69692 Federal Register / Vol. 70, No. 221 / Thursday, November 17, 2005 / Proposed Rules 

objective to provide high assurance that 

activities involving special nuclear 

material are not inimical to the common 

defense and security and do not 

constitute an unreasonable risk to the 

public health and safety.’’ (10 CFR 

73.55(a)), and ‘‘* * * may make no 

change which would decrease the 

effectiveness of a security plan * * *’’

(10 CFR 50.54(p)(1)). These regulations 

are focused on evaluation of specific 

areas of safety and security and do not 

explicitly require evaluation of the 

interactive effect of plant changes on the 

security plan or the effect of changes to 

the security plan on plant safety. 

Additionally, the regulations do not 

require communication amongst 

operations, maintenance, and security 

organizations regarding the 

implementation and timing of plant 

changes in order to promote awareness 

of the effects of changing conditions to 

allow the organizations to make an 

appropriate assessment of changes and 

implement any necessary response. 

Because existing regulations are 

focused on ensuring that licensees 

evaluate changes to specific subject 

areas, and because guidance has already 

been developed to help ensure that 

those evaluations are performed 

appropriately, the NRC must consider 

carefully the effect of a revision on the 

existing regulations. For example, 10 

CFR 50.59 is focused on ensuring safe 

operation of the facility by requiring 

evaluation of changes, tests, and 

experiments that affect the facility as 

described in the FSAR. Industry and 

NRC have expended a large amount of 

resources to provide guidance to help 

ensure that regulatory expectations for 

this area are clearly described. At this 

time, regulatory expectations for the 

implementation of 10 CFR 50.59 are 

thought to be well understood. Further, 

operations personnel, performing a 10 

CFR 50.59 evaluation, may not be 

sufficiently knowledgeable of the 

security plan details in order to make an 

appropriate evaluation of the effect of 

changes, tests, and experiments on 

security. Current regulations do not 

require such an evaluation for many 

plant changes made to nonsafety 

systems, structures, and components. 

Therefore, it may be appropriate to 

provide a requirement in 10 CFR part 73 

that changes to the facility be assessed 

for potential adverse interaction on the 

safety/security interface. 

The NRC believes that the rulemaking 

process, including stakeholder 

comment, will better identify how the 

regulations should be modified and 

what the scope and details of a revision 

should be. 

In summary, the NRC agrees with the 

petitioners that rulemaking may be 

appropriate for the first requested 

action. 

NRC Plans for the First Proposed Action 

Regarding the first requested action, 

the NRC’s interoffice Safety/Security 

Interface Advisory Panel (SSIAP) has 

advised the staff on the most effective 

and efficient method to integrate this 

rulemaking with other ongoing safety/ 

security actions to require that licensees 

evaluate changes to the facility or to the 

security plan for adverse interactions. 

Further, in its SRM on June 28, 2005, 

the Commission directed the staff to 

include this issue as part of ongoing 

rulemaking for 10 CFR 73.55, currently 

due to the Commission on May 31, 

2006. 

Second Proposed Action 

The NRC evaluated the second 

proposed action and is deferring 

resolution of the second issue of the 

petition. The NRC intends to address 

the request when the NRC responds to 

comments on its proposed Design Basis 

Threat rule. That rule was issued for 

public comment on November 7, 2005. 

For these reasons, the Commission is 

granting the first requested action of 

PRM–50–80 and is deferring resolution 

of the second requested action. 

Dated at Rockville, Maryland, this 9th day 

of November, 2005. 

For the Nuclear Regulatory Commission. 

Annette L. Vietti-Cook, 

Secretary of the Commission. 

[FR Doc. E5–6365 Filed 11–16–05; 8:45 am] 

BILLING CODE 7590–01–P 

FARM CREDIT ADMINISTRATION 

12 CFR Parts 652 and 655 

RIN 3052–AC17 

Federal Agricultural Mortgage 

Corporation Funding and Fiscal 

Affairs; Federal Agricultural Mortgage 

Corporation Disclosure and Reporting 

Requirements; Risk-Based Capital 

Requirements 

AGENCY: Farm Credit Administration. 

ACTION: Proposed rule. 

SUMMARY: The Farm Credit 

Administration (FCA, Agency, us, or 

we) is proposing to amend regulations 

governing the Federal Agricultural 

Mortgage Corporation (Farmer Mac or 

the Corporation). Analysis of the Farmer 

Mac risk-based capital stress test 

(RBCST or the model) in the 3 years 

since its first official submission as of 

June 30, 2002, has identified several 

opportunities to update the model in 

response to changing financial markets, 

new business practices and the 

evolution of the loan portfolio at Farmer 

Mac, as well as continued development 

of best-industry practices among leading 

financial institutions. The proposed rule 

focuses on improvements to the RBSCT 

by modifying regulations found at 12 

CFR part 652, subpart B. The effect of 

the proposed rule is intended to be a 

more accurate reflection of risk in the 

model in order to improve the model’s 

output—Farmer Mac’s regulatory 

minimum capital level. The proposed 

rule also makes one clarification relating 

to Farmer Mac’s reporting requirements 

at 12 CFR 655.50(c). 

DATES: You may send us comments by 

February 15, 2006. 

ADDRESSES: Send us your comments by 

electronic mail to reg-comm@fca.gov, 

through the Pending Regulations section 

of our Web site at 

http://www.fca.gov, or through the 

Government-wide Web site http:// 

www.regulations.gov. You may also 

submit your comments in writing to 

Robert Coleman, Director, Office of 

Secondary Market Oversight, Farm 

Credit Administration, 1501 Farm 

Credit Drive, McLean, VA 22102–5090, 

or by facsimile transmission to (703) 

883–4477. 

You may review copies of comments 

we receive at our office in McLean, 

Virginia, or from 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 you provide, 

such as phone numbers and addresses, 

will be publicly available. However, we 

will attempt to remove electronic-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 

Joy Strickland, Senior Counsel, Office of 

the General Counsel, Farm Credit 

Administration, McLean, VA 22102–

5090, (703) 883–4020, TTY (703) 883–

4020. 

SUPPLEMENTARY INFORMATION: 

I. Purpose 

The purpose of this proposed rule is 

to revise the risk-based capital (RBC) 

regulations that apply to Farmer Mac. 

The substantive issues addressed in this 

Federal Register / Vol. 70, No. 221 / Thursday, November 17, 2005 / Proposed Rules 69693 

1This includes loan data where certain 

origination data are not collected by Farmer Mac as 

well as other data anomalies or ambiguous loan 

data. 2United States General Accounting Office, 

Farmer Mac: Some Progress Made, but Greater 

Attention to Risk Management, Mission, and 

Corporate Governance Is Needed, GAO–04–116 

(2003). At the time of the report’s publication, the 

GAO was known as the General Accounting Office. 

proposed rule are: Miscellaneous 

income estimates, operating expense 

estimates, counterparty risk on nonprogram investments, the resolution 

timing for troubled loans and associated 

carrying costs, the treatment for income 

related to gain on sale of agricultural 

mortgage-backed securities (AMBS), the 

treatment of certain loan data for 

modeling purposes,1 and the estimation 

of credit risk in the Long-Term Standby 

Purchase Commitment (Standby) 

portfolio. 

The RBC rule contains language that 

anticipates the need for continuing 

changes to the model over time in an 

effort to adapt the model to Farmer 

Mac’s actual operations on an on-going 

basis to the extent practicable. The 

Office of Secondary Market Oversight 

(OSMO) is also interested in updating 

the model in future rulemakings to 

respond to opportunities created by the 

continued evolution in techniques 

available for modeling risk-based capital 

requirements. 

Further, consistent with the FCA 

Chairman and Chief Executive Officer’s 

(CEO) letter to Congress on actions 

taken or to be taken in response to the 

Government Accountability Office 

(GAO) report entitled, ‘‘Farmer Mac: 

Some Progress Made, but Greater 

Attention to Risk Management, Mission, 

and Corporate Governance Is Needed’’

(Report),2 the regulatory development 

process also included consideration of 

all comments and recommendations in 

the Report pertaining to the RBCST. 

II. Background 

Analysis of the Farmer Mac RBCST 

since its first official submission as of 

June 30, 2002, has identified several 

opportunities to update the model in 

response to changing financial markets, 

new business practices and from the 

evolution of the loan portfolio at Farmer 

Mac, as well as continued development 

of best-industry practices among leading 

financial institutions. We have divided 

the changes into two broad categories 

that we label ‘‘technical’’ and 

‘‘substantive.’’ Technical changes are 

those we may implement without 

rulemaking and that do not require FCA 

Board action. We incorporated several 

such technical changes in December 

2002, June 2004, and August 2005, and 

implemented them as Versions 1.1, 1.2, 

and 1.25 of the RBCST, respectively. 

These technical changes, and other Call 

Report-related changes, are detailed 

later in this preamble. This proposed 

rule makes substantive changes that 

require formal rulemaking procedures 

and FCA Board approval to implement. 

III. Objectives 

The FCA, through this proposed rule, 

seeks to update and refine the RBCST. 

Our goal is to ensure that the RBCST 

reflects changes in the Corporation’s 

business structure and loan portfolio 

that have occurred since the model was 

originally developed by FCA, while 

complying with the statutory 

requirements and constraints on the 

model’s design. 

IV. Overview 

The changes are summarized below. 

A. Modify the RBCST’s treatment of 

loans for which Farmer Mac does not 

collect certain loan origination data 

required by the model because of the 

loan product type and related 

underwriting requirements (e.g., 

seasoned and fast-track loans). The 

proposed revision would use loan proxy 

data to estimate loan level losses rather 

than applying state-level average loss 

rates to such loans. The proposed 

revision also includes the use of data 

proxies when certain data anomalies are 

identified or other ambiguous data 

conditions are present. 

B. Revise the treatment of Standby 

loans for which loan origination data 

needed by the model are available. 

Currently, the model treats all Standby 

loans as if they are seasoned loans for 

which the loan origination data needed 

for RBCST purposes are not available. 

Average loss rates by-state estimated 

from other loans are applied to Standby 

loans located in the same state. The 

proposed rule would improve the loss 

estimation method applied to Standby 

loans by applying an approach similar 

to that applied to the rest of the loan 

portfolio. 

C. Change the method used to 

estimate future years’ miscellaneous 

income from a fixed rate of 2 basis 

points of total assets to the 3-year 

average of the annualized actual 

miscellaneous income for each quarter 

as a percent of the sum of: Cash, 

investments, guaranteed securities, and 

loans held for investment. This change 

is consistent with the regulation’s goal 

to reflect Farmer Mac’s actual 

operations, as much as practicable. 

D. Revise the variables in the 

regression formula used to calculate 

operating expense coefficients to more 

completely reflect Farmer Mac’s cost. 

Operating expense coefficients are used 

to estimate future years’ operating 

expenses. 

E. Revise the model’s estimate of gain 

on sale of AMBS from a fixed rate of 

0.75 percent of new Farmer Mac I 

program volume to a rolling 3-year 

weighted average of actual gain levels 

experienced by Farmer Mac. 

F. Change the model’s assumption 

concerning loan loss resolution timing. 

The proposed revision reflects the stress 

associated with carrying costs on nonperforming loans based on Farmer Mac’s 

actual experience resolving troubled 

loans. 

G. Adjust the model’s estimate of 

income on non-program investments to 

reflect counterparty risk. We propose 

the application of discounts or 

‘‘haircuts’’ to the yields on individual 

investments, scaled according to their 

credit ratings. FCA’s consideration of 

such an adjustment was suggested in the 

October 2003 GAO Report. 

H. Publish all prior technical changes, 

including those implemented in 

December 2002 (RBCST Version 1.1), 

June 2004 (RBCST Version 1.2), and 

August 2005 (RBCST Version 1.25). 

I. Make other technical changes 

including improved formatting and 

clarity of labeling in certain cells of the 

RBCST worksheets and deletion of 

§ 652.100 which is no longer relevant as 

it dealt with the date the original final 

rule on the RBCST became effective. 

V. Issues, Options Considered, and 

Proposed Revisions 

We have identified several items that 

require regulatory attention to amend or 

clarify the final rule published on April 

12, 2001 (66 FR 19048). Below is a 

detailed explanation of all changes 

considered and proposed. 

1. Treatment of Loans for Which 

Origination Data Are Not Collected by 

Farmer Mac 

There is a significant portion of 

Farmer Mac’s portfolio for which loan 

origination data required by the model 

are not collected by Farmer Mac under 

its underwriting requirements. The 

RBCST was designed to use loan data at 

origination. While not always necessary 

for underwriting purposes, loan 

origination data is important to the 

functioning of the model. 

The RBCST uses a predictive equation 

to estimate the probability of default 

(PD) for each loan held or securitized by 

Farmer Mac as well as those underlying 

Standby contracts. The predictive 

equation is based on variables 

representing data at loan origination for 

each loan’s debt-to-asset ratio, current 

ratio, loan-to-value ratio (LTV), and debt 

service coverage ratio, as well as 

69694 Federal Register / Vol. 70, No. 221 / Thursday, November 17, 2005 / Proposed Rules 

inflation-adjusted loan size and worstcase rates of decline in farmland values. 

