[Federal Register Volume 76, Number 81 (Wednesday, April 27, 2011)]
[Rules and Regulations]
[Pages 23459-23469]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-10172]


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FARM CREDIT ADMINISTRATION

12 CFR Parts 651 and 652

RIN 3052-AC51


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

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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SUMMARY: The Farm Credit Administration (FCA, Agency, us, or we) issues 
this final rule amending our regulations on the Risk-Based Capital 
Stress Test (RBCST or model) used by the Federal Agricultural Mortgage 
Corporation (Farmer Mac). This rulemaking updates the model to ensure 
that it continues to appropriately reflect risk in a manner consistent 
with statutory requirements for calculating Farmer Mac's regulatory 
minimum capital level under a risk-based capital stress test. This rule 
updates the model to estimate the capital requirements associated with 
Farmer Mac's statutory authority to finance rural utility loans and to 
revise the treatment of certain secured general obligations held by 
Farmer Mac as program investments. This rule also revises the treatment 
of counterparty risk on non-program investments in the model by 
adjusting the haircuts applied to those investments to keep the model 
internally consistent with revisions made to stressed historical 
corporate bond default and recovery rates.

DATES: Effective date: This regulation will be effective 30 days after 
publication in the Federal Register during which either or both Houses 
of Congress are in session. We will publish a notice of the effective 
date in the Federal Register.
    Compliance date: Compliance with the changes to the model must be 
achieved by the first day of the fiscal quarter following the effective 
date of the rule. All other provisions require compliance on the 
effective date of this rule.

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

Laura McFarland, Senior Counsel, Office of the General Counsel, Farm 
Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703) 
883-4020.

SUPPLEMENTARY INFORMATION:

I. Objective

    The objective of this final rule is to ensure that the RBCST for 
Farmer Mac continues to determine regulatory capital requirements in a 
manner consistent with statutory requirements.

II. Background

    The FCA is an independent agency in the executive branch of the 
Federal Government that, in part, serves as the safety and soundness 
regulator of Farmer Mac. The FCA regulates Farmer Mac through the 
Office of Secondary Market Oversight (OSMO). Farmer Mac is a 
stockholder-owned instrumentality of the United States, chartered by 
Congress to establish a secondary market for agricultural real estate, 
rural housing mortgage loans, and rural utilities loans. Farmer Mac 
also facilitates the capital markets funding for USDA-guaranteed farm 
program and rural development loans. Section 5406 of the Food, 
Conservation and Energy Act of 2008 (2008 Farm Bill) \1\ amended the 
definition of ``qualified loan'' in Title VIII of the Farm Credit Act 
of 1971, as amended, (Act) \2\ to include rural utility loans. This 
change gave Farmer Mac the authority to purchase and guarantee 
securities backed by loans to rural electric and telephone utility 
cooperatives as program business. The

[[Page 23460]]

2008 Farm Bill further directed FCA to estimate the credit risk on the 
portfolio covered by this new authority at a rate of default and 
severity reasonably related to the risks in rural electric and 
telephone facility loans. The existing RBCST (Version 3.0) for Farmer 
Mac is contained in part 652, subpart B, and is used to determine the 
minimum level of regulatory capital Farmer Mac must hold to maintain 
positive capital during a 10-year period, as characterized by stressful 
credit and interest rate conditions. Version 3.0 of the RBCST was 
developed according to the provisions of section 8.32 of the Act before 
Farmer Mac was given rural utility authority and thus lacks a component 
to directly recognize the credit risk on such loans.\3\ The updated 
version of the RBCST will be identified as Version 4.0.
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    \1\ Public Law 110-246, 122 Stat. 1651 (June 18, 2008) 
(repealing and replacing Pub. L. 110-234).
    \2\ Public Law 92 181, 85 Stat. 583 (December 10, 1971).
    \3\ FCA currently treats Farmer Mac's portfolio of investments 
in rural utility loans as non-program investments.
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    On January 22, 2010, we published a proposed rule (75 FR 3647) to 
enhance the RBCST for Farmer Mac and to add a component addressing 
Farmer Mac's recently acquired authority to purchase and guarantee 
securities backed by loans to rural electric and telephone utility 
cooperatives. The comment period closed on April 22, 2010.\4\ This 
rulemaking finalizes policies proposed prior to the passage of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 
(Dodd-Frank Act).\5\ Section 939A of the Dodd-Frank Act requires 
federal agencies to review all regulatory references to Nationally 
Recognized Statistical Ratings Organization (NRSRO) credit ratings by 
July 21, 2011, and, as a result of this review, to remove those 
references. While this rule maintains existing reliance on NRSRO credit 
ratings, the Agency intends to begin a rulemaking initiative 
immediately following this one to address the requirements of the Dodd-
Frank Act.
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    \4\ 75 FR 13682 (March 23, 2010).
    \5\ Public Law 111-203, 124 Stat. 1376, (H.R. 4173), July 21, 
2010.
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III. Comments and Our Response

    We received several comments on the proposed rule from Farmer Mac 
and one comment letter from the Farm Credit Council (FCC), acting for 
its membership and each of the five Farm Credit banks. The FCC 
expressed support for using a more conservative approach to loss rate 
estimation in the AgVantage portfolio. It also noted its belief that 
capital standards for Farmer Mac should be equivalent to those of Farm 
Credit System (FCS or System) lenders. The FCC was also generally 
supportive of the proposed characterization of credit risk in the rural 
utility portfolio, but noted that the approach requires vigilant 
oversight of Farmer Mac's guarantee fee-pricing procedures.
    While we appreciate the FCC's comment, the Act provides for a 
different treatment of capital than that of the other System 
institutions. As such, the FCC's suggestion to make the capital 
standards equivalent to those of other FCS lenders is outside the scope 
of this rulemaking. Farmer Mac submitted comments on three aspects of 
the proposed rule--the method of characterizing credit losses on rural 
utility loans, the stress factor applied to the general obligation 
adjustment (GOA) to estimated losses in the AgVantage portfolio, and 
the concentration risk adjustment to the GOA factors. Farmer Mac stated 
that the proposed method of characterizing losses in the rural utility 
loans is not consistent across different market environments because it 
was too high relative to both the historical loss experience in that 
sector as well as levels that could be reasonably applied to 
agricultural mortgages. Farmer Mac also commented that the multiplier 
selected to stress GOA factors was too high, and the concentration risk 
adjustment to the GOA factors was unwarranted and duplicative to the 
use of credit ratings in the base GOA factors. Farmer Mac asked that 
the concentration risk be reversed in its impact to reflect a reduction 
in Farmer Mac's risk exposure in light of the counterparty's relative 
portfolio diversification.
    We discuss the comments specific to our proposed rule and our 
responses below. For purposes of responding to the comments made 
regarding GOA factors, we will be using the following terms to 
distinguish between the existing ``base GOA'' factors to refer to those 
set forth in Version 3.0, which are based solely on historical 
corporate bond default and recovery rates, and ``stressed GOA'' factors 
to refer Version 4.0 where base GOA factors are increased by a multiple 
of 3. Those areas of the proposed rule not receiving comment are 
finalized as proposed unless otherwise discussed in this preamble.

