Recognize the risk mitigation provided by the counterparty's 
general obligation. This is accomplished by multiplying any 
remaining losses after the adjustments in ``(1)'' and ``(2)'' above 
by the appropriate general obligation adjustment factor according to 
the counterparty's whole-letter issuer credit rating (set forth in 
the table above) to reflect the likelihood of exhausting the 
capacity of the issuer to maintain adequate collateral.

    We acknowledge that the order of these adjustments may seem 
incongruous with the legal structure of a given transaction, but we 
believe the proposed order makes sense from a modeling perspective. For 
example, the counterparty's general obligation might legally be first 
in terms of the security provided in support of Farmer Mac's risk 
position--followed by access to the loan collateral after an event of 
default by the counterparty. However, we adjust for the risk-mitigation 
of the contractually required overcollateralization first, followed by 
the adjustment for the general obligation. As a practical matter, we 
believe that Farmer Mac, to make itself whole on any losses after the 
counterparty defaults, would first work through the overcollateral, 
which would be held by a bankruptcy-remote vehicle. Only after that 
overcollateral proved insufficient to make Farmer Mac whole, would it 
need to pursue further recovery from the counterparty.

B. Add a Treatment for Products that Could Include a Subordinated 
Interest Retained by the Primary Lender or Seller

    In the event Farmer Mac introduces new products that include the 
specific retention of a portion of the credit risk at either a loan 
level or a pool level by the primary lender or seller, this loan volume 
would also be modeled in separate worksheets of the CLM. The model 
would recognize the subordinated interest by multiplying the age-
adjusted dollar losses in the subject portfolio by one minus the 
percentage of the subordinated interest in order to isolate the portion 
of estimated loss that Farmer Mac would incur. To the extent that such 
structures include further stratification of losses, such as a cap on 
the exposure to losses assumed by Farmer Mac, such stratification would 
be treated in a similar manner.

C. Add Haircuts on Nonprogram Investments

    Currently, the RBCST does not include a component to reflect 
counterparty risk on Farmer Mac's portfolio of nonprogram investments 
or its derivatives. We propose adopting a system of haircuts to the 
yields on investment securities scaled according to credit ratings, 
with larger haircuts applied to cash flows from investments from 
issuers with lower credit ratings. We previously proposed haircuts in 
our November 2005 proposed rule but did not include them in our final 
rule published on December 26, 2006.
    The previously proposed rule based investment haircuts on the risk-
based capital regulations of the Office of Federal Housing Enterprise 
Oversight (OFHEO) (12 CFR part 1750). OFHEO's haircut levels were based 
on worst-case corporate bond default rates using Depression-era default 
rates and recovery rates, expanded to a 10-year period. For all 
counterparties, the default rates used were 5 percent for AAA, 12.5 
percent for AA, 20 percent for A, 40 percent for BBB and 100 percent 
for below BBB or unrated. Severity rates used were 70 percent for 
nonderivative securities, yielding net haircuts of 3.5 percent, 8.75 
percent, 14.0 percent, and 28.0 percent for ratings AAA through BBB, 
respectively. One hundred percent (100%) haircuts were applied to the 
``BBB or unrated'' category. Our November 2005 proposal contained the 
same haircut levels as in OFHEO's regulations.
    We decided not to adopt the November 2005 haircut proposal out of 
concern that the worst-case perspective on historical default rates is 
not as appropriate for Farmer Mac as it is for the housing Government-
sponsored enterprises (GSEs). While it is plausible that worst-case 
stress in the housing markets could be highly correlated with worst-
case conditions throughout the economy as exhibited by corporate bond 
defaults, we believe that worst-case agricultural credit conditions 
would likely be far less correlated with events of major stress in 
financial markets generally. Therefore, we have based the haircuts in 
this proposed rule on average bond default rates rather than worst-case 
historical corporate defaults. In addition, we have chosen not to 
follow a similar method for expansion of the worst case interval to the 
10-year time interval. Instead, we propose a more direct reliance on 
empirical evidence and base the haircuts on Moody's Average 10-year 
cumulative issuer-weighted corporate default rates by whole letter 
rating, adjusted by the average implied long-term severity rate for 
Senior Unsecured bonds. The weighted-average yields of non-program 
investment categories would be reduced by the haircut percentage phased 
in linearly over the 10-year modeling horizon. The haircut levels are 
the same as the loss rate adjustment factors proposed above for 
application on loans underlying guaranteed notes, and like those 
factors these will be updated as

[[Page 52304]]

new information becomes available. The proposed investment haircuts to 
recognize counterparty risk are as follows:

------------------------------------------------------------------------
                                                               Haircut
                 Whole letter credit rating                   (percent)
------------------------------------------------------------------------
AAA........................................................         0.49
AA.........................................................         1.26
A..........................................................         1.58
BBB........................................................         3.98
Below BBB and Unrated......................................        15.16
------------------------------------------------------------------------