The PD estimated for each loan is 

combined with a loss-given-default 

estimate and loan size to determine 

expected loss. The loan loss is then 

adjusted for seasoning to account for a 

decline in PD as a loan ages. The RBCST 

then processes losses, together with 

other factors, to determine Farmer Mac’s 

risk-based capital requirement. This 

approach to estimating PDs requires 

data at loan origination for the financial 

variables associated with each loan. 

Currently, the RBCST separates 

Farmer Mac’s portfolio into two groups 

referred to as ‘‘Cash Window’’ loans and 

Standby loans. Cash Window loans are 

loans held for investment and loans that 

underlie guaranteed securities, and 

Standby loans are loans that underlie 

Standby contracts. This segmentation 

was originally made to reflect Farmer 

Mac’s business and loan underwriting 

practices when FCA developed the 

RBCST. At that time, Cash Window 

loans were newly originated full-time 

farm loans on which origination 

underwriting data were consistently 

available. Standby loans, on the other 

hand, were primarily highly seasoned 

Farm Credit System loans for which 

origination underwriting data were not 

available. Similarly, the business 

processes that pertain to Cash Window 

and Standby loans differed. Cash 

Window loans were generally processed 

by Farmer Mac on a loan-by-loan basis 

and held in a loan pool until sufficient 

volume was attained to permit 

securitization as an AMBS. Standby 

loans were largely underwritten on a 

pool basis and subject to a due diligence 

review. Therefore, the RBCST’s portfolio 

segmentation was designed to treat Cash 

Window loans and Standby loans 

differently to reflect their operational 

differences. In versions 1.25 and earlier, 

the RBCST directly applies the 

estimated loss rates to individual Cash 

Window loans. For Standby loans, the 

RBCST indirectly applies these rates to 

individual loans following the 

specialized treatment discussed below. 

During initial development of the 

RBCST in 1998, origination financial 

data were available on a majority 

(approximately 88 percent) of Farmer 

Mac’s Cash Window loans, excluding 

pre-1996 loans. Since then, Farmer 

Mac’s loan portfolio has evolved such 

that several of its loan products do not 

require collection of origination 

financial data. For instance, Farmer Mac 

has established specialized 

underwriting standards for Fast Track 

(i.e., reduced documentation loans), 

seasoned, and part-time farm loans that 

exclude the collection of certain 

origination loan data used for RBCST 

purposes in recognition of acceptable 

alternative underwriting criteria. Total 

growth in these loan types, especially 

seasoned loans, has outpaced other 

types in the years since the model was 

first designed. Due to this growth, the 

proportion of loans with incomplete 

underwriting data has increased. As a 

result, the current treatment of applying 

average state-level loss rates estimated 

from other loans within the portfolio is 

applied to a significant proportion of the 

total loan portfolio. We recognize that 

collecting origination financial data 

used for RBCST purposes on all loan 

products may be impractical. Therefore, 

we propose modifying the current 

treatment of such loans to apply loan 

data proxies that conservatively reflect 

Farmer Mac’s underwriting criteria and 

practices. 

In describing the revisions, we will 

first discuss revisions for Cash Window 

loans and address Standby loans in the 

following section of this preamble as a 

separate improvement to the RBCST. 

Under this proposed rule, the RBCST 

would substitute conservative proxies 

when the necessary loan origination 

data is unavailable. The conservative 

proxies reflect the higher end of the 

range of acceptable LTV and debt-toasset ratios, and the lower end of the 

range of acceptable debt service 

coverage (DSC) ratios according to 

Farmer Mac’s underwriting criteria. The 

proxy values to be applied are as 

follows: Debt-to-asset ratio of 0.60, LTV 

ratio of 0.70, and DSC ratio of 1.20. 

The conservative proxies relate 

directly to Farmer Mac’s underwriting 

standards thereby serving as another 

aspect of the proposed rule that draws 

on Farmer Mac’s actual operations to 

enhance the RBCST. Using conservative 

proxy data preserves the theoretical and 

structural integrity of the RBCST and 

maintains consistency with statutory 

requirements for a stressful, worst-case 

scenario. 

In addition, we propose application of 

the proxy data to data anomalies that 

occasionally occur in large sets of loan 

level data. Several conditions under 

which an anomaly would be identified 

are described in section 4.1, paragraph 

d.(3)(A) of the Technical Appendix to 

this proposed rule along with the proxy 

data that would be applied in each case. 

Other loan data adjustments would be 

made in response to certain unique 

situations. These deal with rare 

instances where an origination date 

field might be blank, purchase or 

commitment date fields are blank, or the 

original loan balance is less than the 

current scheduled loan balance. For 

example, if the original loan balance 

field is blank or is less than the 

scheduled loan balance, the RBCST will 

use the scheduled (current) loan balance 

for modeling purposes. In such cases, 

when alternative loan balance data are 

used, the RBCST will substitute the 

‘‘cut-off’’ date (i.e., the date the loan was 

guaranteed or placed under a Standby 

agreement) for the origination date for 

that loan for purposes of the seasoning 

adjustment. In addition, the model uses 

the cut-off date when the loan 

origination date field is blank for lack of 

any other data to use in the model’s 

seasoning adjustment. Because it would 

not be possible to compile an exhaustive 

list of data anomalies, the proposed rule 

reserves FCA’s authority to require an 

explanation from Farmer Mac on other 

data anomalies and to apply the proxy 

data to such data until the anomaly is 

addressed by Farmer Mac. 

2. Revise the Treatment of Standby 

Loans 

As discussed in the previous section, 

loans underlying a Standby agreement 

receive specialized treatment by the 

RBCST Versions 1.25 and earlier. Rather 

than modeling loan-specific data, the 

average state-level loss rates determined 

from the Cash Window loan portfolio 

are applied to Standby loans based on 

the state in which the property is 

located. The loans are then seasoned 

based on their age from origination date. 

We adopted this treatment in response 

to the characteristics of Standby loans at 

the time the RBCST was developed. At 

that time, nearly all Standby loans were 

seasoned and origination financial data 

were not readily or consistently 

available from the originating FCS 

institution. Because the volume of the 

Standby program was not high at the 

time we developed the RBCST, and 

because the Standby loans were 

generally highly seasoned, it was 

deemed appropriate to establish a 

separate treatment for Standby loans 

that based losses on loans estimated 

using the Cash Window portfolio. 

However, given the availability of the 

newly proposed data proxies described 

above, it is now deemed more 

appropriate to treat Standby loans in a 

similar manner to Cash Window loans 

when estimating credit risk. In addition, 

Farmer Mac’s Standby portfolio now 

includes more unseasoned loans for 

which loan origination data are 

available but are not currently used to 

estimate losses under the model’s 

current treatment of Standby loans. 

We propose to remove the specialized 

treatment of Standby loans and treat 

these loans in the same manner as Cash 

Window loans with the exception of 

seasoned Standby loans. Loans for 

Federal Register / Vol. 70, No. 221 / Thursday, November 17, 2005 / Proposed Rules 69695 

which origination data are available 

would be processed using those data. 

Standby loans for which origination 

data are not available or where data 

anomalies are identified would receive 

the same proxy data used for Cash 

Window loans. Seasoned Standby loans 

where data are available will receive the 

proxy data in light of Farmer Mac’s 

practice of populating origination data 

fields with ‘‘cut off’’ data for such loans. 

‘‘Cut off’’ data are data as of the date the 

loan was taken into Farmer Mac’s 

portfolio. As a result, the RBCST would 

apply the loss-frequency model and 

loss-severity factor to all loans both 

Standby and Cash Window. This change 

would yield a more complete measure 

of credit risk of unseasoned Standby 

loans and compensate for the 

uncertainty associated with missing 

data on Standby loans. 

3. Revise the Treatment of 

Miscellaneous Income 

Currently, the RBCST estimates 

Farmer Mac’s miscellaneous income 

over the 10 years of the model’s time 

horizon as 2 basis points of total assets. 

This estimate was considered adequate 

because it approximated the historical 

average over the years prior to the 

model’s development. Moreover, the 

amounts estimated were not significant. 

We propose to change the estimate of 

future years’ miscellaneous income to 

the 3-year weighted average of actual 

miscellaneous income in each quarter 

divided by that quarter’s actual sum of: 

Cash, investments, guaranteed 

securities, and loans held for 

investment. This change is consistent 

with the goal to reflect, as much as 

practicable, Farmer Mac’s actual 

operations on an on-going basis, as it 

will be updated quarterly with Farmer 

Mac’s most recent actual miscellaneous 

income experience. 

The benefits of this proposed change 

are that it will: 

(1) Build in an on-going adjustment to 

the estimate based on recent experience; 

(2) Be easily understood; 

(3) Add transparency to the 

miscellaneous income estimate; and 

(4) Be consistent with the current 

rule’s intent to simulate Farmer Mac’s 

operations to the maximum extent 

practicable. 

4. Revise the Treatment of Gain on Sale 

of AMBS 

The proposed rule revises the 

methodology used to estimate future 

years’ gains on the sale of AMBS, thus 

improving the model’s ability to reflect 

Farmer Mac’s current operations on an 

on-going basis. Previously, the model 

credited Farmer Mac with income of 

0.75 percent of new Farmer Mac I 

program volume as estimated by the 

backfilling of loan volume in 

accordance with the steady-state 

scenario. However, recent trends in 

Farmer Mac’s operations demonstrate 

that AMBS sales are more sporadic. The 

revised approach reflects the gain rates 

most recently experienced in Farmer 

Mac’s operations by establishing a new 

input in the Data Inputs worksheet for 

‘‘Gain Rate on AMBS Sales’’ and 

applying that gain rate factor (expressed 

as the actual gain as a percentage of the 

par value of the AMBS sold) to the 

dollar amount of AMBS sold during the 

most recent 4 quarters. Applying the 3- 

year gain rate factor to the most recent 

4 quarters of activity appropriately 

smoothes the variability in Farmer 

Mac’s sales of AMBS for RBCST 

purposes. 

5. Revise the Operating Expense 

Regression Equation 

The RBCST currently uses a 

regression equation to estimate 

operating expenses in future years that 

relates historic Farmer Mac operating 

expenses to a constructed variable 

reflecting loan and investment volumes. 

The goal is to accurately reflect costs 

associated with operating Farmer Mac 

as its program balances and investment 

levels change without being overly 

influenced by random variations that 

can reasonably occur in any given 

quarter. The structural model for 

estimating operating expenses was 

developed soon after the 1996 

legislation that resulted in Farmer Mac’s 

current business structure. As a result, 

the historic data can be divided into two 

time periods—with one time period 

representing activity prior to their 

ability to pool whole loans and hold 

loans on their balance sheet, and a 

second period with their business 

activities focused more directly and 

actively on loan-based activities. The 

data from the latter period had much 

higher cost structures than the former. 

To accommodate the data structure 

while retaining the longest sample 

period possible, a specification was 

adopted that included pre-1996 data 

with a dummy variable that permitted 

an intercept shift or, equivalently, as 

two segments of the regression with a 

‘‘jump’’ in the fitted line at the point of 

the changes in cost structure related to 

the 1996 legislation. Additionally, it 

seemed reasonable to consider a 

structure that recognized economies of 

scale, assuming incremental business 

additions could be underwritten at 

lower marginal costs. As a result, a 

structure was adopted relating the 

logarithm of the sum of loans and 

investments to actual operating 

expenses with a dummy variable 

separating the pre- and post-1996 data 

periods. 

Considerable data have accumulated 

since the operating expense regression 

was developed. Therefore, it is 

appropriate to develop a more complete 

representation of Farmer Mac’s business 

activities at this point. We have 

considered: (a) The appropriate historic 

data period, (b) specific business 

segments and activities to include as 

explanatory variables, (c) the potential 

for seasonality in the expense structure, 

(d) the potential automation of the 

estimation of the coefficients within the 

RBCST, and (e) the need to utilize 

existing data structures and accounting 

conventions to the degree reasonable 

(i.e., the potential difficulty with 

reconstructing some historic data series 

related to changed business segments). 

The Agency believes that a more 

complete characterization of the 

expense structure of Farmer Mac can be 

specified by separating the business 

activities that contribute to variation in 

annualized expenses into: 

(i) On-balance sheet investments, 

(ii) On-balance sheet guaranteed 

securities, 

(iii) The sum of off-balance sheet 

loans in the Farmer Mac I and Farmer 

Mac II programs, and 

(iv) Gross real estate owned (REO). 

The use of the multiple regressors 

obviates the need for the dummy 

variable. The inclusion of REO captures 

a possible high-cost segment of their 

business and provides a direct linkage 

between problem loans and higher 

operating costs. To reflect economies of 

scale, the independent variables are 

expressed on a logarithmic scale. The 

proposed specification and attendant 

revision in the RBCST utilize the 

following expression: 

Expensest = a + b1ln(OnFt) + 

b2ln(OnGSt) + b3ln(OnIt + OffIIt) + 

b4ln(OnREOt) 

Where ‘‘t’’ indicates time period in the 

model, ‘‘OnF’’ represents on-balance 

sheet investments, ‘‘OnGS’’ represents 

on-balance sheet guaranteed securities, 

‘‘OffI’’ and ‘‘OffII’’ represent off-balance 

sheet Farmer Mac I and II program 

loans, respectively, and ‘‘REO’’

represents gross real-estate owned. The 

in-sample fit is improved with this 

specification relative to the previously 

required approach for comparable data 

periods. Tests of the appropriate sample 

period for estimation are roughly 

comparable when using either complete 

available sample period data or data 

from quarters after the 1996 legislation 

and the establishment of the RBC 

69696 Federal Register / Vol. 70, No. 221 / Thursday, November 17, 2005 / Proposed Rules 

3Farmer Mac provided data on historical problem 

loan resolution timing which were used by FCA to 

estimate the time interval for problem loan 

resolution. As additional data become available, 

FCA may recalculate the LLRT interval. 