A. Credit Loss Estimation on Rural Utility Loans [Sec. Sec.  652.50 and 
652.65(b); Appendix A to Part 652]

1. Guarantee Fee
    We proposed amending Sec.  652.50 by adding a definition for 
guarantee fees charged on rural utility loans to distinguish treatment 
of these fees from those assessed against all other loans guaranteed by 
Farmer Mac. We explained ``rural utility guarantee fee,'' as it 
pertains to funded volume, means the gross spread over cost of funds, 
not a subset of that spread. Farmer Mac requested that we clarify 
whether or not the definition of ``rural utility guarantee fee'' is 
meant to reflect a subset of the term ``pricing spread.''
    We apply the term ``rural utility guarantee fee'' as a standalone 
term and not as a subset of pricing spread, and therefore, no component 
of the pricing spread should be netted. The rule defines ``rural 
utility guarantee fee'' as the actual guarantee fee charged for off-
balance sheet volume and the earnings spread over Farmer Mac's funding 
costs for on-balance sheet volume on rural utility loans.\6\ As 
explained in the proposed rulemaking, we use the phrase ``earnings 
spread'' in the guarantee fee definition to represent the incoming 
cashflow rate minus Farmer Mac's total funding rate associated with 
that volume. We expect Farmer Mac to maintain records of these spreads 
when they are established for each transaction. We do not consider this 
an overly burdensome expectation given Farmer Mac's current practice of 
documenting such approvals of such spreads. Thus, the guarantee fee is 
the gross spread over cost of funds, not a subset of that spread. We 
are finalizing the definition as proposed. As a conforming technical 
change, we finalize amendments to sections 1.0.a., 4.1.b., 4.2.b.(2), 
and 4.2.b.(3) of the model in Appendix A of part 652 to add rural 
utility guarantee fees.
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    \6\ For purposes of the mechanics within the spreadsheets of 
RBCST Version 4.0, on-balance sheet volume will, if necessary, be 
divided into those with AgVantage Plus-type structures and those 
that are outright loan purchases similar in structure to Farmer 
Mac's cash window for agricultural mortgages.
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2. Credit Risk
    We proposed amending the model in Appendix A of part 652 to include 
rural utility program volume by using a stylized approach to 
characterizing credit risk for rural utility program volume by 
multiplying the dollar-weighted average rural utility guarantee fee by 
a factor of two to characterize stressed annual loss rates.\7\ We also 
proposed clarifying the applicability of individual sections of the 
model to the

[[Page 23461]]

rural utility portfolio and adding new sections 2.6, 4.1.e., and 4.3.e. 
to calculate losses for rural utility loans.
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    \7\ In the proposed rule, in this context, we used the phrase 
``average annual loss rates.'' We believe the phrase ``stressed 
annual loss rates'' is clearer. What we intend to convey is that 
while agricultural lifetime loss rates are calculated by the model 
and then distributed on a front-loaded basis, we characterize rural 
utility loss rates as equal annual loss rates, or what could be 
referred to as average loss rates over a period of worst case 
stress.
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    Farmer Mac objected to the proposed approach on the grounds that it 
results in projected stressed credit losses on rural utility loans that 
are inconsistent across different market environments and exceed both 
the historical experience in the rural utility sector and levels that 
could be reasonably applied to agricultural mortgages. Farmer Mac 
explained that the stressed credit loss characterizations on rural 
utility loans will be inconsistent across different market environments 
because it would be subject to inaccuracy due to potential volatility 
in the pricing by Farmer Mac of similar exposures under varying market 
conditions through time. In other words, investor risk tolerances vary 
with changes in perceived levels of overall risk in the market, and 
such changes could enable Farmer Mac to charge higher rates on rural 
utility loans despite no change in the underlying fundamentals of the 
sector or the specific loans it guarantees. We disagree with the 
suggestion that the stressed credit loss characterizations on rural 
utility loans will be inconsistent across different market 
environments. We used a multiple of the Farmer Mac rural utility 
guarantee fee as a proxy for stressed loss rates because the data on 
historical losses are not suitable for the development of a more 
statistically reliable estimate. We elected not to decompose the 
guarantee fee and earnings spreads into their component parts 
(including required versus ``excess'' spread) as that approach would 
have: (1) Required significant assumptions regarding what portion might 
be attributable to Farmer Mac's perception of market conditions versus 
credit risk; and (2) added a level of calculation complexity that is 
disproportionate to the coarse level of precision achievable given the 
data limitations. In other words, we take the view that the market 
clearing price reflects the market consensus of risk at a point in 
time.
    Farmer Mac asserts that the proposed approach is also incongruous 
because it characterizes losses of on- and off-balance sheet rural 
utility volume identically, though the rural utility guarantee fee 
would be inherently different. Farmer Mac suggests that the earnings 
spread on on-balance sheet volume might be larger than the guarantee 
fee on off-balance sheet volume. Farmer Mac clarified this comment by 
explaining that the return on equity component of the earnings spread 
would be larger for on-balance sheet volume ``[i]f the return on equity 
pricing is determined using current statutory minimum capital 
requirements (or any other capital requirements set using a 
differential approach to capital allocation).'' The comment references 
the statutory minimum requirements for on-balance sheet exposure (2.75 
percent) and off-balance sheet exposure (0.75 percent) of outstanding 
principal. We understand the comment to indicate that program 
investment decisions, i.e., capital allocations, might be made on the 
basis of some required equity return margin over the associated 
statutory minimum capital requirements rather than on the basis of the 
risk and expense characteristics of the investments. We disagree with 
this premise. We are aware of no reason to base return on equity 
requirements on fixed statutory minimum capital requirements or to use 
such minimum capital requirements as a proxy for capital allocated to 
specific program investments. We reject the suggestion that such fixed 
minimums could be appropriately used as a basis to justify differential 
return on equity requirements on investments that have otherwise 
exactly the same risk and expense characteristics.
    Farmer Mac also commented that a multiple of two times the rural 
utility guarantee fee would not be consistent with FCA's stated 
position that the agriculture sector is generally more risky than the 
rural utility sector. Farmer Mac used a hypothetical example to 
demonstrate its comment. In this example, the cumulative annual loss 
rate characterization on rural utility volume over the 10 years of the 
modeling horizon slightly exceeded the estimated lifetime loss rate on 
newly originated, agricultural loans underwritten according to Farmer 
Mac's minimum standards. Farmer Mac modified the example to create a 
situation where the two sets of loans were equally seasoned and 
concluded that the cumulative loss rate for electrical loans in such 
cases would always exceed that of the agricultural real estate loans. 
Farmer Mac explained that the example demonstrated that the rule's 
approach would not be consistent with the statute's authorizing 
language requiring modeled loss rates to be ``reasonably related to 
risks'' in rural electric and telephone facility loans. Farmer Mac 
instead suggests that cumulative loss rates should, at the very least, 
be no greater than those for comparably sized agricultural mortgage 
loans. While Farmer Mac noted that the multiplier of two could be 
reduced, it instead asked FCA to adopt a credit risk estimate supported 
by historical loss and recovery rate trends.
    We disagree with the commenter's use of FCA Bookletter BL-053, 
``Revised Regulatory Capital Treatment for Certain Electric Cooperative 
Assets,'' to support the contention that the proposed treatment is 
inconsistent with the bookletter's conclusion that the electric 
cooperative sector has a lower risk profile than the agricultural 
sector.\8\ While under normal conditions an average dollar of exposure 
to a rural electric cooperative is viewed as a lower credit risk than 
an average dollar of agricultural real estate mortgage exposure, the 
purpose of the RBCST is to represent a worst-case loss scenario for 
program-related assets. We view the concept of ``worst case'' in the 
rural utility cooperative sector as fundamentally different from the 
agriculture sector. The rule's approach inherently reflects our 
expectation that worst-case losses in the rural utility sector will 
occur far less frequently than worst-case losses in the agriculture 
sector--but when they occur, can be far more severe. While the average 
annual loss rate over the long term may be viewed as likely to be lower 
in the rural utility sector due to the infrequent occurrence of loss 
events, in a scenario where worst-case losses do occur, they will 
involve much greater loss rates than worst-case losses in agriculture. 
Further, the relationship between the two cumulative 10-year loss rates 
(agricultural versus rural utility) is not instructive, as the sector 
with the higher cumulative rate will vary depending on rural utility 
guarantee fee rates and the credit risk characteristics of the 
agriculture portfolio at any given time. Thus, in attempting to 
characterize both sectors' worst-case scenarios in the RBCST over a 10-
year modeling horizon, having 10 years of loss rates that do not always 
sum to lower cumulative rate in the rural utility portfolio is not 
inconsistent with the general tenet that the electric cooperative 
sector typically has a lower risk profile.
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    \8\ While BL-053 pertains to Farm Credit System banks and 
associations, and not to Farmer Mac, we believe the general tenets 
set forth in it apply to those same certain loan types in Farmer 
Mac's portfolio.
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    Notwithstanding our position on this comment, using the suggested 
approach, it would be more appropriate to compare cumulative loss rates 
only to the modeling year at which the model indicates capital would 
approach its limit of zero (the zero-year) because losses recognized by 
the model in subsequent modeling years do not impact the calculation of 
the minimum capital requirement. Expanding on