    We propose to phase in the haircuts over the 10-year modeling 
horizon, based on our assumption that defaults on investments in 
response to a general downturn in the economy would not be 
instantaneous but rather spread through time. Furthermore, consistent 
with the OFHEO rule, we would not assign the rating of a parent company 
to its unrated subsidiary because NRSROs will not impute a corporate 
parent's rating to a derivative or credit enhancement counterparty in 
the context of a securities transaction, and because extending that 
rating to the unrated subsidiary would be tantamount to the regulator 
rating the subsidiary.\5\ However, when an investment is structured as 
a collateralized obligation backed by the issuer's general obligation 
and, in turn, a pool of collateral, we accept the issuer rating of that 
issuer as the credit rating applicable to the security. Unrated 
securities that are fully guaranteed by GSEs receive the same treatment 
as AAA securities. Unrated securities backed by the full faith and 
credit of the U.S. Government do not receive a haircut.
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    \5\ 66 FR 47730, 47777 (September 13, 2001).
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    In the event that FCA approves the purchase of an unrated 
investment, and portions of that investment with specific risk 
characteristics are later sold by Farmer Mac, the Director will take 
reasonable measures to adjust the haircut level applied to the 
investment to recognize the change in the risk characteristics of the 
retained portion. In taking these measures, the Director will consider 
the approaches taken to address capital requirements related to similar 
investments that have been adopted by other Federal financial 
institution regulators.
    We propose to apply the haircuts to yields on a weighted-average 
basis by investment categories established in the ``Data Inputs'' 
worksheet of the RBCST, e.g., commercial paper, corporate debt and 
asset-backed securities, agency mortgaged-backed securities and 
collateralized mortgage obligations. This treatment would require 
Farmer Mac to calculate the weighted-average haircut by investment 
category to be applied to the weighted-average yields for each 
investment category and to input the haircuts into the ``Data Inputs'' 
worksheet. The proposed haircuts are set forth in the table in 
paragraph e. of section 4.1 in the appendix A, subpart B of part 652.
    We considered proposing a similar haircut on derivative securities, 
on the ground that credit stress that impacts Farmer Mac's nonprogram 
investment portfolio would reasonably be expected to affect its 
derivatives counterparties and its terms of access to the swap 
market.\6\ We believe a more appropriate approach to haircutting 
derivatives may be to reflect lost payments on defaulted derivative 
securities in a net-receive position, as well as the ``replacement 
cost''--i.e., the additional expense associated with the replacement of 
derivative positions when the counterparty defaults and the market 
value of the derivative has increased since the date the defaulted 
derivative contract was executed. Such an increased market value would 
be to Farmer Mac's benefit when the counterparty does not default, but 
to its detriment when it does default. The Agency plans to address this 
issue in future revisions of the RBCST and specifically requests 
comment on the most appropriate approach to incorporate into the RBCST 
such ``replacement cost'' risk relating to derivative securities.
---------------------------------------------------------------------------

    \6\ The term ``derivative'' refers to over-the-counter financial 
derivative instruments used by Farmer Mac to hedge interest rate 
risk and synthetically extend the term structure of its debt to 
reduce funding costs.
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D. Improve the Estimate of Carrying Costs of Nonperforming Loans by 
Revising LLRT Assumptions

    The RBCST was originally developed with a loss-severity estimate 
that assumes it would take Farmer Mac 1 year to work through problem 
loans from the point of default through final disposition. An estimate 
was used because, at the time of development of the RBCST, historical 
nonperforming loan resolution timing data from Farmer Mac were not 
sufficient. Farmer Mac data collected since that time indicate that an 
adjustment to the 1-year assumption to recognize Farmer Mac's actual 
historical experience is appropriate. If the actual historical time 
interval is longer than the current model's assumption, the capital 
needs for carrying nonperforming assets are likely understated in the 
model. Therefore, we propose amendments to the model to reflect costs 
associated with any additional time period over which Farmer Mac has 
carried nonperforming loans on average throughout its history. The LLRT 
is the weighted average time in fractions of 1 year that Farmer Mac has 
carried nonperforming loans from the date of the last interest payment, 
the Interest Paid-Through Date (ITPD) and the date the loan is finally 
resolved. This proposed LLRT differs from that proposed in November 
2005 in the method used to estimate the LLRT period, as described in 
detail below.
    In the final rule preamble to RBCST Version 2.0 published December 
26, 2006, we discussed our intent to review further the scaling factor 
used to estimate the unpaid premium balance associated with estimated 
loan loss dollar volume. After further review, we believe that basing 
the scaling factor on the total current portfolio average relationship 
between origination loan amount and current outstanding loan amounts, 
as originally proposed, is more appropriate than basing the scaling 
factor on that same relationship among the small universe of loans that 
have been through the default and resolution process historically. Our 
view is based on the small size of the latter data set. This proposed 
rule also clarifies the calculation of the LLRT period and incorporates 
additional information provided by Farmer Mac regarding its actual 
historical LLRT experience.
    With the exception of the 1-year period assumed in the loss-
severity rate, the current RBCST under a steady-state scenario requires 
backfilling of loan loss volume with like assets, without recognizing 
any of the costs associated with carrying loans as non-earning, but 
funded, assets. Under the proposed rule, the RBCST would reflect 
additional costs associated with carrying the unpaid principal balance 
of nonperforming loans during the portion of the LLRT period that 
exceeds the 1-year assumption.
    The change would be incorporated into the RBCST as follows. Off-
balance sheet loans with estimated losses are assumed to be purchased 
from the off-balance sheet portfolio and fully funded at the short-term 
cost of funds rate used in the model, and any associated guarantee fee 
income is reversed. The short-term cost of funds (adjusted to 
incorporate interest rate shock effects) is used to estimate this 
additional funding cost in recognition of Farmer Mac's actual business 
practices. On-balance sheet loans generating losses are also removed 
from the interest earnings calculations and continue to generate 
interest expense at the blended cost of long- and short-term funds for 
the