4The LLRT period is equal to the period of time 

in excess of the portion of carrying costs already 

assumed in the RBCST’s loss-severity rate. The lossseverity rate is assumed to incorporate losses 

associated with a period of 1 year of carrying 

defaulted loans and, thus, the LLRT period is equal 

to the FCA-determined actual period minus one. 

5 Keenan, S., Carty L., Shtogrin I., ‘‘Historical 

Default Rates of Corporate Bond Issuers, 1920–

1997,’’ published by Moody’s Investor’s Services, 

February 1998. 

6Hickman, W. Braddock, ‘‘Corporate Bond 

Quality and Investor Experience,’’ A Study by the 

National Bureau of Economic Research, Princeton 

University Press, Princeton, 1955. 

requirement. As under the current 

RBCST, Farmer Mac must re-estimate 

the coefficients quarterly and supply the 

coefficients and worksheet as part of its 

quarterly submission. 

6. Improve Estimates of Carrying Costs 

of Troubled Loans by Revising 

Assumptions Regarding Loan Loss 

Resolution Timing 

The RBCST was 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. At the 

time of development of the RBCST, 

historical problem loan resolution 

timing data from Farmer Mac were not 

available. Farmer Mac data now indicate 

that problem loans may take longer to 

resolve than the 1 year assumed in the 

model’s loss-severity rate.3 If the time 

interval is longer than the current 

model’s assumption, the capital needs 

for carrying non-performing assets in 

the model are likely understated in the 

current model. Therefore, we propose to 

reflect costs associated with any 

additional loan loss resolution time 

(LLRT) period (i.e., the period beyond 

the 1-year period assumed in the lossseverity rate) in the model.4

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 problem 

loan volume with like assets, without 

recognizing any additional cost 

associated with carrying loans as nonearning, but funded, assets. Under the 

proposed rule, the RBCST will now 

reflect costs associated with the LLRT 

period. The change would be 

incorporated into the RBCST as follows. 

Off-balance sheet loans associated with 

losses are assumed to be purchased from 

the Standby portfolio and fully funded 

at the short-term cost of funds rate used 

in the model, and no associated 

guarantee fee is generated. The shortterm 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 (again 

adjusted to incorporate interest rate 

shock effects) for the LLRT period. 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 only be 

generated on performing loan 

guarantees and commitments. The LLRT 

becomes a line item in the Data Inputs 

worksheet. The initial LLRT will be set 

by FCA based on Farmer Mac historical 

data. The Corporation has not had a 

significant number of problem loans 

that have gone through the full 

resolution process from which to 

determine the LLRT for RBCST purpose. 

Nevertheless, the Agency has 

consistently designed the RBCST to 

reflect Farmer Mac data and its actual 

experience when available. The 

proposed treatment reflects the data 

currently available from Farmer Mac on 

the resolution of troubled loans. If 

Farmer Mac establishes a pattern of 

faster or slower resolution of troubled 

loans in the future, we will consider 

adjustments to the LLRT at that time. 

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 1 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 

required. An approach involving such a 

restatement was considered but deemed 

to add an unnecessary degree of 

complexity to the model. We note that 

the revision to more accurately reflect 

the carrying cost of non-performing 

loans results in less additional stress 

under a down-rate interest rate shock 

than under an up-rate shock. This result 

is logical as it would be less costly to 

fund non-performing loans when 

interest rates are relatively low. 

One further calculation is necessary to 

complete the proposed LLRT revision. 

Implementation of the LLRT revision 

requires an estimate of loan 

amortization to estimate the additional 

carrying cost associated with the LLRT 

period by applying the appropriate cost 

of funds to a loan’s remaining balance 

at the time of default. We use the 

portfolio average principal amortization 

to make this adjustment (i.e., total 

portfolio current scheduled principal 

balance divided by total origination 

balance). The LLRT scaling factor is 

calculated in the Credit Loss Module as 

the ratio of total portfolio current 

scheduled principal balance divided by 

total origination balance divided by the 

loss-severity factor (0.209). This 

approach results in the calculation of a 

stressed level of nonperforming loan 

volume based on the credit losses 

estimated by the RBCST. 

7. Add a Component To Reflect 

Counterparty Risk 

Currently, the RBCST does not 

include a component to reflect 

counterparty risk on Farmer Mac’s 

portfolio of investment securities, and 

derivatives. We propose adopting a 

system of haircuts to the yields on 

investment securities, scaled according 

to credit ratings—with greater haircuts 

applied to lower credit ratings. The riskbased capital regulations of the Office of 

Federal Housing Enterprise Oversight 

(OFHEO) (12 CFR part 1750) established 

a precedent for the levels of such 

haircuts. OFHEO defines five levels of 

credit ratings from ‘‘AAA’’ to ‘‘below 

BBB and unrated.’’ They assign each of 

the nationally recognized statistical 

rating organizations’ (NRSRO) rating 

categories to one of the four OFHEO 

general rating categories. With these 

definitions specified, rate haircuts are 

applied by OFHEO to the securities in 

the investment and derivatives 

portfolios of its regulated enterprises. 

In assessing the counterparty risk 

associated with non-program 

investments, OFHEO examined 

Depression-era default rates (1929 to 

1931) 5 and a study completed for the 

National Bureau of Economic Research 

(NBER) in the 1950’s.6 OFHEO’s haircut 

levels recognize recoveries on defaulted 

instruments, an adjustment that was 

also based on Depression-era data. Thus, 

haircut levels were derived based on 

default rates multiplied by severity 

rates. 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 

Federal Register / Vol. 70, No. 221 / Thursday, November 17, 2005 / Proposed Rules 69697 

7The 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. 

BBB, respectively. One hundred percent 

haircuts are applied to the ‘‘BBB or 

unrated’’ category. The haircuts are 

applied on a weighted-average basis as 

reductions in the weighted-average 

yields of non-program investment 

categories. 

We also considered OFHEO’s phasein of the haircuts and believe such a 

phase-in is appropriate for the RBCST as 

well. The rationale for the phase-in is 

based on the assumption that defaults 

on investments in response to a general 

downturn in the economy would not be 

instantaneous but on a more random 

basis through time. Therefore, the 

Agency proposes to phase-in the 

haircuts on a linear basis over the 

RBCST’s 10-year time horizon. Further, 

we elected not to assign the rating of a 

parent company to its unrated 

subsidiary. This treatment is consistent 

with the OFHEO rule, which defends 

this policy on the basis that (a) NRSROs 

will not impute a corporate parent’s 

rating to a derivative or credit 

enhancement counterparty in the 

context of a securities transaction, and 

(b) to extend that rating to the unrated 

subsidiary would be tantamount to the 

regulator rating the subsidiary. 

We propose to apply these haircuts 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 

proposal requires the Corporation to 

calculate the weighted-average haircut 

by investment category to be applied to 

the weighted-average yields for each 

investment category and 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 Technical Appendix. 

Stress that impacts Farmer Mac would 

reasonably be expected to affect its 

terms of access to the swap market. 

Therefore, we considered adopting a 

similar haircut on derivative securities.7

However, while the OFHEO regulation 

applies haircuts to derivatives, we do 

not propose to do so at this time. Our 

reasoning is based on our preference for 

a different approach to haircutting 

derivatives that reflects lost payments 

from derivative securities in a netreceive position, as well as the 

additional expense associated with the 

replacement of derivative positions 

when the counterparty has defaulted 

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. The 

Agency will address this risk in future 

revisions of the RBCST and specifically 

requests comment on the most 

appropriate approach to incorporate 

such ‘‘replacement cost’’ risk into the 

RBCST. 

8. Provide Public Notice of Technical 

Changes to the RBCST 

In December 2002, the Agency 

modified the RBCST with four technical 

changes. The changes resulted in the 

release of FARMER MAC RBCST 

Version 1.1.xls, which was uploaded for 

public access on the FCA Web site in 

the same month and first used by 

Farmer Mac for its December 31, 2002, 

submission. FARMER MAC RBCST 

Version 1.2 incorporates an individual 

change to the calculation of regulatory 

capital held by Farmer Mac and was 

implemented in June 2004. FARMER 

MAC RBCST Version 1.25 completed 

the changes in Version 1.2 to fully 

accommodate the format of Farmer 

Mac’s balance sheet after its adoption of 

FASB Financial Interpretation 45 (FIN 

45) in August 2005. The changes are 

summarized below. 

(i) Added two line items in the Data 

Inputs worksheet for Real Estate Owned 

(REO), one for ‘‘gross’’ REO and the 

other ‘‘net’’ of allowances for losses on 

REO assets. This change in the RBCST 

balance sheet was made to adapt the 

model to the new balance sheet 

reporting format in Farmer Mac’s 

financial statements. The change also 

corrects the amount of REO that is 

captured in assets-subject-to-loss on the 

Loan and Cashflows worksheet. Gross 

REO, not net REO, is now added into 

assets-subject-to-loss. 

(ii) Corrected the ‘‘base-case’’ interest 

rate used in measuring interest rate risk 

on the Risk Measures worksheet. The 

Act requires that the model apply 

‘‘shocks’’ to current interest rates at the 

lesser of 600 basis points or 50 percent 

of average interest rates on Treasury 

obligations in order to gauge Farmer 

Mac’s sensitivity to interest rate risk. 

Previously, the model’s base-case was 

calculated applying the shock to the 12- 

month average Constant Maturity 

Treasury rate (CMT) instead of the 3- 

month average CMT as required by the 

regulation. The change makes the model 

more consistent with the language in the 

original regulation. 

(iii) Added the line item for ‘‘Gain/ 

Loss on Available for Sale Assets’’ in the 

balance sheet. The RBCST ignores these 

gains and losses for purposes of 

calculating income because they do not 

represent actual cash flows. However, 

they must be presented in the balance 

sheet to maintain balanced financial 

statements and for accuracy of 

disclosure. This changes only the 

presentation of the model’s balance 

sheet and has no impact on the 

regulatory capital requirement. 

(iv) Corrected the method of 

distributing credit losses over time. The 

formula to distribute losses on new loan 

volume previously allocated the impact 

of those losses over all 10 years of the 

model’s projected time horizon. For 

example, a small portion of losses on 

new loan volume in year 5 was 

recognized in years 1, 2, 3, and 4 of 

Version 1.0. The change correctly 

associates losses on each year’s 

estimated new loan originations across 

the remaining years in the 10-year 

period. 

(v) Recently, Farmer Mac changed the 

reporting format of its balance sheet in 

order to adopt the Financial Accounting 

Standards Board Interpretation No. 45 

(FIN 45). The change resulted in the 

RBCST misstating Farmer Mac’s 

regulatory capital held. To correct this, 

we inserted a new data element for 

Farmer Mac to submit in the Data Inputs 

worksheet of the RBCST, ‘‘Contingent 

obligation for probable losses under FIN 

45.’’ The new data input, combined 

with a new line item in the balance 

sheet for the contra-asset account 

‘‘Allowance for Loan Losses,’’ will 

permit the RBCST to correctly gross up 

Farmer Mac’s generally accepted 

accounting principles (GAAP) equity to 

calculate its regulatory capital held as 

follows: 

RCapital = EquityGAAP ¥ OCI + R + ALL 

+ C 

Where: 

RCapital = Regulatory Capital Held 

EquityGAAP = Equity according to GAAP 

OCI = Other Comprehensive Income 

R = Reserves for Loan Losses 

ALL = Allowance for Loan Losses 

C = Contingent obligation for Probable 

Losses under FIN45 

This change was implemented in June 

2004 as FARMER MAC RBCST Version 

1.2. 

(vi) FARMER MAC RBCST Version 

1.25 was implemented to complete the 

modifications necessary as a result of 

Farmer Mac’s reporting format changes 

after the adoption of FIN 45. It ensures 

that the income generator references the 

appropriate fractions of all relevant 

balance sheet accounts for purposes of 

projecting income over the model’s 10- 

year time horizon. 

69698 Federal Register / Vol. 70, No. 221 / Thursday, November 17, 2005 / Proposed Rules 

8 Duncan, D. and M. Singer, ‘‘The Farm Credit 

System Crisis and Agency Security Yield-Spread 

Response’’ Agricultural Finance Review, 1992: 30–

42. 

(vii) Currently § 652.85(d) requires the 

RBCST to be submitted quarterly not 

later than the last business day of April 

for the quarter ended March 31, July for 

the quarter ended June 30, October for 

the quarter ended September 30, and 

January for the quarter ended December 

31. OSMO recently formally 

incorporated the RBCST submission 

into the Farmer Mac Call Report, which 

is due by the date of Farmer Mac’s filing 

of its quarterly Form 10–Q, or annual 

Form 10–K, with the Securities and 

Exchange Commission. Therefore, we 

propose to revise the rule by changing 

the RBCST submission deadline as 

follows. The RBCST submission will be 

due on the date of the filing of Farmer 

Mac’s SEC Form 10–Q or 10–K, but no 

later than the 40th day after the 

quarter’s ending March 31, June 30, and 

September 30, and the 60th day after the 

quarter ending on December 30. This 

technical change was implemented in 

the Call Report submitted for the first 

quarter of 2004. 