[[Page 23462]]

Farmer Mac's example, if the zero-year occurred at year three, 
cumulative losses over those 3 years in agriculture portfolio would be 
9.87 percent versus 4.2 percent in the rural utility portfolio. 
Seasoning could further affect the relative impacts of credit risk in 
the model. Given our stated view of the fundamentally different 
concepts of ``worst-case'' in the two sectors, this fact does not 
contradict the Agency's stated position.
    Farmer Mac's comment goes on to suggest various approaches to 
achieve the ``result'' recommended (that cumulative losses projected in 
the RBCST for rural utilities loans should be, on a relative basis, no 
greater than those for comparably sized agricultural mortgage loans). 
Farmer Mac notes that this result could be achieved by reducing the 
multiplier of two, but suggests instead that we abandon the proposed 
approach of applying a multiplier to Farmer Mac pricing factors in 
favor of an approach that references historical loss trends. In the 
proposed rule's preamble, we discussed in detail the insufficiency of 
historical lost trend data, as well as other alternatives to the 
proposed approach that were considered and why they were rejected.
    Farmer Mac also stated that the proposed approach was inconsistent 
with historical loss trends. We disagree because the comment is based 
on the premise that appropriate historical loss trend information is 
available. As discussed in the proposed rulemaking, we determined that 
a data set suitable to build a reliable default probability loss 
function is not available due to the fact that historical losses in the 
electric cooperative sub-sector of the utilities industry have been 
extremely rare and dissimilar.\9\ We also note that historical 
instances of default appear largely unrelated to specific underwriting 
decisions. Further, even among the few historical instances of non-
performing loans in the data we obtained, restructured credit defaults 
have in many instances become more profitable than the original loan in 
terms of interest income, while others were never fully resolved 
despite exceptionally long periods of time since initial default. For 
those reasons, an empirical frequency-based analog for estimating 
credit risk, as was used to arrive at the model's approach to 
estimating agricultural loan risks, was not feasible for rural 
utilities. Instead, the rule characterizes credit risk on rural utility 
loans using the stylized approach of multiplying the dollar-weighted 
average rural utility guarantee fee by a factor of two to characterize 
stressed annual loss rates.
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    \9\ In evaluating the suitability of empirical data sources, we 
examined historical loan performance data of the U.S. Department of 
Agriculture's (USDA) loan programs and interviewed market 
participants including the National Rural Utility Cooperative 
Financing Corporation, CoBank, and USDA's Rural Utility Service.
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    Finally, Farmer Mac commented that the proposed approach to 
characterizing credit losses in the rural utility portfolio is 
inconsistent with the Act. We disagree with this assessment because the 
Act does not require us to use any particular statistical methodology. 
The Act, at section 8.32(a)(1)(B), requires us to estimate credit loss 
risk ``at a rate of default and severity reasonably related to risks in 
electric and telephone facility loans * * * as determined by the 
Director [of OSMO].'' The proposed rulemaking explained in some detail 
the reason behind selecting the method of identifying rural utilities 
credit loss risk, and Farmer Mac has offered no evidence to demonstrate 
that our method does not reasonably relate to actual risks in the rural 
utilities sector.
    We selected a method that relies directly on the notion that the 
assessment of relative risk would be reflected in differences in priced 
guarantee fees charged by Farmer Mac. These fees represent Farmer Mac's 
estimate of likely long-term average annual losses on an investment, in 
addition to fee loads to cover operating costs and return-on-equity 
requirements. We selected the combination of the total earnings spread 
with a lower stress multiple because the total spread also represents 
agreement on the value of the transaction between at least two parties: 
Farmer Mac and its counterparty (i.e., a market clearing price).
    For these reasons, we finalize this section and the conforming 
changes as proposed to reflect the treatment of the rural utility 
authority. As we gain more experience and data in this sector, the 
Agency may revisit this approach.

B. Modification of the Treatment of Loans Backed by an Obligation of 
the Counterparty and Loans for Which Pledged Loan Collateral Volume 
Exceeds Farmer Mac-Guaranteed Volume [Sec. Sec.  652.50 and 652.65(d); 
Appendix A to Part 652]

    We are amending sections 2.4.b.3, 2.4.b.4, 4.1.f., and 4.2.b. of 
the model in Appendix A of part 652 to increase the GOA factors, 
address counterparty concentration risks, and ensure AgVantage Plus 
volume maturities are recognized in the model.
1. GOA Factors--Treatment of Loan Volume
    We proposed revising the GOA factors by stressing the historical 
corporate bond loss rates to levels intended to represent stressed 
conditions instead of average conditions. We accomplish this in the 
model by modifying the GOA factors through the application of increases 
(or ``haircuts'') to the estimated historical loss rates by whole-
letter credit rating category using a multiple of three.
    Farmer Mac commented that our selection of three as the multiplier 
appeared to be much too high based on data in reports issued by Moody's 
Investor Services. Farmer Mac explained that the multiple and its 
implied assumption of a coefficient of variation (CV) equal to one 
lacked empirical support or theoretical justification. Farmer Mac 
askedthat the implied underlying CV ratio be much lower than one and 
that separate multipliers, scaled by whole-letter credit rating, be 
applied based on the historical variability over time of each whole-
letter credit rating. Farmer Mac based this request on Moody's data on 
the standard deviations for 10-year cumulative default rates. Farmer 
Mac recommends these data be used to derive empirically based multiples 
of GOA factors to represent stress on issuer counterparties.
    We disagree with the recommendation as we believe it to be based on 
a mistaken reliance on CVs of average default rates within credit 
rating categories over time, rather than cross-sectional CVs of the 
individual issuer defaults within each period.\10\ The long-term 
average rate of the annual average default rate combined with the 
standard deviation of those average default rates do not convey a 
reasonable measure of ``worst-case'' default risk, but rather, as 
identified in the Moody's report, are primarily related to sample size 
used in construction of the estimated average loss rates. We believe 
our approach places the adjusted corporate bond loss estimate in a 
range that provides a meaningfully stressful representation, given 
limited data, and reflects generally accepted statistical principles 
and relationships. We selected the multiplier of three on the basis 
that it was a reasonable policy position given that the most accurate 
alternative to the selected multiple using statistical theory to 
establish the limits on probability from the sample variance (i.e., 
Chebychev's theorem as discussed in