[[Page 52305]]

portion of the LLRT period that exceeds 1 year. In response to a 
comment on the original proposed rule, the rates are not adjusted to 
incorporate interest rate shock effects in this proposed rule, in 
contrast to the original proposal of this revision, in recognition that 
these rates would be in place at the time of the onset of the stress. 
The model would continue to backfill new loans at the point of loan 
resolution to retain its steady-state specification.
    The proposed revisions involve two principal changes from the 
current RBCST. First, the date of backfill would be moved to a point in 
time that more accurately reflects Farmer Mac's actual experience. The 
model would then capture the additional costs of carrying loans in a 
non-interest earning category on the balance sheet. Second, the 
guarantee fee income would be reduced by the weighted average guarantee 
fee in the portfolio multiplied by the relevant off-balance sheet loan 
volume over the portion of the LLRT period that exceeds one year. The 
LLRT would become a data input to be updated with each quarterly 
submission of the model.
    When we first proposed to revise this component in November 2005, 
we received several comments that noted the need for greater clarity in 
the LLRT's calculation formula. We have attempted to provide greater 
clarity in the proposed LLRT calculation as follows:

    (1) Assemble in a spreadsheet individual loan level data for all 
historical nonperforming loans that migrated from the program loan 
portfolio into nonaccrual status. Identify the ``resolution type,'' 
i.e., whether the loan resolved by the borrower bringing the loan 
current or paying off the loan in full, or whether the loan was 
foreclosed and liquidated prior to being placed in real estate owned 
(REO), or placed in REO. For each of these resolution types, include 
the associated dates (e.g., the date the loan was brought current, 
paid off, liquidated prior to REO, or placed in REO);
    (2) Include the following data elements:

Loan Number
Origination Date
Original Balance
Payment Frequency
Interest Paid Through Date (ITPD)
Non-Accrual Date
Unpaid Principal Balance (UPB) at Non-Accrual Date
Accrued Interest Through Non-Accrual Date
Resolution-type Code (assign numerical code to each type listed in 
the paragraph above)
Resolution Date
Net Gain/Loss Amount

    (3) Remove loan records with missing data elements in ``(2)'' 
above from the database for purposes of the LLRT calculation;
    (4) Calculate the number of days between the ITPD and the 
Resolution Date for each loan;
    (5) Divide that number of days by 365. The quotient is the LLRT 
for each loan. Calculate the weighted-average LLRT using weights 
based on the total obligation at the Non-Accrual Date (Unpaid 
Principal Balance at Non-Accrual) and input the resulting weighted-
average LLRT into the model's Data Inputs worksheet.
    (6) For nonperforming loans that have not resolved, include 
these loans in the calculation using the quarter end ``as of'' date 
of each model submission in place of the resolution date, but 
include them only if the calculated time interval to the ``as of'' 
date is longer than the calculated average LLRT when these records 
are excluded. In other words, if the carrying time interval is not 
longer than the calculated LLRT using the data set excluding these 
records, the records should be excluded from the final LLRT 
calculation. This will prevent loan records that have not gone 
completely through the resolution process from exerting a downward 
influence on the LLRT but allow them to have an upward influence if 
the unresolved loans' LLRTs are greater than the calculated average 
before inclusion of such loans.