9. Stressed-Based Cost of Funds 

Increment 

It is reasonable to assume that a crisis 

in the agriculture sector that generates 

worst-case historical loan loss levels 

would have an impact on Farmer Mac’s 

cost of funds. We considered alternative 

approaches to reflect the possible 

impact on funding spreads of significant 

stress to FAMC. For example, the cost 

of funds data used in the RBCST could 

be adjusted to correspond to the 

maximum spreads over U.S. Treasury 

securities of comparable maturity that 

were experienced by the Farm Credit 

System during the worst-case credit risk 

conditions of the 1980s. According to 

findings of Duncan and Singer, the 

worst-case historical stressful spreads 

over treasuries for comparable maturity 

Farm Credit System issuances were 138 

basis points for 6-month securities, 130 

basis points for 1-year securities, 115 

basis points for 3-year securities, and 95 

basis points for 5-year securities.8

The spreads in the RBCST could 

reflect these increased levels with an 

adjustment to account for Farmer Mac’s 

current holdings of non-program 

investments relative to those held by the 

FCS institutions at the time of 

maximum stress. 

FCA requests specific comments on 

an appropriate methodology to add 

stress to funding spreads in the RBCST. 

In particular, we request suggestions on 

how best to incorporate differences in 

the relative risk in the portfolios of the 

FCS and Farmer Mac as it relates to 

expected cost of funds differences 

between the two entities, including how 

one might scale the on-going changes in 

the risk of Farmer Mac’s portfolio to 

moderate or amplify the stressful cost of 

funds spread. 

10. Recognition of Risk on AgVantage 

Bonds 

We considered applying the haircuts 

on non-program investments to 

AgVantage bonds because, despite their 

status as program assets, they exhibit 

many characteristics of investment 

securities. The model does not currently 

recognize risk associated with these 

assets or the loan collateral associated 

with them. We rejected that approach 

because AgVantage bonds are securities 

representing an interest in a pool of 

qualified loans. The statute requires 

losses on such loans to be estimated in 

a manner similar to the credit risk on 

other program assets. 

AgVantage bonds are secured by 

either a general pledge of collateral that 

constitutes a representation and 

warranty of the availability of 

unencumbered qualified loan assets, or 

a specific pledge of qualified loans 

which, however, may be freely 

substituted at any time. Submitting 

loan-level data on AgVantage loan 

collateral for loss estimation is either 

not possible for lack of specifically 

identified loans, or subject to inaccuracy 

due to specific loans being replaced at 

any time, or simply impractical in terms 

of cost. The AgVantage program 

accounts for a very small portion of total 

program loan volume, and the proposed 

rule makes no change to the treatment 

of AgVantage assets. However, we 

specifically request comment on the 

question of how best to modify the 

RBCST in future rulemakings to 

consider the risk of AgVantage bonds. 

11. Impact of Proposed Changes on 

Required Capital 

We evaluated the impact of the 

proposed changes to the currently active 

version of the model, Version 1.25. Our 

tests indicated that changes related to 

the data proxies, the treatment of 

Standby loan portfolio, and the LLRT 

would have the most significant impact 

on minimum regulatory capital 

calculated by the model. The table 

below provides an indication of the 

impact of the revisions in the quarter 

ended June 30, 2005. Lines 1 through 6 

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 June 30, 

2005, compared to the minimum 

requirement calculated using the 

currently active Version 1.25. Line 7 

presents the impact of all proposed 

revisions in Version 2.0. As the table 

shows, the individual change 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 2.0. 

Calculated Regulatory Minimum Capital 6/30/2005 Difference 

RBCST Version 1.25 (calculated as of 6/30/2005) 49,605 

RBCST 2.0 Individual Change Impacts: 

(1) CLM Changes: Data Proxies and Standby Treatment ............................................................................... 75,665 26,060 

(2) Miscellaneous Income Treatment ............................................................................................................... 45,468 (4,137) 

(3) Gain on Sale of AMBS ............................................................................................................................... 49,605 ........................

(4) Investment Haircuts .................................................................................................................................... 51,737 2,131 

(5) Loan Loss Resolution Timing (LLRT) ......................................................................................................... 76,956 27,350 

(6) Operating Expenses ................................................................................................................................... 59,063 9,458 

(7) Total RBCST Version 2.0 Impact ............................................................................................................... 123,529 73,924 

As shown in the table, 

implementation of the LLRT carrying 

costs and application of the data proxies 

result in the greatest impact on the 

calculated risk-based capital 

requirements. The impact of using loan 

data proxies reflects the conservative 

nature of the proxies and to the 

modeling of all loans in the portfolio 

Federal Register / Vol. 70, No. 221 / Thursday, November 17, 2005 / Proposed Rules 69699 

compared to the current approach of 

applying state-level loss estimated from 

certain loans to loan where loan 

origination data are unavailable. The 

table also indicates that increases in the 

LLRT period result in greater capital 

needs to offset the income and expense 

effects of carrying nonperforming loan 

volume. The other proposed changes 

create a more comprehensive 

representation of Farmer Mac operations 

for RBCST purposes, though they are 

not as significant in their impact. 

12. Change to Disclosure Regulations 

We are also proposing one change to 

the disclosure regulations in § 655.50(c). 

We propose to remove the word 

‘‘should’’ and replace it with ‘‘must’’ to 

clarify that Farmer Mac must provide 

FCA with a copy of substantive 

correspondence it files with the 

Securities and Exchange Commission. 

VI. 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 them as small entities. 

Therefore, Farmer Mac is not considered 

a ‘‘small entity’’ as defined in the 

Regulatory Flexibility Act. 

List of Subjects 

12 CFR Part 652 

Agriculture, Banks, Banking, Capital, 

Investments, Rural areas. 

12 CFR Part 655 

Accounting, Agriculture, Banks, 

Banking, Accounting and reporting 

requirements, Disclosure and reporting 

requirements, Rural areas. 

For the reasons stated in the 

preamble, parts 652 and 655 of chapter 

VI, title 12 of the Code of Federal 

Regulations are proposed to be amended 

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. 

2. Add subpart B to part 652 to read 

as follows: 

Subpart B—Risk-Based Capital 

Requirements 

Sec. 

652.50 Definitions. 

652.55 General. 

652.60 Corporation board guidelines. 

652.65 Risk-based capital stress test. 

652.70 Risk-based capital level. 

652.75 Your responsibility for determining 

the risk-based capital level. 

652.80 When you must determine the riskbased capital level. 

652.85 When to report the risk-based 

capital level. 

652.90 How to report your risk-based 

capital determination. 

652.95 Failure to meet capital requirements. 

652.100 Audit of the risk-based capital 

stress test. 

Appendix A—Subpart B of Part 652—RiskBased Capital Stress Test 

§ 652.50 Definitions. 

For purposes of this subpart, the 

following definitions will apply: 

Farmer Mac, Corporation, you, and 

your means the Federal Agricultural 

Mortgage Corporation and its affiliates 

as defined in subpart A of this part. 

Our, us, or we means the Farm Credit 

Administration. 

Regulatory capital means the sum of 

the following as determined in 

accordance with generally accepted 

accounting principles: 

(1) The par value of outstanding 

common stock; 

(2) The par value of outstanding 

preferred stock; 

(3) Paid-in capital, which is the 

amount of owner investment in Farmer 

Mac in excess of the par value of stock; 

(4) Retained earnings; and, 

(5) Any allowances for losses on loans 

and guaranteed securities. 

Risk-based capital means the amount 

of regulatory capital sufficient for 

Farmer Mac to maintain positive capital 

during a 10-year period of stressful 

conditions as determined by the riskbased capital stress test described in 

§ 652.65. 

§ 652.55 General. 

You must hold risk-based capital in 

an amount determined in accordance 

with this subpart. 

§ 652.60 Corporation board guidelines. 

(a) Your board of directors is 

responsible for ensuring that you 

maintain total capital at a level that is 

sufficient to ensure continued financial 

viability and provide for growth. In 

addition, your capital must be sufficient 

to meet statutory and regulatory 

requirements. 

(b) No later than 65 days after the 

beginning of Farmer Mac’s planning 

year, your board of directors must adopt 

an operational and strategic business 

plan for at least the next 3 years. The 

plan must include: 

(1) A mission statement; 

(2) A review of the internal and 

external factors that are likely to affect 

you during the planning period; 

(3) Measurable goals and objectives; 

(4) Forecasted income, expense, and 

balance sheet statements for each year of 

the plan; and 

(5) A capital adequacy plan. 

(c) The capital adequacy plan must 

include capital targets necessary to 

achieve the minimum, critical and riskbased capital standards specified by the 

Act and this subpart as well as your 

capital adequacy goals. The plan must 

address any projected dividends, equity 

retirements, or other action that may 

decrease your capital or its components 

for which minimum amounts are 

required by this subpart. You must 

specify in your plan the circumstances 

in which stock or equities may be 

retired. In addition to factors that must 

be considered in meeting the statutory 

and regulatory capital standards, your 

board of directors must also consider at 

least the following factors in developing 

the capital adequacy plan: 

(1) Capability of management; 

(2) Strategies and objectives in your 

business plan; 

(3) Quality of operating policies, 

procedures, and internal controls; 

(4) Quality and quantity of earnings; 

(5) Asset quality and the adequacy of 

the allowance for losses to absorb 

potential losses in your retained 

mortgage portfolio, securities 

guaranteed as to principal and interest, 

commitments to purchase mortgages or 

securities, and other program assets or 

obligations; 

(6) Sufficiency of liquidity and the 

quality of investments; and, 

(7) Any other risk-oriented activities, 

such as funding and interest rate risks, 

contingent and off-balance sheet 

liabilities, or other conditions 

warranting additional capital. 

§ 652.65 Risk-based capital stress test. 

You will perform the risk-based 

capital stress test as described in 

summary form below and as described 

in detail in Appendix A to this subpart. 

The risk-based capital stress test 

spreadsheet is also available 

electronically at http://www.fca.gov. 

The risk-based capital stress test has five 

components: 

(a) Data requirements. You will use 

the following data to implement the 

risk-based capital stress test. 

(1) You will use Corporation loanlevel data to implement the credit risk 

component of the risk-based capital 

stress test. 

69700 Federal Register / Vol. 70, No. 221 / Thursday, November 17, 2005 / Proposed Rules 

(2) You will use Call Report data as 

the basis for Corporation data over the 

10-year stress period supplemented 

with your interest rate risk 

measurements and tax data. 

(3) You will use other data, including 

the 10-year Constant Maturity Treasury 

(CMT) rate and the applicable Internal 

Revenue Service corporate income tax 

schedule, as further described in 

Appendix A to this subpart. 

(b) Credit risk. The credit risk part 

estimates loan losses during a period of 

sustained economic stress. 

(1) For each loan in the Farmer Mac 

I portfolio, you will determine a default 

probability by using the logit functions 

specified in Appendix A to this subpart 

with each of the following variables: 

(i) Borrower’s debt-to-asset ratio at 

loan origination; 

(ii) Loan-to-value ratio at origination, 

which is the loan amount divided by the 

value of the property; 

(iii) Debt-service-coverage ratio at 

origination, which is the borrower’s net 

income (on- and off-farm) plus 

depreciation, capital lease payments, 

and interest, less living expenses and 

income taxes, divided by the total term 

debt payments; 

(iv) The origination loan balance 

stated in 1997 dollars based on the 

consumer price index; and, 

(v) The worst-case percentage change 

in farmland values (23.52 percent). 

(2) You will then calculate the loss 

rate by multiplying the default 

probability for each loan by the 

estimated loss-severity rate, which is the 

average loss of the defaulted loans in the 

data set (20.9 percent). 

(3) You will calculate losses by 

multiplying the loss rate by the 

origination loan balances stated in 1997 

dollars. 

(4) You will adjust the losses for loan 

seasoning, based on the number of years 

since loan origination, according to the 

functions in Appendix A to this subpart. 

(5) The losses must be applied in the 

risk-based capital stress test as specified 

in Appendix A to this subpart. 

(c) Interest rate risk. (1) During the 

first year of the stress period, you will 

adjust interest rates for two scenarios, 

an increase in rates and a decrease in 

rates. You must determine your riskbased capital level based on whichever 

scenario would require more capital. 

(2) You will calculate the interest rate 

stress based on changes to the quarterly 

average of the 10-year CMT. The starting 

rate is the 3-month average of the most 

recent CMT monthly rate series. To 

calculate the change in the starting rate, 

determine the average yield of the 

preceding 12 monthly 10-year CMT 

rates. Then increase and decrease the 

starting rate by: 

(i) 50 percent of the 12-month average 

if the average rate is less than 12 

percent; or 

(ii) 600 basis points if the 12-month 

average rate is equal to or higher than 

12 percent. 

(3) Following the first year of the 

stress period, interest rates remain at the 

new level for the remainder of the stress 

period. 