[[Page 23463]]

the proposed rule) would have yielded a proposed multiple many times 
higher than three. We continue to believe that use of the limit of 
probability established through limited sample information to require 
too extreme a multiple, and instead maintain our more moderate 
treatment through the use of our proposed value of three.
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    \10\ In the proposed rule, we used a CV of one in an example to 
demonstrate a point and not as a factual premise of this rulemaking.
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    We further disagree that one can accurately infer individual 
variability directly from the variance of a set of pooled experiences 
(aggregate annual default rates) through time. The primary purpose of 
the cited report, as explained by Moody's in the report, appears 
fundamentally different from its use in the comment letter. Moody's 
report explicitly states its purpose is to present confidence intervals 
around historical average cumulative default rates and, as warning 
against interpretation as a cross-sectional variance, the report 
indicates that standard errors around estimated long-run average 
default rates ``should not be confused with the much greater bands of 
uncertainty associated with the expected performance of particular 
cohorts of issuers formed at specific points in time (cross section).'' 
\11\
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    \11\ Cantor, R; Hamilton, D.; Tennant, J. ``Confidence Intervals 
for Corporate Default Rates'', Moody's Investor Services, Global 
Credit Research: Special Comment, April 2007; p. 1-2.
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    We finalize this provision as proposed.
2. GOA Factors--Concentration Ratios
    We proposed modifying GOA factors to recognize the risk associated 
with a counterparty's (also referred to as the AgVantage Plus issuer) 
loan portfolio concentration in the industry sector used in an 
AgVantage Plus issuance. We also proposed modifying section 2.4.b.3.A. 
of Appendix A to allow the Director of OSMO to make final 
determinations of concentration ratios on a case-by-case basis by using 
publicly reported data on counterparty portfolios, non-public data 
submitted and certified by Farmer Mac as part of its RBCST submissions, 
and generally recognizing two rural utility sectors--rural electric 
cooperatives and rural telephone cooperatives.
    Farmer Mac objected to the GOA modifications because it believes 
the change creates redundancy in two ways: (1) The level of an issuer's 
loan portfolio concentration is already captured in the NRSRO's credit 
rating and therefore already captured in the level of the base GOA 
factor (prior to the proposed concentration risk adjustment), and (2) 
base GOA factors already capture stress associated with ``tail'' events 
according to the newly proposed stressed corporate bond loss-rate 
multiple. Farmer Mac suggests instead that the new GOA factors be 
adjusted to reflect a reduction in risk due to the level of 
diversification of the issuer, not an increase in risk due to the 
issuer's portfolio concentration.
    Farmer Mac further commented that the proposed methodology is vague 
and might oversimplify industry concentration. Farmer Mac asked that at 
least two sub-sectors of rural electric utilities be recognized in the 
concentration adjustment: Distribution cooperatives and generation and 
transmission (G&T) cooperatives. Farmer Mac explained that the 
magnitude of the concentration risk-adjusted GOA (CRAGOA) factors are 
driven more by the concentration risk adjustment than by the stressed 
historical corporate bond default and recovery rates (stressed GOA 
factors). Farmer Mac states that this is counterintuitive to the 
concept of the GOA because it associates more of the final effect of 
the CRAGOA adjustment with the issuer's portfolio structure than is 
warranted. Farmer Mac illustrates this point using the example of a 
sovereign issuer without credit risk. In this scenario, the CRAGOA 
factor would equal the concentration ratio, due to the mathematical 
relationship between the stressed GOA (pre-concentration risk 
adjustment) and the CRAGOA (i.e., 1-(1-GOA) (1-concentration ratio), 
where GOA = 0)). If that concentration ratio were one, then no risk-
mitigation would be recognized in the general obligation of the 
sovereign issuer even if the issuer were rated AAA. Farmer Mac views 
this as placing an overly heavy emphasis on the issuer's portfolio 
concentration.
    Farmer Mac contends that our approach is inherently deficient 
because, in the example, the percentage increase in the GOA factor 
after adjustment for concentration risk is much greater for the AAA 
issuer (1,800 percent) than it is for the BBB issuer (300 percent), 
though the magnitudes of change stated in percentage terms are actually 
artifacts of the scale of remaining credit risk within each whole-
letter rating category, as we discuss in depth below. Farmer Mac 
commented that the concentration risk adjustment should, if it has any 
impact at all, reduce risk rather than increase risk. Farmer Mac 
suggested replacing the mathematical relationship we had proposed with 
a multiplicative relationship--i.e., because the concentration ratio 
will frequently be less than one, that the stressed GOA factor should 
be reduced for any level of issuer portfolio diversification, rather 
than increased for any level of portfolio concentration. Farmer Mac 
suggests the following formula: CRAGOA = stressed GOA * CR.
    We appreciate Farmer Mac's concern that the two sub-sectors of 
rural electric utilities be recognized. However, we believe the rule 
provides for recognition of those sub-sectors and others on a case-by-
case basis. We recognize Farmer Mac's authority to finance four 
industry sectors: Agriculture (including farms and agribusiness), rural 
electric distribution cooperatives, rural electric G&T cooperatives, 
and rural telephone cooperatives. The modifications to section 
2.4.b.3.A. of Appendix A will allow the Director of OSMO (Director) to 
make final determinations of concentration ratios, including 
recognizing two rural utility sectors--rural electric cooperatives and 
rural telephone cooperatives. However, we disagree that the GOA factors 
contain redundancy. While NRSRO's may consider the extent of 
diversification of assets generally in their credit ratings, they do 
not do so in a worst-case context. Nor would the NRSRO's consideration 
of diversification always specifically include the impact of the 
issuer's relative exposure to industry sectors that Farmer Mac is 
authorized to finance. Agriculture and rural utility cooperative 
exposures are often combined with other sector exposures in publicly 
reported documents--including sectors that Farmer Mac is not authorized 
to finance. While it's possible that an NRSRO might require the issuer 
to disaggregate that information, its rating determination would not 
specifically focus on the degree of exposure to the Farmer Mac-
authorized sectors. Hence, credit ratings do not provide the level of 
granularity of information needed. Nor does an NRSRO rating necessarily 
consider the issuer's exposure to the specific industry sector involved 
in the specific AgVantage Plus pool being modeled as this approach 
does. We do not believe that consideration of these specific risk 
components to the modeling of AgVantage Plus volume is sufficiently 
reflected in credit ratings to use them as suggested. For example, an 
NRSRO rating on a 100-percent concentrated issuer (e.g., a single-
sector lender) says little or nothing about its ability to guarantee 
the credit on loan volume that it would pledge to Farmer Mac. In a 
worst-case loss scenario in that single sector, the issuer's ability to 
liquidate its unpledged assets to fulfill its general obligation to 
Farmer Mac at a price near the outstanding principal would be

[[Page 23464]]

severely reduced. This rule effectively evaluates the degree of that 
reduced ability at 100 percent. In other words, we do not believe it to 
be plausible that an issuer whose unpledged assets are experiencing 
worst-case losses would be able to continue as a going concern if it 
were forced to liquidate a significant volume of those unpledged, but 
highly impaired assets in order to fulfill its general obligation to 
Farmer Mac.
    Farmer Mac asked that we define the sectors but did not suggest any 
definition with the request. We decline to do so because we believe the 
general understanding of what these sectors include is sufficient for 
setting a parameter but flexible enough to allow the Director to use 
his discretion in a manner appropriate to each case presented. In 
addition, we do not view the fact that the concentration risk 
adjustment has a significant impact on the CRAGOA as counterintuitive. 
We believe it is logically consistent to view the concentration ratio 
as potentially a more significant driver of the value of the issuer's 
general obligation than the estimated corporate bond loss rate. We view 
the concentration risk adjustment as a critical component of the CRAGOA 
because it reflects the ability of the specific counterparty to augment 
the more generalized component derived from stressed corporate bond 
default rates by whole-letter credit rating.
    Farmer Mac's comment included an example of a sovereign (credit-
risk-free) issuer and AgVantage Plus counterparty. We believe this 
example is too extreme to be applicable even for illustrative purposes. 
As a risk-free issuer, the hypothetical sovereign issuer in the example 
would be guaranteeing the credit risk on the subject loan volume, thus 
making the transaction more akin to the Farmer Mac II program than to 
the AgVantage Plus product.\12\ The RBCST already contains an approach 
on this type of transaction, i.e., it does not recognize credit risk 
and therefore would it not be appropriate to model this volume using 
the treatment for AgVantage Plus. Such transactions would result in a 
gross loss estimate of zero to which the CRAGOA (equal to the 
concentration ratio as previously discussed) would be applied for a net 
loss estimate of zero. However, to the more general point outside of 
this extreme case, i.e., a single-sector AAA issuer, we believe it 
reasonably and logically consistent for the single sector 
characteristic to weigh most heavily in the CRAGOA. The discussion and 
tables below further describe these relationships.
---------------------------------------------------------------------------