    Farmer Mac commented on our November 2005 proposal that the 
application of funding rates to the calculation of the carrying cost of 
nonperforming loans is inconsistent with its actual practice and that 
the proposed change should be withdrawn. Farmer Mac's comment focused 
on three aspects of the proposed LLRT change. We will summarize those 
three and then provide a discussion of each with our response. In this 
discussion, we refer to liabilities due in 1 year or less as short-term 
liabilities and to liabilities due after 1 year as ``long-term'' debt. 
The comment's three points were: (a) Farmer Mac does not fund 
nonperforming loans using a certain tenor of debt with perfect 
consistency, (b) Farmer Mac can effectively change the cost of funds of 
any nonperforming on-balance sheet loan by employing a ``cross-
funding'' strategy, and (c) the model should not fund on-balance sheet, 
nonperforming loans at the shocked interest rates under the interest 
rate risk stress component in the model because these loans would, by 
having been on the balance sheet at the point in time when rates are 
shocked, have already been funded at pre-shock rates.
    Farmer Mac acknowledged that purchases of nonperforming, off-
balance sheet loans would be done at short-term rates in the 
preponderance of cases, which is consistent with this proposed rule. 
However, Farmer Mac stated that, in actual practice, it uses a mix of 
short- and long-term debt because it decides on the appropriate funding 
term for such purchases based on the existing yield curve conditions 
and REO disposition expectations. While we accept the premise that in 
certain cases Farmer Mac might fund such purchases using longer term 
debt, we believe these cases are likely to be rare exceptions (e.g., 
steeply inverted yield curves) and do not create a sufficiently 
compelling reason to add more complexity to the model such as, for 
example, a new data input for average off-balance sheet nonperforming 
loan funding rates. Therefore, we made no change to this specific 
aspect of the model in this proposed rule.
    Farmer Mac commented that it could employ a cross-funding strategy 
to effectively fund on-balance sheet non-performing loans at the short-
term debt rates such as it uses in most cases of purchases of off-
balance sheet nonperforming loans. While we agree that such 
opportunities could occur, we believe that assuming that Farmer Mac 
would always have the opportunity to purchase new program assets with 
the same size and expected life characteristics as on-balance sheet 
nonperforming loans is too broad an assumption to incorporate into the 
model. While it is possible that Farmer Mac could execute a similar 
rebalancing and reassignment of debt tenors among its program assets by 
adjustments to its ongoing daily funding selections, we would also view 
such a potentially complex incorporation of this contingent scenario 
into the model as unjustified for the added level of accuracy it might 
provide in certain cases. Therefore, we have made no change to the 
funding rates applied to calculate carrying cost of on-balance sheet 
nonperforming loans in this proposed rule.
    Finally, Farmer Mac commented that the model should not fund on-
balance sheet, nonperforming loans at shocked interest rate levels 
established by statute because these loans would, by having been 
already on the balance sheet at the point in time when rates are 
shocked, have been funded at pre-shocked rates. We agree with the 
comment and have revised the cost of funds applied to on-balance sheet 
nonperforming loans during the LLRT to pre-shock blended long- and 
short-term cost of funds rates in this proposed rule.
    The proposed LLRT revisions are forward-looking only. In other 
words, actual loans that defaulted in year zero and are in their second 
year of nonperforming status in year one of the model's 10-year time 
horizon are not included in the proposed LLRT revision, and therefore 
no adjustment to restate current balance sheet amounts is needed. We 
considered an approach involving such a restatement but rejected it as 
unnecessarily complex. We note that our proposed revision to more 
accurately reflect the carrying cost of nonperforming loans results in 
less

[[Page 52306]]

additional stress in a down-rate interest rate risk environment. This 
result is appropriate, as it would be less costly to fund nonperforming 
loans when interest rates are relatively low.
    We propose one further adjustment to complete the LLRT revision. 
The RBCST is sometimes referred to as an ``origination loan model'' 
because it performs its loss estimation based on origination loan 
amounts and dates. The model does not incorporate loan interest rates 
or amortization of the loan portfolio. However, implementation of the 
LLRT revision would require us to make an estimate of loan amortization 
because it would be inaccurate to estimate the additional carrying cost 
associated with the LLRT period by applying the appropriate cost of 
funds to a loan's origination amount. We propose to use the portfolio 
average principal amortization to make this adjustment (i.e., total 
portfolio current scheduled principal balance divided by total 
origination balance). We would also incorporate into the blended rate 
used to calculate the carrying cost of nonperforming on-balance sheet 
loans an increment of interest expense associated swap expense 
according to Farmer Mac's practice of combining debt and swap contracts 
to fund loans.

E. Technical Changes to Improve Formatting and Clarity of Cell Labeling 
and Submission Deadlines

    In the RBCST spreadsheet, we have relocated the quarter-end date 
selection pull-down menu from the Assumptions and Relationships page to 
the Capital worksheet for convenience. We have also made line item 
labeling changes to enhance clarity in both the CLM and the RBC 
modules. We have also revised Sec.  652.85 to update submission 
deadlines to be the same as the filing deadlines of Farmer Mac's public 
disclosures on Forms 10-Q and 10-K required by the Securities and 
Exchange Commission.

IV. Impact of Proposed Changes on Required Capital

    We have evaluated the impact of the proposed changes to the 
currently active version of the model, Version 2.0. Our tests indicate 
that changes related to the LLRT would have the most significant impact 
on risk-based capital calculated by the model. The table below provides 
an indication of the impact of the revisions in the quarter ended March 
31, 2007. The lines labeled ``General Obligation Adjustment'', 
``Investment Haircuts'', and ``Carrying Costs of Nonperforming Loans'' 
present the impacts if only that revision were made to the current 
version, and the column labeled ``Difference'' calculates the impact of 
that individual change for the quarter ended March 31, 2007, compared 
to the requirement calculated using the currently active Version 2.0. 
The bottom line presents the impact of all proposed revisions in 
Version 3.0. As the table shows, the individual estimated impacts do 
not have an additive relationship to the total impact on the model 
output. This is due to the interrelationship of the changes with one 
another when they are combined in Version 3.0.