(4) You will apply the interest rate 

changes scenario as indicated in 

Appendix A to this subpart. 

(5) You may use other interest rate 

indices in addition to the 10-year CMT 

subject to our concurrence, but in no 

event can your risk-based capital level 

be less than that determined by using 

only the 10-year CMT. 

(d) Cashflow generator. (1) You must 

adjust your financial statements based 

on the credit risk inputs and interest 

rate risk inputs described above to 

generate pro forma financial statements 

for each year of the 10-year stress test. 

The cashflow generator produces these 

financial statements. You may use the 

cashflow generator spreadsheet that is 

described in Appendix A to this subpart 

and available electronically at http:// 

www.fca.gov. You may also use any 

reliable cashflow program that can 

develop or produce pro forma financial 

statements using generally accepted 

accounting principles and widely 

recognized financial modeling methods, 

subject to our concurrence. You may 

disaggregate financial data to any greater 

degree than that specified in Appendix 

A to this subpart, subject to our 

concurrence. 

(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. 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. 

(3) You must simulate annual pro 

forma balance sheets and income 

statements in the risk-based capital 

stress test using Farmer Mac’s starting 

position, the credit risk and interest rate 

risk components, resulting cashflow 

outputs, current operating strategies and 

policies, and other inputs as shown in 

Appendix A to this subpart and the 

electronic spreadsheet available at 

http://www.fca.gov. 

(e) Calculation of capital requirement. 

The calculations that you must use to 

solve for the starting regulatory capital 

amount are shown in Appendix A to 

this subpart and in the electronic 

spreadsheet available at 

http://www.fca.gov. 

§ 652.70 Risk-based capital level. 

The risk-based capital level is the sum 

of the following amounts: 

(a) Credit and interest rate risk. The 

amount of risk-based capital determined 

by the risk-based capital test under 

§ 652.65. 

(b) Management and operations risk. 

Thirty (30) percent of the amount of 

risk-based capital determined by the 

risk-based capital test in § 652.65. 

§ 652.75 Your responsibility for 

determining the risk-based capital level. 

(a) You must determine your riskbased capital level using the procedures 

in this subpart, Appendix A to this 

subpart, and any other supplemental 

instructions provided by us. You will 

report your determination to us as 

prescribed in § 652.90. At any time, 

however, we may determine your riskbased capital level using the procedures 

in § 652.65 and Appendix A to this 

subpart, and you must hold risk-based 

capital in the amount we determine is 

appropriate. 

(b) You must at all times comply with 

the risk-based capital levels established 

by the risk-based capital stress test and 

must be able to determine your riskbased capital level at any time. 

(c) If at any time the risk-based capital 

level you determine is less than the 

minimum capital requirements set forth 

in section 8.33 of the Act, you must 

maintain the statutory minimum capital 

level. 

§ 652.80 When you must determine the 

risk-based capital level. 

(a) You must determine your riskbased capital level at least quarterly, or 

whenever changing circumstances occur 

that have a significant effect on capital, 

such as exposure to a high volume of, 

or particularly severe, problem loans or 

a period of rapid growth. 

(b) In addition to the requirements of 

paragraph (a) of this section, we may 

require you to determine your riskbased capital level at any time. 

(c) If you anticipate entering into any 

new business activity that could have a 

significant effect on capital, you must 

determine a pro forma risk-based capital 

level, which must include the new 

business activity, and report this pro 

forma determination to the Director, 

Federal Register / Vol. 70, No. 221 / Thursday, November 17, 2005 / Proposed Rules 69701 

Office of Secondary Market Oversight, at 

least 10-business days prior to 

implementation of the new business 

program. 

§ 652.85 When to report the risk-based 

capital level. 

(a) You must file a risk-based capital 

report with us each time you determine 

your risk-based capital level as required 

by § 652.80. 

(b) You must also report to us at once 

if you identify in the interim between 

quarterly or more frequent reports to us 

that you are not in compliance with the 

risk-based capital level required by 

§ 652.70. 

(c) If you make any changes to the 

data used to calculate your risk-based 

capital requirement that cause a 

material adjustment to the risk-based 

capital level you reported to us, you 

must file an amended risk-based capital 

report with us within 5-business days 

after the date of such changes; 

(d) You must submit your quarterly 

risk-based capital report for the last day 

of the preceding quarter not later than 

the last business day of April, July, 

October, and January of each year. 

§ 652.90 How to report your risk-based 

capital determination. 

(a) Your risk-based capital report must 

contain at least the following 

information: 

(1) All data integral for determining 

the risk-based capital level, including 

any business policy decisions or other 

assumptions made in implementing the 

risk-based capital test; 

(2) Other information necessary to 

determine compliance with the 

procedures for determining risk-based 

capital as specified in Appendix A to 

this subpart; and, 

(3) Any other information we may 

require in written instructions to you. 

(b) You must submit each risk-based 

capital report in such format or 

medium, as we require. 

§ 652.95 Failure to meet capital 

requirements. 

(a) Determination and notice. At any 

time, we may determine that you are not 

meeting your risk-based capital level 

calculated according to § 652.65, your 

minimum capital requirements 

specified in section 8.33 of the Act, or 

your critical capital requirements 

specified in section 8.34 of the Act. We 

will notify you in writing of this fact 

and the date by which you should be in 

compliance (if applicable). 

(b) Submission of capital restoration 

plan. Our determination that you are 

not meeting your required capital levels 

may require you to develop and submit 

to us, within a specified time period, an 

acceptable plan to reach the appropriate 

capital level(s) by the date required. 

§ 652.100 Audit of the risk-based capital 

stress test. 

You must have a qualified, 

independent external auditor review 

your implementation of the risk-based 

capital stress test every 3 years and 

submit a copy of the auditor’s opinion 

to us. 

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 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. 

1.0 Introduction 

a. Appendix A provides details about the 

risk-based capital stress test (stress test) for 

Farmer Mac. The stress test calculates the 

risk-based capital level required by statute 

under stipulated conditions of credit risk and 

interest rate risk. The stress test uses loanlevel data from Farmer Mac’s agricultural 

mortgage portfolio or proxy data as described 

in section 4.1d.(3) below, as well as quarterly 

Call Report and related information to 

generate pro forma financial statements and 

calculate a risk-based capital requirement. 

The stress test also uses historic agricultural 

real estate mortgage performance data, 

relevant economic variables, and other inputs 

in its calculations of Farmer Mac’s capital 

needs over a 10-year period. 

b. Appendix A establishes the 

requirements for all components of the stress 

test. The key components of the stress test 

are: Specifications of credit risk, interest rate 

risk, the cashflow generator, and the capital 

calculation. Linkages among the components 

ensure that the measures of credit and 

interest rate risk pass into the cashflow 

generator. The linkages also transfer 

cashflows through the financial statements to 

represent values of assets, liabilities, and 

equity capital. The 10-year projection is 

designed to reflect a steady state in the scope 

and composition of Farmer Mac’s assets. 

2.0 Credit Risk 

Loan loss rates are determined by applying 

loss-frequency and loss-severity equations to 

Farmer Mac loan-level data. From these 

equations, you must calculate loan losses 

under stressful economic conditions 

assuming Farmer Mac’s portfolio remains at 

a ‘‘steady state.’’ Steady state assumes the 

underlying characteristics and risks of 

Farmer Mac’s portfolio remain constant over 

the 10 years of the stress test. Loss rates are 

computed from estimated dollar losses for 

use in the stress test. The loan volume 

subject to loss throughout the stress test is 

then multiplied by the loss rate. Lastly, the 

stress test allocates losses to each of the 10 

years assuming a time pattern for loss 

occurrence as discussed in section 4.3, ‘‘Risk 

Measures.’’

2.1 Loss-Frequency and Loss-Severity 

Models 

a. Credit risks are modeled in the stress test 

using historical time series loan-level data to 

measure the frequency and severity of losses 

on agricultural mortgage loans. The model 

relates loss frequency and severity to loanlevel characteristics and economic conditions 

through appropriately specified regression 

equations to account explicitly for the effects 

of these characteristics on loan losses. Loan 

losses for Farmer Mac are estimated from the 

resulting loss-frequency equation combined 

with the loss-severity factor by substituting 

the respective values of Farmer Mac’s loanlevel data or proxy data as described in 

section 4.1d.(3) below, and applying stressful 

economic inputs. 

b. The loss-frequency equation and lossseverity factor were estimated from historical 

agricultural real estate mortgage loan data 

from the Farm Credit Bank of Texas (FCBT). 

Due to Farmer Mac’s relatively short history, 

its own loan-level data are insufficiently 

developed for use in estimating the default 

frequency equation and loss-severity factor. 

In the future, however, expansions in both 

the scope and historic length of Farmer Mac’s 

lending operations may support the use of its 

data in estimating the relationships. 

c. To estimate the equations, the data used 

included FCBT loans, which satisfied three 

of the four underwriting standards Farmer 

Mac currently uses (estimation data). The 

four standards specify: (1) The debt-to-assets 

ratio (D/A) must be less than 0.50, (2) the 

loan-to-value ratio (LTV) must be less than 

0.70, (3) the debt-service-coverage ratio 

(DSCR) must exceed 1.25, (4) and the current 

ratio (current assets divided by current 

liabilities) must exceed 1.0. Furthermore, the 

D/A and LTV ratios were restricted to be less 

than or equal to 0.85. 

d. Several limitations in the FCBT loanlevel data affect construction of the lossfrequency equation. The data contained loans 

that were originated between 1979 and 1992, 

but there were virtually no losses during the 

early years of the sample period. As a result, 

losses attributable to specific loans are only 

available from 1986 through 1992. In 

addition, no prepayment information was 

available in the data. 

e. The FCBT data used for estimation also 

included as performing loans, those loans 

that were re-amortized, paid in full, or 

merged with a new loan. Including these 

loans may lead to an understatement of lossfrequency probabilities if some of the reamortized, paid, or merged loans experience 

default or incur losses. In contrast, when the 

69702 Federal Register / Vol. 70, No. 221 / Thursday, November 17, 2005 / Proposed Rules 

1Excluding loans with defaults, 11,527 loans 

were active and 7,515 loans were paid in full, reamortized or merged as of 1992. A t-test 2 of the 

differences in the means for the group of defaulted 

loans and active loans indicated that active loans 

had significantly higher D/A and LTV ratios, and 

lower current ratios than defaulted loans where loss 

occurred. These results indicate that, on average, 

active loans have potentially higher risk than loans 

that were re-amortized, paid in full, or merged. 2Loss probability is likely to be more sensitive to 

changes in LTV at higher values of LTV. The power 

function provides a continuous relationship 

between LTV and defaults. 

3The dampening function reflects the declining 

effect that the maximum land value decline has on 

the probability of default when it occurs later in a 

loan’s life. 

4The nonlinear parameters for the variable 

transformations were simultaneously estimated 

using SAS version 8e NLIN procedure. The NLIN 

procedure produces estimates of the parameters of 

a nonlinear transformation for LTV, dampening 

factor, and loan-size variables. To implement the 

NLIN procedure, the loss-frequency equation and 

its variables are declared and initial parameter 

values supplied. The NLIN procedure is an iterative 

process that uses the initial parameter values as the 

starting values for the first iteration and continues 

to iterate until acceptable parameters are solved. 

The initial values for the power function and 

dampening function are based on the proposed rule. 

The procedure for the initial values for the size 

variable parameter is provided in an Excel 

spreadsheet posted at http://www.fca.gov. 

The Gauss-Newton method is the selected 

iterative solving process. As described in the 

preamble, the loss-frequency function for the 

nonlinear model is the negative of the loglikelihood function, thus producing maximum 

likelihood estimates. In order to obtain statistical 

properties for the loss-frequency equation and 

verify the logistic coefficients, the estimates for the 

nonlinear transformations are applied to the FCBT 

data and the loss-frequency model is re-estimated 

using the SAS Logistic procedure. The SAS 

procedures, output reports and Excel spreadsheet 

used to estimate the parameters of the lossfrequency equation are located on the Web site 

http://www.fca.gov. 

5Splett, N.S., P. J. Barry, B. Dixon, and P. 

Ellinger. ‘‘A Joint Experience and Statistical 

Approach to Credit Scoring,’’ Agricultural Finance 

Review, 54(1994):39–54. 

6Barry, P. J., P. N. Ellinger, J. A. Hopkin, and C. 

B. Baker. Financial Management in Agriculture, 5th 

ed., Interstate Publishers, 1995. 

7On- and off-balance sheet Farmer Mac I 

agricultural mortgage program assets booked after 

the 1996 Act amendments are subject to the loss 

calculation. 

8While the worst-case losses, based on 

origination year, occurred during 1983 and 1984, 

this benchmark was determined using annual land 

value changes that occurred 2 years later. 