    \12\ Farmer Mac's program investments in loans that are 
guaranteed by the USDA as described in section 8.0(9)(B) of the Act, 
and which are securitized by Farmer Mac, are known as the ``Farmer 
Mac II'' program.
---------------------------------------------------------------------------

    Farmer Mac argued that our approach is inherently deficient due to 
the fact that the CRAGOA factor increases (relative to the stressed 
GOA) so much more for the AAA issuer (18 times) than it does for the 
BBB issuer (three times). We disagree and use the following tables to 
illustrate the ultimate effects of the CRA across a set of cases that 
we believe provide a more meaningful context for interpretation of the 
effects of its application.
    The table is organized in three panels across base Pre-GOA 
probability of default rates (PD) of 1, 3, and 6 percent (i.e., 
examples of loss rates as would be determined by the RBCST credit loss 
module or from the rural utility guarantee fee). The stressed GOA (GOA 
Pre-CRA) is applied to each case and a pre-concentration risk adjusted 
loss rate provided in column D (Pre-CRA loss rate). The first table 
assumes a 25-percent concentration ratio (CR) and provides associated 
final loss rates in column F after the CRA. Column G reproduces the 
multiples of change cited by Farmer Mac in its comment.

----------------------------------------------------------------------------------------------------------------
                 A                       B            C            D            E            F            G
----------------------------------------------------------------------------------------------------------------
                                                  GOA  Pre-     Pre-CRA                  Loss rate
                                     Pre-GOA PD      CRA       loss rate        CR      post-CRAGOA     = F/D
                                     (percent)    (percent)    (percent)    (percent)     (percent)
----------------------------------------------------------------------------------------------------------------
AAA...............................            1         1.41       0.0141           25        0.261        18.48
AA................................            1         3.70       0.0370           25        0.278         7.51
A.................................            1         5.13       0.0513           25        0.288         5.62
BBB...............................            1        11.48       0.1148           25        0.336         2.93
< BBB.............................            1        44.52       0.4452           25        0.584         1.31
----------------------------------------------------------------------------------------------------------------
AAA...............................            3         1.41       0.0423           25        0.782        18.48
AA................................            3         3.70       0.1110           25        0.833         7.51
A.................................            3         5.13       0.1539           25        0.865         5.62
BBB...............................            3        11.48       0.3444           25        1.008         2.93
< BBB.............................            3        44.52       1.3356           25        1.752         1.31
----------------------------------------------------------------------------------------------------------------
AAA...............................            6         1.41       0.0846           25        1.563        18.48
AA................................            6         3.70       0.2220           25        1.667         7.51
A.................................            6         5.13       0.3078           25        1.731         5.62
BBB...............................            6        11.48       0.6888           25        2.017         2.93
< BBB.............................            6        44.52       2.6712           25        3.503         1.31
----------------------------------------------------------------------------------------------------------------

    As the table indicates, assuming a counterparty concentration ratio 
of 25 percent and a loss rate estimate of 1 percent before any 
adjustment for general obligation credit enhancement, the proportional 
changes are as provided in Farmer Mac's comment letter--the AAA 
issuer's post-CRAGOA loss rate increases by a factor of 18.48, whereas 
the BBB issuer's loss rate increases only 2.93 times after considering 
the concentration risk. We consider the increase differential 
consistent with the logic that when a structure is backed by a high-
quality issuer's general obligation, there is effectively more risk-
mitigation value to lose if that issuer happens to be highly 
concentrated in the same sector as the underlying loans and the 
magnitude of that loss is appropriate and proportionate to the 
concentration risk at the issuer. Despite this difference in CRA 
impact, the loss rate post-CRAGOA for a AAA issuer is still less than 
half the stressed loss rate applied to a BBB issuer, and this 
relationship is not

[[Page 23465]]

affected by the level of the pre-GOA PD (i.e., the 3-percent and 6-
percent Pre-GOA PD scenarios reflect the same magnitude of change post-
CRAGOA). When there is little credit risk, there is less risk to 
mitigate with the GOA. However, in the ``below-BBB and unrated'' cases, 
the magnitude of the reduction in credit risk is far greater than in 
the case of the higher rated initial exposures. For example, observe 
the last two rows in column C with 11.48-percent and 44.52-percent 
``GOA Pre-CRA'' factors. Prior to the CRA, the stressed GOA would have 
reduced initial PD losses by 88.52 percent (1-0.1148) and 55.48 percent 
(1-0.4452), respectively. The magnitude of difference among these 
changes to the initial PD is reduced by the application of the CRA, 
which is the same for each of them. The percentage reduction in the 
initial PD post-CRA is 73.94 percent (down 24.65 percentage points) in 
the AAA case, 66.39 percent (down 22.13 percentage points) and 41.61 
percent (down 13.67 percentage points) in the ``BBB'' and ``< BBB'' 
cases, respectively--down 25 percent from the Pre-CRA PD risk 
mitigation levels. We consider this result consistent with reasonable 
depictions of final credit exposure relationships.
    The next table provides comparable information, but with a 
concentration ratio of 50 percent rather than 25 percent. As can be 
seen in the table, a consistent and appropriate proportionality remains 
as the multiples of change become much larger due to increases in the 
concentration ratio--that is, the loss rate post-CRA GOA for a AAA 
issuer is still less than the stressed loss rate applied to a BBB 
issuer, though by increasingly smaller margins as concentration ratios 
rise. This is logical and intentional because as the concentration 
ratio approaches one, risk-mitigation value of the CRAGOA approaches 
zero for all categories of issuer leaving Pre-GOA PDs unadjusted for 
the general obligation of the issuer.

----------------------------------------------------------------------------------------------------------------
                 A                       B            C            D            E            F            G
----------------------------------------------------------------------------------------------------------------
                                                                                         Loss Rate
                                     Pre-GOA PD   GOA  Pre-     Pre-CRA         CR        post-CRA
                                     (percent)       CRA       loss rate    (percent)       GOA         = F/D
                                                  (percent)    (percent)                 (percent)
----------------------------------------------------------------------------------------------------------------
AAA...............................            1         1.41       0.0141           50        0.507        35.96
AA................................            1         3.70       0.0370           50        0.519        14.01
A.................................            1         5.13       0.0513           50        0.526        10.25
BBB...............................            1        11.48       0.1148           50        0.557         4.86
< BBB.............................            1        44.52       0.4452           50        0.723         1.62
----------------------------------------------------------------------------------------------------------------
AAA...............................            3         1.41       0.0423           50        1.521        35.96
AA................................            3         3.70       0.1110           50        1.556        14.01
A.................................            3         5.13       0.1539           50        1.577        10.25
BBB...............................            3        11.48       0.3444           50        1.672         4.86
< BBB.............................            3        44.52       1.3356           50        2.168         1.62
----------------------------------------------------------------------------------------------------------------
AAA...............................            6         1.41       0.0846           50        0.030        35.96
AA................................            6         3.70       0.2220           50        3.111        14.01
A.................................            6         5.13       0.3078           50        3.154        10.25
BBB...............................            6        11.48       0.6888           50        3.344         4.86
< BBB.............................            6        44.52       2.6712           50        4.336         1.62
----------------------------------------------------------------------------------------------------------------