------------------------------------------------------------------------
  Calculated regulatory capital  ($ in
               thousands)                    3/31/2007      Difference
------------------------------------------------------------------------
RBCST Version 2.0.......................          80,831  ..............
Treatment of Loans Backed by an                   73,244          -7,587
 Obligation of the Counterparty and
 Contractually Required Overcollateral..
Investment Haircuts.....................          83,922           3,091
Carrying Cost of Nonperforming Loans....         105,170          24,340
RBCST Version 3.0 Change Impacts........         100,079          19,249
------------------------------------------------------------------------

V. Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.), FCA hereby certifies the rule will not have a 
significant economic impact on a substantial number of small entities. 
Farmer Mac has assets and annual income over the amounts that would 
qualify it as a small entity. Therefore, Farmer Mac is not considered a 
``small entity'' as defined in the Regulatory Flexibility Act.

List of Subjects in 12 CFR Part 652

    Agriculture, Banks, banking, Capital, Investments, Rural areas.

    For the reasons stated in the preamble, part 652 of chapter VI, 
title 12 of the Code of Federal Regulations is proposed to be amended 
to read as follows:

PART 652--FEDERAL AGRICULTURAL MORTGAGE CORPORATION FUNDING AND 
FISCAL AFFAIRS

    1. The authority citation for part 652 continues to read as 
follows:

    Authority: Secs. 4.12, 5.9, 5.17, 8.11, 8.31, 8.32, 8.33, 8.34, 
8.35, 8.36, 8.37, 8.41 of the Farm Credit Act (12 U.S.C. 2183, 2243, 
2252, 2279aa-11, 2279bb, 2279bb-1, 2279bb-2, 2279bb-3, 2279bb-4, 
2279bb-5, 2279bb-6, 2279cc); sec. 514 of Pub. L. 102-552, 106 Stat. 
4102; sec. 118 of Pub. L. 104-105, 110 Stat. 168.

Subpart B--Risk-Based Capital Requirements

    2. Amend Sec.  652.65 by redesignating paragraph (b)(5) as new 
paragraph (b)(6) and adding a new paragraph (b)(5) to read as follows:


Sec.  652.65  Risk-based capital stress test.

* * * * *
    (b) * * *
    (5) You will further adjust losses for loans that collateralize the 
general obligation of Off-Balance Sheet AgVantage volume, and for loans 
where the program loan counterparty retains a subordinated interest in 
accordance with Appendix A to this subpart.
* * * * *
    3. Amend Sec.  652.85 by revising paragraph (d) to read as follows:


Sec.  652.85  When to report the risk-based capital level.

* * * * *
    (d) You must submit your quarterly risk-based capital report for 
the last day of the preceding quarter by the earlier of the reporting 
deadlines for Securities and Exchange Commission Forms 10-K and 10-Q, 
or the 40th day after each of the quarter's ending March 31st, June 
30th, and September 30th, and the 75th day after the quarter ending on 
December 31st.
    4. Appendix A of subpart B, part 652 is amended by:
    a. Revising the table of contents;
    b. Revising the first and second sentences of section 2.0;
    c. Redesignating existing section 2.4 as new section 2.5;
    d. Adding a new section 2.4;
    e. Revising section 4.1 e.;
    f. Revising the last sentence of section 4.2 b.(3) introductory 
text;
    g. Redesignating existing section 4.2 b.(3)(C) and (D) as new 
paragraph (3)(F) and (G);
    h. Adding new section 4.2 b. (3)(C), (D), and (E);
    i. Revising section 4.4;
    j. Revising section 4.5 a.;
    k. Removing the word ``unretained'' and adding in its place, the 
word

[[Page 52307]]

``retained'' in the ninth sentence of section 4.6 b.

Appendix A--Subpart B of Part 652--Risk-Based Capital Stress Test

1.0 Introduction.
2.0 Credit Risk.
2.1 Loss-Frequency and Loss-Severity Models.
2.2 Loan-Seasoning Adjustment.
2.3 Example Calculation of Dollar Loss on One Loan.
2.4 Treatment of Loans Backed by an Obligation of the Counterparty 
and Loans for which Pledged Loan Collateral Volume Exceeds Farmer 
Mac-Guaranteed Volume.
2.5 Calculation of Loss Rates for Use in the Stress Test.
3.0 Interest Rate Risk.
3.1 Process for Calculating the Interest Rate Movement.
4.0 Elements Used in Generating Cashflows.
4.1 Data Inputs.
4.2 Assumptions and Relationships.
4.3 Risk Measures.
4.4 Loan and Cashflow Accounts.
4.5 Income Statements.
4.6 Balance Sheets.
4.7 Capital.
5.0 Capital Calculations.
5.1 Method of Calculation.
* * * * *

2.0 Credit Risk.

    Loan loss rates are determined by applying the loss-frequency 
equation and the loss-severity factor to Farmer Mac loan-level data. 
Using this equation and severity factor, you must calculate loan 
losses under stressful economic conditions assuming Farmer Mac's 
portfolio remains at a ``steady state.'' * * *
* * * * *

2.4 Treatment of Loans Backed by an Obligation of the Counterparty, 
and Loans for which Pledged Loan Collateral Volume Exceeds Farmer 
Mac-Guaranteed Volume.