9We calculated the weighted-average loss 

severity from the estimation data. 

loans that are re-amortized, paid in full, or 

merged are excluded from the analysis, the 

loss-frequency rates are overstated if a higher 

proportion of loans that are re-amortized, 

paid in full, or combined (merged) into a new 

loan are non-default loans compared to live 

loans.1

f. The structure of the historical FCBT data 

supports estimation of loss frequency based 

on origination information and economic 

conditions. Under an origination year 

approach, each observation is used only once 

in estimating loan default. The underwriting 

variables at origination and economic factors 

occurring over the life of the loan are then 

used to estimate loan-loss frequency. 

g. The final loss-frequency equation is 

based on origination year data and represents 

a lifetime loss-frequency model. The final 

equation for loss frequency is: 

p = 1/(1 + exp (¥(BX)) 

Where: 

BX = (¥12.62738) + 1.91259 · X1 + 

(¥0.33830) 

· X2/ (1 + 0.0413299)Periods + (¥0.19596) · X3

+ 4.55390 

· (1¥exp ((¥0.00538178) · X4) + 2.49482 · X5

Where: 

• p is the probability that a loan defaults and 

has positive losses (Pr (Y=1 | x)); 

• X1 is the LTV ratio at loan origination 

raised to the power 5.3914596; 2

• X2 is the largest annual percentage decline 

in FCBT farmland values during the life of 

the loan dampened with a factor of 

0.0413299 per year; 3

• X3 is the DSCR at loan origination 

• X4 is 1 minus the exponential of the 

product of negative 0.00538178 and the 

original loan balance in 1997 dollars 

expressed in thousands; and 

• X5 is the D/A ratio at loan origination. 

h. The estimated logit coefficients and pvalues are: 4

Coefficients p-value 

Intercept ......................................................................................................................................................................... ¥12.62738 <0.0001 

X1: LTV variable ............................................................................................................................................................. 1.91259 0.0001 

X2: Max land value decline variable .............................................................................................................................. 0.33830 <0.0001 

X3: DSCR ....................................................................................................................................................................... ¥0.19596 0.0002 

X4: Loan size variable .................................................................................................................................................... 4.55390 <0.0001 

X5: D/A ratio ................................................................................................................................................................... 2.49482 <0.0000 

i. The low p-values on each coefficient 

indicate a highly significant relationship 

between the probability ratio of loan-loss 

frequency and the respective independent 

variables. Other goodness-of-fit indicators 

are: 

Hosmer and Lemeshow goodness-of-fit pvalue—0.1718 

Max-rescaled R2—0.2015 

Concordant—85.2% 

Disconcordant—12.0% 

Tied—2.8% 

j. These variables have logical relationships 

to the incidence of loan default and loss, as 

evidenced by the findings of numerous 

credit-scoring studies in agricultural 

finance.5 Each of the variable coefficients has 

directional relationships that appropriately 

capture credit risk from underwriting 

variables and, therefore, the incidence of 

loan-loss frequency. The frequency of loan 

loss was found to differ significantly across 

all of the loan characteristics and lending 

conditions. Farmland values represent an 

appropriate variable for capturing the effects 

of exogenous economic factors. It is 

commonly accepted that farmland values at 

any point in time reflect the discounted 

present value of expected returns to the 

land.6 Thus, changes in land values, as 

expressed in the loss-frequency equation, 

represent the combined effects of the level 

and growth rates of farm income, interest 

rates, and inflationary expectations—each of 

which is accounted for in the discounted, 

present value process. 

k. When applying the equation to Farmer 

Mac’s portfolio, you must get the input 

values for X1, X3, X4, and X5 for each loan 

in Farmer Mac’s portfolio on the date at 

which the stress test is conducted, using 

either submitted data or proxy data as 

described in section 4.1 d.(3) below. For the 

variable X2, the stressful input value from the 

benchmark loss experience is ¥23.52 

percent. You must apply this input to all 

Farmer Mac loans subject to loss to calculate 

loss frequency under stressful economic 

conditions.7 The maximum land value 

decline from the benchmark loss experience 

is the simple average of annual land value 

changes for Iowa, Illinois, and Minnesota for 

the years 1984 and 1985.8

l. Forecasting with data outside the range 

of the estimation data requires special 

treatment for implementation. While the 

estimation data embody Farmer Mac values 

for various loan characteristics, the 

maximum farmland price decline 

experienced in Texas was ¥16.69 percent, a 

value below the benchmark experience of 

¥23.52 percent. To control for this effect, 

you must apply a procedure that restricts the 

slope of all the independent variables to that 

observed at the maximum land value decline 

observed in the estimation data. Essentially, 

you must approximate the slope of the lossfrequency equation at the point ¥16.69 

percent in order to adjust the probability of 

loan default and loss occurrence for data 

beyond the range in the estimating data. The 

adjustment procedure is shown in step 4 of 

section 2.3 entitled, ‘‘Example Calculation of 

Dollar Loss on One Loan.’’

m. Loss severity was not found to vary 

systematically and was considered constant 

across the tested loan characteristics and 

lending conditions. Thus, the simple 

weighted average by loss volume of 20.9 

percent is used in the stress test.9 You must 

Federal Register / Vol. 70, No. 221 / Thursday, November 17, 2005 / Proposed Rules 69703 

10We estimated the loan-seasoning distribution 

from portfolio aggregate charge-off rates from the 

estimation data. To do so, we arrayed all defaulting 

loans where loss occurred according to the time 

from origination to default. Then, a beta 

distribution, B(p, q), was fit to the estimation data 

scaled to the maximum time a loan survived (14 

years). 

11 In the examples presented we rounded the 

numbers, but the example calculation is based on 

a larger number of significant digits. The stress test 

uses additional digits carried at the default 

precision of the software. 

12This process facilitates the approximation of 

slope needed to adjust the loss probabilities for land 

value declines greater than observed in the 

estimation data. 

13The dampened period is the number of years 

from the beginning of the origination year to the 

current year (i.e., January 1, 1996 to January 1, 2000 

is 4 years). 

14The age adjustment of 0.157178762 is 

determined from the beta distribution for a 4-yearold loan. 

15See paragraph c. of section 4.1 entitled, ‘‘Data 

Inputs,’’ for a description of the interest rate risk 

shock-reporting requirement. 

multiply loss severity with the probability 

estimate computed from the loss-frequency 

equation to determine the loss rate for a loan. 

n. Using original loan balance results in 

estimated probabilities of loss frequency over 

the entire life of a loan. To account for loan 

seasoning, you must reduce the loan-loss 

exposure by the cumulative probability of 

loss already experienced by each loan as 

discussed in section 2.2 entitled, ‘‘LoanSeasoning Adjustment.’’ This subtraction is 

based on loan age and reduces the loss 

estimated by the loss-frequency and lossseverity equations. The result is an ageadjusted lifetime dollar loss that can be used 

in subsequent calculations of loss rates as 

discussed in section 2.4, ‘‘Calculation of Loss 

Rates for Use in the Stress Test.’’

2.2 Loan-Seasoning Adjustment. 

a. You must use the seasoning function 

supplied by FCA to adjust the calculated 

probability of loss for each Farmer Mac loan 

for the cumulative loss exposure already 

experienced based on the age of each loan. 

The seasoning function is based on the same 

data used to determine the loss-frequency 

equation and an assumed average life of 14 

years for agricultural mortgages. If we 

determine that the relationship between the 

loss experience in Farmer Mac’s portfolio 

over time and the seasoning function can be 

improved, we may augment or replace the 

seasoning function. 

b. The seasoning function is parameterized 

as a beta distribution with parameters of p = 

4.288 and q = 5.3185.10 How the loanseasoning distribution is used is shown in 

Step 7 of section 2.3, ‘‘Example Calculation 

of Dollar Loss on One Loan.’’

2.3 Example Calculation of Dollar Loss on 

One Loan. 

Here is an example of the calculation of the 

dollar losses for an individual loan with the 

following characteristics and input values:11

Loan Origination Year .......... 1996 

Loan Origination Balance ..... $1,250,000 

LTV at Origination ................ 0.5 

D/A at Origination ................. 0.5 

DSCR at Origination ............. 1.3984 

Maximum Percentage Land 

Price Decline (MAX) ......... ¥23.52 

Step 1: Convert 1996 Origination Value to 

1997 dollar value (LOAN) based on the 

consumer price index and transform as 

follows: 

$1,278,500 = $1,250,000 · 1.0228 

0.998972 = 1 ¥ exp((¥.00538178) ·

$1,278,500 / 1000) 

Step 2: Calculate the default probabilities 

using ¥16.64 percent and ¥16.74 percent 

land value declines as follows: 12

Where, 

Z1 = (¥12.62738) + 1.91259 · LTV5.3914596 ¥ 

0.33830 · (¥16.6439443)¥0.19596 ·

DSCR + 4.55390 · 0.998972 + 2.49482 ·

DA = (¥1.428509) 

Default Loss Frequency at (¥16.64%) = 1 / 1 

+ exp ¥ (¥1.428509) = 0.19333111 

And 

Z1 = (¥12.62738) + 1.91259 · LTV5.3914596 ¥ 

0.33830 · (¥16.7439443) ¥ 0.19596 ·

DSCR + 4.55390 · 0.998972 + 2.49482 ·

DA = (¥1.394679) 

Loss Frequency Probability at (¥16.74%) = 

1 / 1 + exp¥(¥1.394679) = 0.19866189 

Step 3: Calculate the slope adjustment. You 

must calculate slope by subtracting the 

difference between ‘‘Loss-Frequency 

Probability at ¥16.64 percent’’ and ‘‘LossFrequency Probability at ¥16.74 percent’’

and dividing by ¥0.1 (the difference between 

¥16.64 percent and 16.74 percent as follows: 

0.05330776 = (0.19333111¥0.19866189) / 

¥0.1 

Step 4: Make the linear adjustment. You 

make the adjustment by increasing the lossfrequency probability where the dampened 

stressed farmland value input is less than 

¥16.69 percent to reflect the stressed 

farmland value input, appropriately 

discounted. As discussed previously, the 

stressed land value input is discounted to 

reflect the declining effect that the maximum 

land value decline has on the probability of 

default when it occurs later in a loan’s life.13

The linear adjustment is the difference 

between ¥16.69 percent land value decline 

and the adjusted stressed maximum land 

value decline input of ¥23.52 multiplied by 

the slope estimated in Step 3 as follows: 

Loss Frequency at ¥16.69 percent = 

Z1 = (¥12.62738) + (1.91259) (LTV5.3914596) 

¥(0.33830) (¥16.6939443)¥(0.19596) 

(DSCR) + (4.55390) (0.998972) + 

(2.49482) (DA) = ¥1.411594 

And 

1 / 1 + exp(¥1.411594) = 0.19598279 

Dampened Maximum Land Price Decline = 

(¥20.00248544) = (¥23.52) 

(1.0413299)¥4

Slope Adjustment = 0.17637092 = 

0.053312247 ·

(¥16.6939443¥(¥20.00248544)) 

Loan Default Probability = 0.37235371 = 

0.19598279 + 0.17637092 

Step 5: Multiply loan default probability 

times the average severity of 0.209 as follows: 

0.077821926 = 0.37235371 · 0.209 

Step 6: Multiply the loss rate times the 

origination loan balance as follows: 

$97,277 = $1,250,000 · 0.077821926 

Step 7: Adjust the origination based dollar 

losses for 4 years of loan seasoning as 

follows: 

$81,987 = $97,277¥$97,277 ·

(0.157178762) 14

2.4 Calculation of Loss Rates for Use in the 

Stress Test 

a. You must compute the loss rates by state 

as the dollar weighted average seasoned loss 

rates from the Cash Window and Standby 

loan portfolios by state. The spreadsheet 

entitled, ‘‘Credit Loss Module.XLS’’ can be 

used for these calculations. This spreadsheet 

is available for download on our Web site, 

http://www.fca.gov, or will be provided upon 

request. The blended loss rates for each state 

are copied from the ‘‘Credit Loss Module’’ to 

the stress test spreadsheet for determining 

Farmer Mac’s regulatory capital requirement. 

b. The stress test use of the blended loss 

rates is further discussed in section 4.3, ‘‘Risk 

Measures.’’

3.0 Interest Rate Risk 

The stress test explicitly accounts for 

Farmer Mac’s vulnerability to interest rate 

risk from the movement in interest rates 

specified in the statute. The stress test 

considers Farmer Mac’s interest rate risk 

position through the current structure of its 

balance sheet, reported interest rate risk 

shock-test results,15 and other financial 

activities. The stress test calculates the effect 

of interest rate risk exposure through market 

value changes of interest-bearing assets, 

liabilities, and off-balance sheet transactions, 

and thereby the effects to equity capital. The 

stress test also captures this exposure 

through the cashflows on rate-sensitive assets 

and liabilities. We discuss how to calculate 

the dollar impact of interest rate risk in 

section 4.6, ‘‘Balance Sheets.’’

3.1 Process for Calculating the Interest Rate 

Movement 

a. The stress test uses the 10-year Constant 

Maturity Treasury (10-year CMT) released by 

the Federal Reserve in HR. 15, ‘‘Selected 

Interest Rates.’’ The stress test uses the 10- 

year CMT to generate earnings yields on 

assets, expense rates on liabilities, and 

changes in the market value of assets and 

liabilities. For stress test purposes, the 

starting rate for the 10-year CMT is the 3- 

month average of the most recent monthly 

rate series published by the Federal Reserve. 