    Finally, Farmer Mac suggested using the formula: CRAGOA = stressed 
GOA * CR to recognize increased risk associated with counterparty 
concentrations. As we previously explained, we intend to recognize the 
increased risk associated with counterparty concentrations and do not 
consider Farmer Mac's suggestion to adequately factor the impact of 
increased concentration on effective credit exposure. The concentration 
risk adjustment is a critical component of the CRAGOA because it 
tightens the focus on this key risk characteristic of the specific 
counterparty to complement the more generalized component derived from 
stressed corporate bond default rates by whole-letter credit rating--
which, we do not believe adequately captures this information.
    We finalize as proposed all changes on this subject matter but 
revise our stated interpretation of the proposed methodology as it is 
applied to rural electric utility cooperative issuers to recognize two 
sectors, electric distribution cooperatives and electric generation and 
transmission cooperatives.
3. Technical Changes
    We proposed amending Sec.  652.50 by adding a definition for 
``AgVantage Plus'' to clarify that, while ``AgVantage Plus'' is a 
product name used by Farmer Mac, we are applying it throughout this 
subpart to refer both specifically to AgVantage Plus volume currently 
in Farmer Mac's portfolio as well as other similarly structured program 
volume that Farmer Mac might finance in the future under other names. 
We described ``AgVantage Plus'' as a program created by Farmer Mac in 
2006 to provide guarantees on timely repayment of principal and 
interest on notes issued by the counterparty. The notes are secured by 
obligations of issuer, which obligations are, in turn, backed by Farmer 
Mac eligible loan assets. We also proposed conforming changes to the 
model at Appendix A of part 652 to replace the term ``Off-Balance Sheet 
AgVantage'' with ``AgVantage Plus.''
    Farmer Mac suggested we reduce the complexity in the rule by 
referring to all AgVantage products by the term ``AgVantage Plus,'' but 
exclude pools with an initial principal amount under $25 million. We 
agree and have revised that definition to include any AgVantage program 
investment over $25 million to avoid unnecessary complexity on small 
deals. Only those AgVantage issuers under the original AgVantage 
program structure (as opposed to what we have been referring to as 
``AgVantage Plus'') identified in the original RBCST, (64 FR 61740, 
November 12, 1999) will be excluded from the RBCST loss calculation.
    In January 2010, Farmer Mac adopted new Financial Accounting 
Standards Board guidance related to the consolidation of variable 
interest entities (Accounting Standards Update, December 23, 2009). The 
adoption

[[Page 23466]]

required consolidation of a significant volume of previously off-
balance sheet program volume onto the balance sheet. As this change 
impacts only the presentation of this volume and has no impact on the 
risk or cashflows associated with this volume, we have made minor 
mechanical adjustments in data inputs to nullify the impact of the 
adoption within the RBCST. These include creating a new asset line item 
for the affected consolidated volume and an offsetting line item in the 
liabilities section.
    We finalize as proposed all other changes on this subject matter.

C. Revise Haircuts on Non-Program Investments

[Appendix A to Part 652]

    We proposed changing the haircut levels for non-program investments 
in existing section 4.1.e. of Appendix A, renumbering the section as 
4.1.f., to the same loss rate adjustment factors proposed for 
application on loans underlying guaranteed notes (i.e., AgVantage Plus) 
as discussed in section III.B.1 of this preamble. The proposed 
investment haircuts to recognize counterparty risk were:

------------------------------------------------------------------------
                                                                Haircut
                 Whole letter credit rating                    (percent)
------------------------------------------------------------------------
AAA.........................................................        1.41
AA..........................................................        3.70
A...........................................................        5.13
BBB.........................................................       11.48
Below BBB and Unrated.......................................       44.52
------------------------------------------------------------------------

    We likewise proposed annually updating these figures, or as often 
as an updated version of the Moody's report on Default and Recovery 
Rates of Corporate Bond Issuers becomes available.
    We received no comments on this proposal and finalize as proposed 
all changes on this subject matter.

D. Other Miscellaneous Changes [Sec. Sec.  651.1(b) and 652.5]

    In the process of this rulemaking, we noted citations that were not 
updated in prior rulemakings and make those corrections now. In a 1994 
rulemaking, a definition for ``affiliate'' was added to Sec.  651.1(b). 
This definition was later duplicated in Sec.  652.5 as part of a 2005 
rulemaking. The definition in both locations references section 
8.3(b)(13) of the Act; this citation should read ``section 
8.3(c)(14).'' The original rulemaking mistakenly used paragraph (b) 
instead of (c), and Congress later renumbered paragraph (c)(13) as 
(c)(14).\13\ Both rulemakings clearly discuss the contents of section 
8.3(c)(14) of the Act, so we are correcting the citations now.
---------------------------------------------------------------------------

    \13\ Section 8.3 is found at 12 U.S.C. 2279aa-3 and discusses 
the powers of Farmer Mac and its board. Amendments to the Act made 
in the Food, Agriculture, Conservation, and Trade Act Amendments of 
1991 [Pub. L. 102-237] gave Farmer Mac the authority to establish, 
acquire, and maintain affiliates under applicable state law. This 
1991 amendment led to the inclusion of the term in Sec.  651.1. 
Subsequently, a 1996 amendment to the Act [Pub. L. 104-105] 
redesignated paragraph (c)(13) as (c)(14).
---------------------------------------------------------------------------

IV. Quantitative Impact of Changes on Required Capital

    We received one comment from a Farm Credit System institution that 
understood the proposed rule to reflect only incremental capital 
requirements on rural utility loan volume. We are clarifying that the 
substantive changes to the RBCST contained in this final rulemaking 
involve more components of the model than simply the incremental 
capital requirements on rural utility volume, including changes to GOA 
factors applied to all AgVantage Plus-type volume and changes to 
investment haircuts. Due to the stated confusion by Farmer Mac 
regarding our intended meaning of ``rural utility guarantee fee'' (see 
Farmer Mac's request for definitional clarification above), we are 
providing further clarification in the estimated impacts table below:

                                      Calculated Regulatory Minimum Capital
                                                [$ in thousands]
----------------------------------------------------------------------------------------------------------------
                                                                     6/30/2010       9/30/2010      12/31/2010
----------------------------------------------------------------------------------------------------------------
0 RBCST Version 3.0.............................................          30,434          36,743          42,105
1 Revised Haircuts on Investments...............................          30,739          37,053          42,358
2 Tripling of Version 3.0 GOA Factors...........................          30,525          36,969          42,816
3 Credit Risk on Rural Utility Loans............................          32,564          37,694          79,997
4 Concentration Risk Adjustment with Rural Utility Credit Risk..          79,924          92,844         123,304
All RBCST Version 4.0 Effects...................................          82,270          94,966         125,498
----------------------------------------------------------------------------------------------------------------

    The impact amounts on line ``1'' reflect only the change associated 
with the revised haircuts on non-program investments. The impact 
amounts on line ``2'' reflect only the change associated with the 
tripling of general obligation adjustment factors with all else equal 
in the RBC Version 3.0 (i.e., it does not reflect rural utility credit-
loss characterization). The impact amounts on line ``3'' reflect only 
the change associated with the credit loss characterization on rural 
utility volume (i.e., it does not reflect the application of the 
tripling GOA factors to rural utility AgVantage Plus volume or 
agricultural AgVantage Plus volume). The impact amounts on line ``4'' 
reflect the concentration adjustment to the general obligation 
adjustment factor on all AgVantage Plus volume, both rural utility and 
agricultural, (i.e., it does not reflect the application of the 
tripling GOA factors to rural utility or agricultural AgVantage Plus 
volume, but it does include the rural utility loss estimates isolated 
in line ``3''). 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 4.0 (proposed). It is worth noting that the 
marginal effects are also not constant rate effects, but depend on the 
starting conditions and earnings spread of Farmer Mac and the magnitude 
of the effect considered. For example, as the volume in the rural 
utility category is increased, the rate of increase in the marginal 
minimum risk-based capital requirement begins to increase as the 
downward-pressure on that rate exerted by earnings from other 
activities are further diluted as those earnings become increasingly 
smaller in proportion to total estimated losses. The same effect is 
evident in other ways as risk increases and the offsetting effect of 
earnings is diminished relative to increased risk. For example, this 
effect would be observed, all else equal, with lower initial earnings 
spreads or higher AgVantage Plus counterparty concentrations, updated 
(and higher) Moody's base corporate bond default rates, or ratings 
downgrades. Thus, the