    You must calculate the age-adjusted loss rates for these loans 
that includes adjustments to scale losses according to the 
proportion of total submitted collateral to the guaranteed amount as 
provided for in the ``Dollar Losses'' column of the transformed 
worksheets in the Credit Loss Module based on new data inputs 
required in the ``Coefficients'' worksheet of the Credit Loss 
Module. Then, you must adjust the calculated loss rates as follows.
    a. For loans in which the seller retains a subordinated 
interest, subtract from the total estimated age-adjusted dollar 
losses on the pool the amount equal to current unpaid principal 
times the subordinated interest percentage.
    b. Some pools of loans underlying specific transactions could 
include loan collateral volume pledged to Farmer Mac in excess of 
Farmer Mac's guarantee amount (``overcollateral''). Overcollateral 
can be either: (i) Contractually required according to the terms of 
the transaction, or (ii) not contractually required, but pledged in 
addition to the contractually required amount at the discretion of 
the counterparty, often for purposes of administrative convenience 
regarding the collateral substitution process, or (iii) both (i) and 
(ii).
    1. If a pool of loans includes collateral pledged in excess of 
the guaranteed amount, you must adjust the age-adjusted, loan-level 
dollar losses by a factor equal to the ratio of the guarantee amount 
to total submitted collateral. For example, consider a pool of two 
loans serving as security for a Farmer Mac guarantee on a note with 
a total issuance face value of $2 million and on which the 
counterparty has submitted 10-percent overcollateral. The two loans 
in the example have the following characteristics and adjustments.

----------------------------------------------------------------------------------------------------------------
                                                                                     Guarantee
                                                   Age-adjusted   Estimated age-  amount scaling      Losses
              Loan                  Origination      loss rate       adjusted     adjustment (2/   adjusted for
                                      balance        (percent)        losses           2.2)       overcollateral
                                                                                     (percent)
----------------------------------------------------------------------------------------------------------------
1...............................      $1,080,000             7.0         $75,600           90.91         $68,727
2...............................       1,120,000             5.0          56,000           90.91          50,909
----------------------------------------------------------------------------------------------------------------

    2. If a pool of loans includes collateral pledged in excess of 
the guaranteed amount that is required under the terms of the 
transaction, you must further adjust the dollar losses as follows. 
Calculate the total losses on the subject portfolio of loans after 
age adjustments and any adjustments related to total submitted 
overcollateral as described in ``1.'' above. Calculate the total 
dollar amount of contractually required overcollateral in the 
subject pool. Subtract the total dollars of contractually required 
overcollateral from the adjusted total losses on the subject pool. 
If the result is less than or equal to zero, input a loss rate of 
zero for this transaction pool in the Data Inputs worksheet of the 
RBCST. A new category must be created for each such transaction in 
the RBCST. If the loss rate after subtracting contractually required 
overcollateral is greater than zero, proceed to additional 
adjustment for the risk-reducing effects of the counterparty's 
general obligation described in ``3.'' below.
    3. Loans with a positive loss estimate remaining after 
adjustments in ``1.'' and ``2.'' above, are further adjusted for the 
security provided by the general obligation of the counterparty. To 
make this adjustment, multiply the estimated dollar losses remaining 
after adjustments in ``1.'' and ``2.'' above by the appropriate 
general obligation adjustment factor based on the counterparty's 
whole-letter issuer credit rating by a nationally recognized 
statistical rating organization (NRSRO).
    The following table sets forth the general obligation adjustment 
factors and their components by whole-letter credit rating 
(Adjustment Factor = Default Rate x Severity Rate).\15\
---------------------------------------------------------------------------

    \15\ Hamilton, D., Ou S., Kim R., Cantor R., ``Corporate Default 
and Recovery Rates, 1920-2006,'' published by Moody's Investors 
Service, February 2007--the most recent edition as of April 2007; 
Default Rates, page 22, Recovery Rates (Severity Rate = 1 minus 
Senior Unsecured Average Recovery Rate) page 18.