The 3-month average is calculated by 

summing the latest monthly series of the 10- 

year CMT and dividing by three. For 

instance, you would calculate the initial rate 

on June 30, 1999, as: 

Month end 

10-year 

CMT 

monthly 

series 

04/1999 ......................................... 5.18 

05/1999 ......................................... 5.54 

69704 Federal Register / Vol. 70, No. 221 / Thursday, November 17, 2005 / Proposed Rules 

Month end 

10-year 

CMT 

monthly 

series 

06/1999 ......................................... 5.90 

Average ........................................ 5.54 

b. The amount by which the stress test 

shocks the initial rate up and down is 

determined by calculating the 12-month 

average of the 10-year CMT monthly series. 

If the resulting average is less than 12 

percent, the stress test shocks the initial rate 

by an amount determined by multiplying the 

12-month average rate by 50 percent. 

However, if the average is greater than or 

equal to 12 percent, the stress test shocks the 

initial rate by 600 basis points. For example, 

determine the amount by which to increase 

and decrease the initial rate for June 30, 

1999, as follows: 

Month end 

10-year 

CMT 

monthly 

series 

07/1998 ......................................... 5.46 

08/1998 ......................................... 5.34 

09/1998 ......................................... 4.81 

10/1998 ......................................... 4.53 

11/1998 ......................................... 4.83 

12/1998 ......................................... 4.65 

01/1999 ......................................... 4.72 

02/1999 ......................................... 5.00 

03/1999 ......................................... 5.23 

04/1999 ......................................... 5.18 

05/1999 ......................................... 5.54 

06/1999 ......................................... 5.90 

12-Month Average ................. 5.10 

Calculation of Shock Amount 

12-Month Average Less than 12%: Yes 

12-Month Average: 5.10 

Multiply the 12-Month Average by: 50% 

Shock in basis points equals: 255 

c. You must run the stress test for two 

separate changes in interest rates: (i) An 

immediate increase in the initial rate by the 

shock amount; and (ii) immediate decrease in 

the initial rate by the shock amount. The 

stress test then holds the changed interest 

rate constant for the remainder of the 10-year 

stress period. For example, at June 30, 1999, 

the stress test would be run for an immediate 

and sustained (for 10 years) upward 

movement in interest rates to 8.09 percent 

(5.54 percent plus 255 basis points) and also 

for an immediate and sustained (for 10 years) 

downward movement in interest rates to 2.99 

percent (5.54 percent minus 255 basis 

points). The movement in interest rates that 

results in the greatest need for capital is then 

used to determine Farmer Mac’s risk-based 

capital requirement. 

4.0 Elements Used in Generating Cashflows 

a. This section describes the elements that 

are required for implementation of the stress 

test and assessment of Farmer Mac capital 

performance through time. An Excel 

spreadsheet named FAMC RBCST, available 

at http://www.fca.gov, contains the stress test, 

including the cashflow generator. The 

spreadsheet contains the following seven 

worksheets: 

(1) Data Input; 

(2) Assumptions and Relationships; 

(3) Risk Measures (credit risk and interest 

rate risk); 

(4) Loan and Cash Flow Accounts; 

(5) Income Statements; 

(6) Balance Sheets; and 

(7) Capital. 

b. Each of the components is described in 

further detail below with references where 

appropriate to the specific worksheets within 

the Excel spreadsheet. The stress test may be 

generally described as a set of linked 

financial statements that evolve over a period 

of 10 years using generally accepted 

accounting conventions and specified sets of 

stressed inputs. The stress test uses the initial 

financial condition of Farmer Mac, including 

earnings and funding relationships, and the 

credit and interest rate stressed inputs to 

calculate Farmer Mac’s capital performance 

through time. The stress test then subjects the 

initial financial conditions to the first period 

set of credit and interest rate risk stresses, 

generates cashflows by asset and liability 

category, performs necessary accounting 

postings into relevant accounts, and 

generates an income statement associated 

with the first interval of time. The stress test 

then uses the income statement to update the 

balance sheet for the end of period 1 

(beginning of period 2). All necessary capital 

calculations for that point in time are then 

performed. 

c. The beginning of the period 2 balance 

sheet then serves as the departure point for 

the second income cycle. The second 

period’s cashflows and resulting income 

statement are generated in similar fashion as 

the first period’s except all inputs (i.e., the 

periodic loan losses, portfolio balance by 

category, and liability balances) are updated 

appropriately to reflect conditions at that 

point in time. The process evolves forward 

for a period of 10 years with each pair of 

balance sheets linked by an intervening set 

of cashflow and income statements. In this 

and the following sections, additional details 

are provided about the specification of the 

income-generating model to be used by 

Farmer Mac in calculating the risk-based 

capital requirement. 

4.1 Data Inputs 

The stress test requires the initial financial 

statement conditions and income generating 

relationships for Farmer Mac. The worksheet 

named ‘‘Data Inputs’’ contains the complete 

data inputs and the data form used in the 

stress test. The stress test uses these data and 

various assumptions to calculate pro forma 

financial statements. For stress test purposes, 

Farmer Mac is required to supply: 

a. Call Report Schedules RC: Balance Sheet 

and RI: Income Statement. These schedules 

form the starting financial position for the 

stress test. In addition, the stress test 

calculates basic financial relationships and 

assumptions used in generating pro forma 

annual financial statements over the 10-year 

stress period. Financial relationships and 

assumptions are in section 4.2, 

‘‘Assumptions and Relationships.’’

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. The 

spreadsheet uses this cashflow information to 

generate starting and ending account 

balances, interest earnings, 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.’’

c. Interest Rate Risk Measurement Results. 

The stress test uses the results from Farmer 

Mac’s interest rate risk model to represent 

changes in the market value of assets, 

liabilities, and off-balance sheet positions 

during upward and downward instantaneous 

shocks in interest rates of 300, 250, 200, 150, 

and 100 basis points. The stress test uses 

these data to calculate a schedule of 

estimated effective durations representing the 

market value effects from a change in interest 

rates. The stress test uses a linear 

interpolation of the duration schedule to 

relate a change in interest rates to a change 

in the market value of equity. This 

calculation is described in section 4.4 

entitled, ‘‘Loan and Cashflow Accounts,’’ and 

is illustrated in the referenced worksheet of 

the stress test. 

d. Loan-Level Data for All Farmer Mac I 

Program Assets. 

(1) The stress test requires loan-level data 

for all Farmer Mac I program assets to 

determine lifetime age-adjusted loss rates. 

The specific loan data fields required for 

running the credit risk component are: 

FARMER MAC I PROGRAM LOAN DATA

FIELDS

Loan Number. 

Ending Scheduled Balance. 

Group. 

Pre/Post Act. 

Property State. 

Product Type. 

Origination Date. 

Loan Cutoff Date. 

Original Loan Balance. 

Original Scheduled P&I. 

Original Appraised Value. 

Loan-to-Value Ratio. 

Debt-to-Assets Ratio. 

Current Assets. 

Current Liabilities. 

Total Assets. 

Total Liabilities. 

Gross Farm Revenue. 

Net Farm Income. 

Depreciation. 

Interest on Capital Debt. 

Capital Lease Payments. 

Living Expenses. 

Income & FICA Taxes. 

Net Off-Farm Income. 

Total Debt Service. 

Guarantee/Commitment Fee. 

Seasoned Loan Flag. 

(2) From the loan-level data, you must 

identify the geographic distribution by state 

of Farmer Mac’s loan portfolio and enter the 

Federal Register / Vol. 70, No. 221 / Thursday, November 17, 2005 / Proposed Rules 69705 

16Application of proxy data recognizes that 

underwriting data on seasoned standby loans are 

not reviewed by Farmer Mac in favor of other 

criteria and frequently not origination data. 

17Any rating that appears in more than one 

category column is assigned to the lower FCA rating 

category. 

current loan balance for each state in the 

‘‘Data Inputs’’ worksheet. The lifetime ageadjustment of origination year loss rates was 

discussed in section 2.0, ‘‘Credit Risk.’’ The 

lifetime age-adjusted loss rates are entered in 

the ‘‘Risk Measures’’ worksheet of the stress 

test. The stress test application of the loss 

rates is discussed in section 4.3, ‘‘Risk 

Measures.’’

(3) Under certain circumstances, described 

below, you must substitute the following data 

proxies for the variables LTV, DSCR, and D/ 

A: LTV = 0.70, DSCR = 1.20, and D/A = 0.60. 

The substitution must be done whenever any 

of these data are missing, i.e., cells are blank, 

or one or more of the conditions in the 

following table is true. 

Condition: Apply: 

1. Total Assets = 0 ................................................................................................................................... Proxy D/A. 

2. Total Liabilities = 0 ............................................................................................................................... Proxy D/A. 

3. Total assets less total liabilities <0 ...................................................................................................... Proxy D/A. 

4. Total debt service = 0 or not calculable .............................................................................................. Proxy DSCR. 

5. Net farm income = 0 ............................................................................................................................ Proxy DSCR. 

6. LTV ratio = 0 ........................................................................................................................................ Proxy LTV. 

7. Total assets less than original appraised value .................................................................................. Proxy LTV, D/A. 

8. Total liabilities less than the original loan amount ............................................................................... Proxy D/A. 

9. Total debt service is less than original scheduled principal and interest payment ............................. Proxy DSCR. 

10. Depreciation, interest on capital debt, capital lease payments, or living expenses are reported as 

less than zero.

Proxy DSCR. 

11. Original Scheduled Principal and Interest is greater than Total Debt Service .................................. Proxy DSCR. 

12. Calculated LTV (original loan amount divided by original appraised value) does not equal the 

submitted greater of LTV ratio.

The greater of the two LTV ratios. 

13. Any of the fields referenced in ‘‘1.’’ through ‘‘12.’’ above are blank or contain spaces, periods, 

zeros, negative amounts, or fonts formatted to any setting ratios other than numbers.

Proxy all realted ratios. 

In addition, the following loan data 

adjustments must be made in response to the 

situations listed below: 

Situation: Data adjustment: 

Original loan balance is less than scheduled loan balance .................................................................... Substitute scheduled balance for origination. 

Purchase (commitment) date (a.k.a. ‘‘cutoff’’ date) field and Origination date field are both blank ....... Insert the quarter end ‘‘as of’’ date of the 

RBCST submission. 

Origination date field is blank .................................................................................................................. Model based on Cutoff date. 

Seasoned Standby loans that include loan data ..................................................................................... Proxy data applied.16

Further, because it would not be possible 

to compile an exhaustive list of loan data 

anomalies, FCA reserves the authority to 

require an explanation on other data 

anomalies it identifies and to apply the loan 

data proxies on such cases until the anomaly 

is adequately addressed by the Corporation. 

e. Weighted Haircuts for Non-Program 

Investments. For non-program investments, 

the stress test adjusts the weighted average 

yield data referenced in section 4.1b. to 

reflect counterparty risk. Non-program 

investments are defined in 12 CFR 652.5. The 

haircuts are applied by credit rating category. 

For this purpose, FCA credit rating categories 

are mapped to the Nationally Recognized 

Statistical Rating Organizations (NRSRO) 

ratings categories as set forth in the following 

table. 

RATING AGENCIES MAPPINGS TO FCA RATINGS CATEGORIES

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+ ........

SP–1+ 

A–1 ..........

SP–1 

A–2 ..........

SP–2 

A–3 .......... SP–3, B, or Below and 

Unrated. 

Fitch Short-Term ................................................................. F–1+ ........ F–1 .......... F–2 .......... F–3 .......... Below F–3 and Unrated. 

Moody’s Short-Term 17 ....................................................... .................. Prime-1 ....

MIG1 

VMIG1 

Prime-2 ....

MIG2 

VMIG2 

Prime-3 ....

MIG3 

VMIG3 

Not Prime, SG and Unrated. 

Fitch Individual Bank Ratings ............................................. A .............. B ..............

A/B 

C ..............

B/C ...........

D ..............

C/D ..........

E 

D/E 

Moody’s Bank Financial Strength Rating ........................... A .............. B .............. C .............. D .............. E 

69706 Federal Register / Vol. 70, No. 221 / Thursday, November 17, 2005 / Proposed Rules 

17Any rating that appears in more than one 

category column is assigned to the lower FCA rating 

category. 

The Corporation must calculate the haircut 

to be applied to each investment based on the 

lowest credit rating the investment received 

from NRSRO using the haircuts levels in the 

following table. 

FARMER MAC RBCST MAXIMUM

HAIRCUT BY FCA RATINGS CATEGORY

FCA ratings category 

Non-derivative contract 

counterparties 

or instruments 

(percent) 

Cash ....................................... 0 

AAA ........................................ 3.50 

AA .......................................... 8.75 

A ............................................. 14.00 

BBB ........................................ 28.00 

Below BBB and Unrated ........ 100.00 

Individual investment haircuts must then 

be aggregated into weighted average haircuts 

by investment category and provided in the 

‘‘Data Inputs’’ worksheet. The spreadsheet 

uses this information to account for 

counterparty insolvency through reduced 

interest earnings on these categories of 

investment according to a 10-year linear 

phase-in. Each asset account category 

identified in this data requirement is 

discussed in section 4.2, ‘‘Assumptions and 

Relationships.’’

f. Other Data Requirements. Other data 

elements are taxes paid over the previous 2 

years, the corporate tax schedule, selected 

line items from Schedule RS–C of the Call 

Report, and 10-year CMT information as 

discussed in section 3.1 entitled, ‘‘Process for 

Calculating the Interest Rate Movement.’’ The 

stress test uses the corporate tax schedule 

and previous taxes paid to determine the 

appropriate amount of taxes, including 

available loss carry-backs and loss carryforwards. Three line items found in sections 

Part II.2.a. and 2.b. of Call Report Schedule 

RS–C Capital Calculation must also be 

entered in the ‘‘Data Inputs’’ sheet. The two 

line items found in Part II.2.a. contain the 

dollar volume off-balance sheet assets 

relating to the Farmer Mac I and II programs. 