[[Page 23467]]

values in the table above are illustrative of the relative effects of 
the revisions in this rulemaking, given the conditions as of each 
quarter end, but can be materially affected by changes in starting 
conditions or risk compositions through time. Moreover, due to the 
substitutability allowed within certain loan pools and ability of 
AgVantage counterparties to vary the level of overcollateral submitted 
in each quarter of a pool's life, the risk characteristics of an 
individual pool are subject to change quarter to quarter.
    Our tests indicate that changes related to credit losses on rural 
utility loans combined with the concentration risk adjustment to the 
GOA would have the most significant impact on risk-based capital 
calculated by the model.

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 final 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

12 CFR Part 651

    Agriculture, Banks, Banking, Conflicts of interest, Rural areas.

12 CFR Part 652

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

    For the reasons stated in the preamble, parts 651 and 652 of 
chapter VI, title 12 of the Code of Federal regulations are amended to 
read as follows:

PART 651--FEDERAL AGRICULTURAL MORTGAGE CORPORATION GOVERNANCE

0
1. The authority citation for part 651 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.


Sec.  651.1  [Amended]

0
2. Amend Sec.  651.1(b) by removing the reference, ``section 
8.3(b)(13)'' and adding in its place the reference, ``section 
8.3(c)(14)''.

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

0
3. 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 A--Investment Management

0
4. Section 652.5 is amended by revising the definition for 
``affiliate'' to read as follows:


Sec.  652.5  Definitions.

* * * * *
    Affiliate means any entity established under authority granted to 
the Corporation under section 8.3(c)(14) of the Farm Credit Act of 
1971, as amended.
* * * * *

Subpart B--Risk-Based Capital Requirements

0
5. Amend Sec.  652.50 by adding alphabetically the following 
definitions:


Sec.  652.50  Definitions.

* * * * *
    AgVantage Plus means both the product by that name used by Farmer 
Mac and other similarly structured program volume that Farmer Mac might 
finance in the future under other names. Those AgVantage securities 
with initial principal amounts under $25 million and whose issuers were 
part of the original AgVantage program are excluded from this 
definition.
* * * * *
    Rural utility guarantee fee means the actual guarantee fee charged 
for off-balance sheet volume and the earnings spread over Farmer Mac's 
funding costs for on-balance sheet volume on rural utility loans.

0
6. Amend Sec.  652.65 by:
0
a. Redesignating paragraphs (b)(5) and (6) as paragraphs (b)(6) and 
(7);
0
b. Adding a new paragraph (b)(5);
0
c. Revising newly redesignated paragraph (b)(6) and paragraph (d)(2) to 
read as follows:


Sec.  652.65  Risk-based capital stress test.

* * * * *
    (b) * * *
    (5) You will calculate loss rates on rural utility loans as further 
described in Appendix A.
    (6) You will further adjust losses for loans that collateralize the 
general obligation of AgVantage Plus volume, and for loans where the 
program loan counterparty retains a subordinated interest in accordance 
with Appendix A to this subpart.
* * * * *
    (d) * * *
    (2) You must use model assumptions to generate financial statements 
over the 10-year stress period. The major assumption is that cashflows 
generated by the risk-based capital stress test are based on a steady-
state scenario. To implement a steady-state scenario, when on- and off-
balance sheet assets and liabilities amortize or are paid down, you 
must replace them with similar assets and liabilities (AgVantage Plus 
volume is not replaced when it matures). Replace amortized assets from 
discontinued loan programs with current loan programs. In general, keep 
assets with small balances in constant proportions to key program 
assets.
* * * * *

0
7. Amend Appendix A of subpart B, part 652 by:
0
a. Revising the table of contents;
0
b. Revising the last sentence of section 1.0.a.;
0
c. Adding a new fourth sentence to section 2.0;
0
d. Adding the words ``for All Types of Loans, Except Rural Utility 
Loans'' at the end of each heading for sections 2.1, 2.2, 2.3, and 2.5;
0
e. Revising section 2.4.b.3 introductory text, b.3.A., and b.4 
introductory text;
0
f. Adding a new section 2.6;
0
g. Renumbering the footnote in section 3.0 from ``15'' to ``16'';
0
h. Revising section 4.1.b., redesignating section 4.1.e. as section 
4.1.f., adding a new section 4.1.e., and revising newly redesignated 
section 4.1.f.;
0
i. Revising section 4.2.b. introductory text, paragraphs b.(1)(A)(v), 
b.(1)(A)(vi), adding paragraph b.(1)(A)(vii), revising the last 
sentence of paragraph b.(1)(B), the first sentence of paragraph b.(2), 
and the last sentence of paragraph b.(3) introductory text;
0
j. Adding section 4.3.e.; and,
0
k. Revising the second sentence of section 4.4.
    The revisions and additions read as follows:

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 for All Types of Loans, 
Except Rural Utility Loans.
2.2 Loan-Seasoning Adjustment for All Types of Loans, Except Rural 
Utility Loans.

[[Page 23468]]

2.3 Example Calculation of Dollar Loss on One Loan for All Types of 
Loans, Except Rural Utility Loans.
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 for All 
Types of Loans, Except Rural Utility Loans.
2.6 Calculation of Loss Rates on Rural Utility Volume 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.
* * * * *

1.0 Introduction

    a. * * * The stress test also uses historic agricultural real 
estate mortgage performance data, rural utility guarantee fees, 
relevant economic variables, and other inputs in its calculations of 
Farmer Mac's capital needs over a 10-year period.
* * * * *

2.0 Credit Risk

    * * * Loss rates discussed in this section apply to all loans, 
unless otherwise indicated. * * *
* * * * *

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

* * * * *
    b. * * *
    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 in our example, multiply the estimated dollar 
losses remaining after adjustments in ``1.'' and ``2.'' above by the 
appropriate general obligation adjustment (GOA) factor based on the 
counterparty's whole-letter issuer credit rating by a nationally 
recognized statistical rating organization (NRSRO) and the ratio of 
the counterparty's concentration of risk in the same industry sector 
as the loans backing the AgVantage Plus volume, as determined by the 
Director.
    A. The Director will make final determinations of concentration 
ratios on a case-by-case basis by using publicly reported data on 
counterparty portfolios, non-public data submitted and certified by 
Farmer Mac as part of its RBCST submissions, and will generally 
recognize rural electric cooperatives and rural telephone 
cooperatives as separate rural utility sectors. The following table 
sets forth the GOA factors and their components by whole-letter 
credit rating (Adjustment Factor = Default Rate x Severity Rate x 
3), which may be further adjusted for industry sector concentration 
by the Director.\15\
---------------------------------------------------------------------------