----------------------------------------------------------------------------------------------------------------
                                                                                                      General
                                                                                                    obligation
                       Whole-letter rating                         Default rate    Severity rate    adjustment
                                                                     (percent)       (percent)        factor
                                                                                                     (percent)
----------------------------------------------------------------------------------------------------------------
AAA.............................................................            0.89              55            0.49
AA..............................................................            2.31              55            1.26
A...............................................................            2.90              55            1.58
BBB.............................................................            7.29              55            3.98
Below BBB and Unrated...........................................           27.39              55           15.16
----------------------------------------------------------------------------------------------------------------

    The adjustment factors will be updated annually as Moody's 
annual report on Default and Recovery Rates of Corporate Bond 
Issuers becomes available, normally in January or February of each 
year. In the event that there is an interruption of Moody's

[[Page 52308]]

publication of this annual report, or FCA determines that the format 
of the report has changed enough to prevent or call into question 
the identification of updated factors, the prior year's factors will 
remain in effect until FCA revises the process through rulemaking.
    4. Continuing the previous example, the pool contains two loans 
on which Farmer Mac is guaranteeing a total of $2 million and with 
total submitted collateral of 110 percent of the guaranteed amount. 
Of the 10-percent total overcollateral, 5 percent is contractually 
required under the terms of the transaction. The pool consists of 
two loans of slightly over $1 million. Total overcollateral is 
$200,000, of which $100,000 is contractually required. The 
counterparty has a single ``A'' credit rating, and after adjusting 
for contractually required overcollateral, estimated losses are 
greater than zero. The net loss rate is calculated as described in 
the steps in the table below.

------------------------------------------------------------------------
                                             Loan A           Loan B
------------------------------------------------------------------------
1...........  Guaranteed Volume.......             $2,000,000
2...........  Origination Balance of 2-     $1,080,000       $1,120,000
               Loan Portfolio.
3...........  Age-adjusted Loss Rate..              7%               5%
4...........  Estimated Age-adjusted           $75,600          $56,000
               Losses.
5...........  Guarantee Volume Scaling          90.91%           90.91%
               Factor.
6...........  Losses Adjusted for              $68,727          $50,909
               Total Overcollateral.
7...........  Contractually required                $100,000
               Overcollateral on Pool
               (5%).
8...........  Net Losses on Pool                     $19,636
               Adjusted for
               Contractually Required
               Overcollateral.
9...........  General Obligation                      1.58%
               Adjustment Factor for
               ``A'' Issuer.
10..........  Losses Adjusted for                     $310
               ``A'' General
               Obligation.
11..........  Loss Rate Input in the                  0.02%
               RBCST for this Pool.
------------------------------------------------------------------------

The net, fully adjusted losses are distributed over time on a 
straight-line basis. When a transaction reaches maturity within the 
10-year modeling horizon, the losses are distributed on a 
straightline over a timepath that ends in the year of the 
transaction's maturity.
* * * * *

4.1 Data Inputs.

* * * * *
    e. Weighted Haircuts for Non-Program Investments. For non-
program investments, the stress test adjusts the weighted average 
yield data referenced in section 4.1 b. to reflect counterparty 
risk. Non-program investments are defined in Sec.  652.5. The 
Corporation must calculate the haircut to be applied to each 
investment based on the lowest whole-letter credit rating the 
investment received from a NRSRO using the haircut levels in the 
following two tables. The first table provides the mappings of NRSRO 
ratings to whole-letter ratings for purposes of applying haircuts. 
Any ``+'' or ``-'' signs appended to NRSRO ratings that are not 
shown in the table should be ignored for purposes of mapping NRSRO 
ratings to FCA whole-letter ratings. The second table provides the 
haircut levels by whole-letter rating category.

                     FCA Whole-Letter Credit Ratings Mapped to Rating Agency Credit Ratings
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
FCA Ratings Category..........  AAA...........  AA............  A.............  BBB...........  Below BBB and
                                                                                                 Unrated.
Standard & Poor's Long-Term...  AAA...........  AA............  A.............  BBB...........  Below BBB and
                                                                                                 Unrated.
Fitch Long-Term...............  AAA...........  AA............  A.............  BBB...........  Below BBB and
                                                                                                 Unrated.
Moody's Long-Term.............  Aaa...........  Aa............  A.............  Baa...........  Below Baa and
                                                                                                 Unrated.
Standard & Poor's Short-Term..  A-1+..........  A-1...........  A-2...........  A-3...........  SP-3, B, or
                                SP-1+.........  SP-1..........  SP-2..........                   Below and
                                                                                                 Unrated.
Fitch Short-Term..............  F-1+..........  F-1...........  F-2...........  F-3...........  Below F-3 and
                                                                                                 Unrated.
Moody's.......................                  Prime-1.......  Prime-2.......  Prime-3.......  Not Prime, SG
                                                MIG1..........  MIG2..........  MIG3..........   and Unrated.
                                                VMIG1.........  VMIG2.........  VMIG3.........
Fitch Bank Ratings............  A.............  B.............  C.............  D.............  E
                                                A/B...........  B/C...........  C/D...........  D/E.
Moody's Bank Financial          A.............  B.............  C.............  D.............  E.
 Strength Rating.
----------------------------------------------------------------------------------------------------------------


       FARMER MAC RBCST Maximum Haircut by Ratings Classification
------------------------------------------------------------------------
                                                            Non-program
                                                            investment
                                                          counterparties
                 Ratings classification                     (excluding
                                                           derivatives)
                                                             (percent)
------------------------------------------------------------------------
Cash....................................................            0.00
AAA.....................................................            0.49
AA......................................................            1.26
A.......................................................            1.58
BBB.....................................................            3.98
Below BBB and Unrated...................................           15.16
------------------------------------------------------------------------