    \15\ Emery, K., Ou S., Tennant, J., Kim F., Cantor R., 
``Corporate Default and Recovery Rates, 1920--2007,'' published by 
Moody's Investors Service, February 2008--the most recent edition as 
of March 2008; Default Rates, page 24, Recovery Rates (Severity Rate 
= 1 minus Senior Unsecured Average Recovery Rate) page 20.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                      A                               B                 C                 D                 E                 F                 G
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                           Factor with
                                                                                                        V4.0 GOA        Concentration     concentration
            Whole-letter  rating                Default rate      Severity rate    V3.0 GOA factor   factors (D x 3)    ratio (e.g.,      adjustment 1-
                                                  (percent)         (percent)         (percent)         (percent)      25%)  (percent)   ((1-E) x (1-F))
                                                                                                                                            (percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
AAA.........................................             0.897                54              0.48              1.41             25.00             26.06
AA..........................................             2.294                54              1.24              3.70             25.00             27.78
A...........................................             2.901                54              1.57              5.13             25.00             28.84
BBB.........................................             7.061                54              3.82             11.48             25.00             33.61
Below BBB and Unrated.......................            26.827                54             14.50             44.52             25.00             58.39
--------------------------------------------------------------------------------------------------------------------------------------------------------

* * * * *
    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, a 25-percent 
concentration ratio, 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-Loan Portfolio.....   $1,080,000   $1,120,000
3 Age-Adjusted Loss Rate......................           7%           5%
4 Estimated Age-Adjusted Losses...............      $75,600      $56,000
5 Guarantee Volume Scaling Factor.............       90.91%       90.91%
6 Losses Adjusted for Total Overcollateral....      $68,727      $50,909
                                               -------------------------
7 Contractually Required Overcollateral on
 Pool (5%)....................................          $100,000
8 Net Losses on Pool Adjusted for
 Contractually Required Overcollateral........           $19,636
9 GOA Factor for ``A'' Issuer with 25%
 Concentration Ratio..........................           28.84%
10 Losses Adjusted for ``A'' General
 Obligation...................................           $5,664
11 Loss Rate Input in the RBCST for this Pool.            0.28%
------------------------------------------------------------------------

* * * * *

2.6 Calculation of Loss Rates on Rural Utility Volume for-Use in 
the Stress Test

    You must submit the outstanding principal, maturity date of the 
loan, maturity date of the AgVantage Plus contract (if applicable), 
and the rural utility guarantee fee percentage for each loan in 
Farmer Mac's rural utility loan portfolio on the date at

[[Page 23469]]

which the stress test is conducted. You must multiply the rural 
utility guarantee fee by two to calculate the loss rate on rural 
utility loans under stressful economic conditions and then multiply 
the loss rate by the total outstanding principal. To arrive at the 
net rural utility loan losses, you must next apply the steps ``5'' 
through ``11'' of section 2.4.b.4 of this Appendix. For loans under 
an AgVantage Plus-type structure, the calculated losses are 
distributed over time on a straight-line basis. For loans that are 
not part of an AgVantage Plus-type structure, losses are distributed 
over the 10-year modeling horizon, consistent with other non-
AgVantage Plus loan volume.
* * * * *

4.1 Data Inputs

* * * * *
    b. Cashflow Data for Asset and Liability Account Categories. The 
necessary cashflow data for the spreadsheet-based stress test are 
book value, weighted average yield, weighted average maturity, 
conditional prepayment rate, weighted average amortization, and 
weighted average guarantee fees and rural utility guarantee fees. 
The spreadsheet uses this cashflow information to generate starting 
and ending account balances, interest earnings, guarantee fees, 
rural utility guarantee fees, and interest expense. Each asset and 
liability account category identified in this data requirement is 
discussed in section 4.2 ``Assumptions and Relationships.''
* * * * *
    e. Loan-Level Data for All Rural Utility Program Volume. The 
stress test requires loan-level data for all rural utility program 
volume. The specific loan data fields required for calculating the 
credit risk are outstanding principal, maturity date of the loan, 
maturity date of the AgVantage Plus contract (if applicable), and 
the rural utility guarantee fee percentage for each loan in Farmer 
Mac's rural utility loan portfolio on the date at which the stress 
test is conducted.
    f. 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 an NRSRO using the haircut levels in effect 
at the time. Haircut levels shall be the same amounts calculated for 
the GOA factor in section 2.4.b.3 above. 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.
Standard & Poor's Short-Term....  A-1+...............  A-1................  A-2...............  A-3...............  SP-3, B, or Below and Unrated.
                                  SP-1+..............  SP-1...............  SP-2..............
Fitch Short-Term................  F-1+...............  F-1................  F-2...............  F-3...............  Below F-3 and Unrated.
Moody's.........................  ...................  Prime-MIG12........  Prime-2 MIG2 VMIG2  Prime-3 MIG3 VMIG3  Not Prime, SG and Unrated.
                                                       VMIg1..............
Fitch Bank Ratings..............  A..................  B..................  C.................  D.................  E.
                                                       A/B................  B/C...............  C/D...............  D/E.
Moody's Bank Financial Strength   A..................  B..................  C.................  D.................  E.
 Rating.
--------------------------------------------------------------------------------------------------------------------------------------------------------


       Farmer Mac RBCST Maximum Haircut by Ratings Classification
------------------------------------------------------------------------
                                                           Non-program
                                                           investment
                                                         counterparties
                Ratings classification                     (excluding
                                                          derivatives)
                                                            (percent)
------------------------------------------------------------------------
Cash..................................................              0.00
AAA...................................................              1.41
AA....................................................              3.70
A.....................................................              5.13
BBB...................................................             11.48
Below BBB or Unrated..................................             44.52
------------------------------------------------------------------------

* * * * *

4.2 Assumptions and Relationships

* * * * *
    b. From the data and assumptions, the stress test computes pro 
forma financial statements for 10 years. The stress test must be run 
as a ``steady state'' with regard to program balances (with the 
exception of AgVantage Plus volume, in which case maturities are 
recognized by the model), and where possible, will use information 
gleaned from recent financial statements and other data supplied by 
Farmer Mac to establish earnings and cost relationships on major 
program assets that are applied forward in time. As documented in 
the stress test, entries of ``1'' imply no growth and/or no change 
in account balances or proportions relative to initial conditions 
with the exception of pre-1996 loan volume being transferred to 
post-1996 loan volume. The interest rate risk and credit loss 
components are applied to the stress test through time. The 
individual sections of that worksheet are:
    (1) * * *
    (A) * * *
    (v) Loans held for securitization;
    (vi) Farmer Mac II program assets; and
    (vii) Rural Utility program volume on balance sheet.
    (B) * * * The exceptions are that expiring pre-1996 Act program 
assets are replaced with post-1996 Act program assets and AgVantage 
Plus volume maturities are recognized by the model.
    (2) Elements related to other balance sheet assumptions through 
time. As well as interest earning assets, the other categories of 
the balance sheet that are modeled through time include interest 
receivable, guarantee fees receivable, rural utility guarantee fees 
receivable, prepaid expenses, accrued interest payable, accounts 
payable, accrued expenses, reserves for losses (loans held and 
guaranteed securities), and other off-balance sheet obligations. * * 
*
    (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 requirement, guarantee fees, rural utility guarantee fees, 
and loan loss resolution timing.
* * * * *

4.3 Risk Measures

* * * * *
    e. The credit loss exposure on rural utility volume, described 
in section 2.6, ``Calculation of Loss Rates on Rural Utility Volume 
for Use in the Stress Test,'' is entered into the ``Risk Measures'' 
worksheet applied to the volume balance. All losses arising from 
rural utility loans are expressed as annual loss rates and 
distributed over the weighted average maturity of the rural utility 
AgVantage Plus Volume, or as annual loss across the full 10-year 
modeling horizon in the case of rural utility Cash Window loans.
* * * * *

4.4 Loan and Cashflow Accounts

    * * * The steady-state formulation results in account balances 
that remain constant except for the effects of discontinued 
programs, maturing AgVantage Plus positions, and the LLRT 
adjustment. * * *
* * * * *

    Dated: April 21, 2011.
Mary Alice Donner,
Acting Secretary, Farm Credit Administration Board.
[FR Doc. 2011-10172 Filed 4-26-11; 8:45 am]
BILLING CODE 6705-01-P