Certain special cases will receive the following treatment. For an 
investment structured as a collateralized obligation backed by the 
issuer's general obligation and, in turn, a pool of collateral, 
reference the Issuer Rating or Financial Strength Rating of that 
issuer as the credit rating applicable to the security. Unrated 
securities that are fully guaranteed by Government-sponsored 
enterprises (GSE) such as the Federal National Mortgage Corporation 
(Fannie Mae) will receive the same treatment as AAA securities. 
Unrated securities backed by the full faith and credit of the U.S. 
Government will not receive a haircut.
    If FCA approves the purchase of an unrated investment, and 
portions of that investment are later sold by Farmer Mac according 
to their specific risk characteristics, the Director will take 
reasonable measures to adjust the haircut level applied to the 
investment to recognize the change in the risk characteristics of 
the retained portion. The Director will consider similar methods for 
dealing with capital requirements adopted by other Federal financial 
institution regulators in similar situations.
    Individual investment haircuts must then be aggregated into 
weighted-average haircuts by investment category and submitted in 
the ``Data Inputs'' worksheet. The spreadsheet uses these inputs to 
reduce the weighted-average yield on the investment category to 
account for counterparty insolvency according to a 10-year linear 
phase-in of the haircuts. Each asset account category identified in 
this data requirement is discussed in section 4.2, ``Assumptions and 
Relationships.''
* * * * *

4.2 Assumptions and Relationships

* * * * *
    b. * * *
    (3) Elements related to income and expense assumptions. * * * 
These parameters are the gain on agricultural mortgage-backed 
securities (AMBS) sales, miscellaneous income, operating expenses, 
reserve

[[Page 52309]]

requirement, guarantee fees and loan loss resolution timing.
* * * * *
    (C) The stress test assumes that short-term cost of funds is 
incurred in relation to the amount of defaulting loans purchased 
from off-balance sheet pools. The remaining unpaid principal balance 
on this loan volume is the origination amount reduced by the 
proportion of the total portfolio that has amortized as of the end 
of the most recent quarter. This volume is assumed to be funded at 
the short-term cost of funds and this expense continues for a period 
equal to the loan loss resolution timing period (LLRT) period minus 
1. We will calculate the LLRT period from Farmer Mac data. In 
addition, during the LLRT period, all guarantee income associated 
with the loan volume ceases.
    (D) The stress test generates no interest income on the 
estimated volume of defaulted on-balance sheet loan volume required 
to be carried during the LLRT period, but continues to accrue 
funding costs during the remainder of the LLRT period.
    (E) You must update the LLRT period in response to changes in 
the Corporation's actual experience with each quarterly submission.
* * * * *

4.4 Loan and Cashflow Accounts

    The worksheet labeled ``Loan and Cashflow Data'' contains the 
categorized loan data and cashflow accounting relationships that are 
used in the stress test to generate projections of Farmer Mac's 
performance and condition. As can be seen in the worksheet, the 
steady-state formulation results in account balances that remain 
constant except for the effects of discontinued programs, maturing 
Off-Balance Sheet AgVantage positions, and the LLRT adjustment. For 
assets with maturities under 1 year, the results are reported for 
convenience as though they matured only one time per year with the 
additional convention that the earnings/cost rates are annualized. 
For the pre-1996 Act assets, maturing balances are added back to 
post-1996 Act account balances. The liability accounts are used to 
satisfy the accounting identity, which requires assets to equal 
liabilities plus owner equity. In addition to the replacement of 
maturities under a steady state, liabilities are increased to 
reflect net losses or decreased to reflect resulting net gains. 
Adjustments must be made to the long- and short-term debt accounts 
to maintain the same relative proportions as existed at the 
beginning period from which the stress test is run with the 
exception of changes associated with the funding of defaulted loans 
during the LLRT period. The primary receivable and payable accounts 
are also maintained on this worksheet, as is a summary balance of 
the volume of loans subject to credit losses.

4.5 Income Statements

    a. Information related to income performance through time is 
contained on the worksheet named ``Income Statements.'' Information 
from the first period balance sheet is used in conjunction with the 
earnings and cost-spread relationships from Farmer Mac supplied data 
to generate the first period's income statement. The same set of 
accounts is maintained in this worksheet as ``Loan and Cashflow 
Accounts'' for consistency in reporting each annual period of the 
10-year stress period of the test with the exception of the line 
item labeled ``Interest reversals to carry loan losses'' which 
incorporates the LLRT adjustment to earnings from the ``Risk 
Measures'' worksheet. Loans that defaulted do not earn interest or 
guarantee any commitment fees during LLRT period. The income from 
each interest-bearing account is calculated, as are costs of 
interest-bearing liabilities. In each case, these entries are the 
associated interest rate for that period multiplied by the account 
balances.

    Dated: September 7, 2007.
Roland E. Smith,
Secretary, Farm Credit Administration Board.

[FR Doc. E7-18014 Filed 9-12-07; 8:45 am]
BILLING CODE 6705-01-P