The off-balance sheet program asset dollar 

volumes are used to calculate the operating 

expense regression on a quarterly basis. The 

single-line item found in Part II.2.b. provides 

the amount of other off-balance sheet 

obligations and is presented in the balance 

sheet section of the stress test for purposes 

of completeness. The 10-year CMT quarterly 

average of the monthly series and the 12- 

month average of the monthly series must be 

entered in the ‘‘Data Inputs’’ sheet. These two 

data elements are used to determine the 

starting interest rate and the level of the 

interest rate shock applied in the stress test. 

4.2 Assumptions and Relationships 

a. The stress test assumptions are 

summarized on the worksheet called 

‘‘Assumptions and Relationships.’’ Some of 

the entries on this page are direct user 

entries. Other entries are relationships 

generated from data supplied by Farmer Mac 

or other sources as discussed in section 4.1, 

‘‘Data Inputs.’’ After current financial data 

are entered, the user selects the date for 

running the stress test. This action causes the 

stress test to identify and select the 

appropriate data from the ‘‘Data Inputs’’

worksheet. The next section highlights the 

degree of disaggregation needed to maintain 

reasonably representative financial 

characterizations of Farmer Mac in the stress 

test. Several specific assumptions are 

established about the future relationships of 

account balances and how they evolve. 

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, 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) Elements related to cashflows, earnings 

rates, and disposition of discontinued 

program assets. 

(A) The stress test accounts for earnings 

rates by asset class and cost rates on funding. 

The stress test aggregates investments into 

the categories of: Cash and money market 

securities; commercial paper; certificates of 

deposit; agency mortgage-backed securities 

and collateralized mortgage obligations; and 

other investments. With FCA’s concurrence, 

Farmer Mac is permitted to further 

disaggregate these categories. Similarly, we 

may require new categories for future 

activities to be added to the stress test. Loan 

items requiring separate accounts include the 

following: 

(i) Farmer Mac I program assets post-1996 

Act; 

(ii) Farmer Mac I program assets post-1996 

Act Swap balances; 

(iii) Farmer Mac I program assets pre-1996 

Act; 

(iv) Farmer Mac I AgVantage securities; 

(v) Loans held for securitization; and 

(vi) Farmer Mac II program assets. 

(B) The stress test also uses data elements 

related to amortization and prepayment 

experience to calculate and process the 

implied rates at which asset and liability 

balances terminate or ‘‘roll off’’ through time. 

Further, for each category, the stress test has 

the capacity to track account balances that 

are expected to change through time for each 

of the above categories. For purposes of the 

stress test, all assets are assumed to maintain 

a ‘‘steady state’’ with the implication that any 

principal balances retired or prepaid are 

replaced with new balances. The exceptions 

are that expiring pre-1996 Act program assets 

are replaced with post-1996 Act program 

assets. 

(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, prepaid expenses, accrued 

interest payable, accounts payable, accrued 

expenses, reserves for losses (loans held and 

guaranteed securities), and other off-balance 

sheet obligations. The stress test is consistent 

with Farmer Mac’s existing reporting 

categories and practices. If reporting 

practices change substantially, the above list 

will be adjusted accordingly. The stress test 

has the capacity to have the balances in each 

of these accounts determined based upon 

existing relationships to other earning 

accounts, to keep their balances either in 

constant proportions of loan or security 

accounts, or to evolve according to a userselected rule. For purposes of the stress test, 

these accounts are to remain constant relative 

to the proportions of their associated balance 

sheet accounts that generated the accrued 

balances. 

(3) Elements related to income and 

expense assumptions. Several other 

parameters that are required to generate pro 

forma financial statements may not be easily 

captured from historic data or may have 

characteristics that suggest that they be 

individually supplied. These parameters are 

the gain on agricultural mortgage-backed 

securities (AMBS) sales, miscellaneous 

income, operating expenses, reserve 

requirement, guarantee fees and loan loss 

resolution timing. 

(A) The stress test applies the actual 

weighted average gain rate on sales of AMBS 

over the most recent 3 years to the dollar 

amount of AMBS sold during the most recent 

four quarters in order to estimate gain on sale 

of AMBS over the stress period. 

(B) The stress test assumes miscellaneous 

income at a level equal to the average of the 

most recent 3-year’s actual miscellaneous 

income as a percent of the sum of; cash, 

investments, guaranteed securities, and loans 

held for investment. 

(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 UPB 

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) The Agency will consider revising the 

LLRT period in response to changes in the 

Corporation’s actual experience. 

(F) Operating costs are determined in the 

model through application of the revised 

Federal Register / Vol. 70, No. 221 / Thursday, November 17, 2005 / Proposed Rules 69707 

operating expense equation which may be 

restated as: 

Expenses = a + b1ln(OnFt) + b2ln(OnGSt) + 

b3ln(OffIt + OffIIt) + b4ln(REOt) 

Where t indicates time period in the model, 

OnF represents on-balance sheet 

investments, OnGS represents on-balance 

sheet guaranteed securities, OffI and OffII 

represent off balance sheet Farmer Mac I and 

II program loans, respectively, REO 

represents gross real-estate owned and the bi

coefficients are taken from the operating 

expense regression equation which is to be 

re-estimated quarterly by Farmer Mac, and 

the resulting coefficients entered into the 

‘‘Assumptions and Relationships’’ worksheet. 

As additional data accumulate, the 

specification will be re-examined and 

modified if we deem changing the 

specification results in a more appropriate 

representation of operating expenses. 

(G) To run the stress test, the operating 

expense regression equation must be reestimated using data from Farmer Mac’s 

inception to the most recent quarterly 

financial information and the resulting 

coefficient entered into the ‘‘Assumptions 

and Relationships’’worksheet. 

(H) The reserve requirement as a fraction 

of loan assets can also be specified. However, 

the stress test is run with the reserve 

requirement set to zero. Setting the parameter 

to zero causes the stress test to calculate a 

risk-based capital level that is comparable to 

regulatory capital, which includes reserves. 

Thus, the risk-based capital requirement 

contains the regulatory capital required, 

including reserves. The amount of total 

capital that is allocated to the reserve account 

is determined by GAAP. The guarantee rates 

applied in the stress test are: post-1996 

Farmer Mac I assets (50 basis points, current 

weighted average of 42 basis points); pre1996 Farmer Mac I assets (25 basis points); 

and Farmer Mac II assets (25 basis points). 

(4) Elements related to earnings rates and 

funding costs. 

(A) The stress test can accommodate 

numerous specifications of earnings and 

funding costs. In general, both relationships 

are tied to the 10-year CMT interest rate. 

Specifically, each investment account, each 

loan item, and each liability account can be 

specified as fixed rate, or fixed spread to the 

10-year CMT with initial rates determined by 

actual data. The stress test calculates specific 

spreads (weighted average yield less initial 

10-year CMT) by category from the weighted 

average yield data supplied by Farmer Mac 

as described earlier. For example, the fixed 

spread for Farmer Mac I program post-1996 

Act mortgages is calculated as follows: 

Fixed Spread = Weighted Average Yield less 

10-year CMT 

0.014 = 0.0694 ¥ 0.0554 

(B) The resulting fixed spread of 1.40 

percent is then added to the 10-year CMT 

when it is shocked to determine the new 

yield. For instance, if the 10-year CMT is 

shocked upward by 300 basis points, the 

yield on Farmer Mac I program post-1996 Act 

loans would change as follows: 

Yield = Fixed Spread + 10-year CMT 

.0994 = .014 + .0854 

(C) The adjusted yield is then used for 

income calculations when generating pro 

forma financial statements. All fixed-spread 

asset and liability classes are computed in an 

identical manner using starting yields 

provided as data inputs from Farmer Mac. 

The fixed-yield option holds the starting 

yield data constant for the entire 10-year 

stress test period. You must run the stress 

test using the fixed-spread option for all 

accounts except for discontinued program 

activities, such as Farmer Mac I program 

loans made before the 1996 Act. For 

discontinued loans, the fixed-rate 

specification must be used if the loans are 

primarily fixed-rate mortgages. 

(5) Elements related to interest rate shock 

test. As described earlier, the interest rate 

shock test is implemented as a single set of 

forward interest rates. The stress test applies 

the up-rate scenario and down-rate scenario 

separately. The stress test also uses the 

results of Farmer Mac’s shock test, as 

described in paragraph c. of section 4.1, 

‘‘Data Inputs,’’ to calculate the impact on 

equity from a stressful change in interest 

rates as discussed in section 3.0 titled, 

‘‘Interest Rate Risk.’’ The stress test uses a 

schedule relating a change in interest rates to 

a change in the market value of equity. For 

instance, if interest rates are shocked upward 

so that the percentage change is 262 basis 

points, the linearly interpolated effective 

estimated duration of equity is ¥6.7405 

years given Farmer Mac’s interest rate 

measurement results at 250 and 300 basis 

points of ¥6.7316 and ¥6.7688 years, 

respectively found on the effective duration 

schedule. The stress test uses the linearly 

interpolated estimated effective duration for 

equity to calculate the market value change 

by multiplying duration by the base value of 

equity before any rate change from Farmer 

Mac’s interest rate risk measurement results 

with the percentage change in interest rates. 

4.3 Risk Measures 

a. This section describes the elements of 

the stress test in the worksheet named ‘‘Risk 

Measures’’ that reflect the interest rate shock 

and credit loss requirements of the stress test. 

b. As described in section 3.1, the stress 

test applies the statutory interest rate shock 

to the initial 10-year CMT rate. It then 

generates a series of fixed annual interest 

rates for the 10-year stress period that serve 

as indices for earnings yields and cost of 

funds rates used in the stress test. (See the 

‘‘Risk Measures’’ worksheet for the resulting 

interest rate series used in the stress test.) 

c. The Credit Loss Module’s state-level loss 

rates, as described in section 2.4 entitled, 

‘‘Calculation of Loss Rates for Use in the 

Stress Test,’’ are entered into the ‘‘Risk 

Measures’’ worksheet and applied to the loan 

balances that exist in each state. The 

distribution of loan balances by state is used 

to allocate new loans that replace loan 

products that roll off the balance sheet 

through time. The loss rates are applied both 

to the initial volume and to new loan volume 

that replaces expiring loans. The total life of 

loan losses that are expected at origination 

are then allocated through time based on a 

set of user entries describing the time-path of 

losses. 

d. The loss rates estimated in the credit 

risk component of the stress test are based on 

an origination year concept, adjusted for loan 

seasoning. All losses arising from loans 

originated in a particular year are expressed 

as lifetime age-adjusted losses irrespective of 

when the losses actually occur. The fraction 

of the origination year loss rates that must be 

used to allocate losses through time are 43 

percent to year 1, 17 percent to year 2, 11.66 

percent to year 3, and 4.03 percent for the 

remaining years. The total allocated losses in 

any year are expressed as a percent of loan 

volume in that year to reflect the conversion 

to exposure year. 

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 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 longand 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 and 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. 

69708 Federal Register / Vol. 70, No. 221 / Thursday, November 17, 2005 / Proposed Rules 

b. The credit losses described in section 

2.0, ‘‘Credit Risk,’’ are transmitted through 

the provision account as is any change 

needed to re-establish the target reserve 

balance. For determining risk-based capital, 

the reserve target is set to zero as previously 

indicated in section 4.2. Under the income 

tax section, it must first be determined 

whether it is appropriate to carry forward tax 

losses or recapture tax credits. The tax 

section then establishes the appropriate 

income tax liability that permits the 

calculation of final net income (loss), which 

is credited (debited) to the retained earnings 

account. 

4.6 Balance Sheets 

a. The worksheet named ‘‘Balance Sheets’’

is used to construct pro forma balance sheets 

from which the capital calculations can be 

performed. As can be seen in the Excel 

spreadsheet, the worksheet is organized to 

correspond to Farmer Mac’s normal reporting 

practices. Asset accounts are built from the 

initial financial statement conditions, and 

loan and cashflow accounts. Liability 

accounts including the reserve account are 

likewise built from the previous period’s 

results to balance the asset and equity 

positions. The equity section uses initial 

conditions and standard accounts to monitor 

equity through time. The equity section 

maintains separate categories for increments 

to paid-in-capital and retained earnings and 

for mark-to-market effects of changes in 

account values. The process described below 

in the ‘‘Capital’’ worksheet uses the initial 

retained earnings and paid-in-capital account 

to test for the change in initial capital that 

permits conformance to the statutory 

requirements. Therefore, these accounts must 

be maintained separately for test solution 

purposes. 

b. The market valuation changes due to 

interest rate movements must be computed 

utilizing the linearly interpolated schedule of 

estimated equity effects due to changes in 

interest rates, contained in the ‘‘Assumptions 

& Relationships’’ worksheet. The stress test 

calculates the dollar change in the market 

value of equity by multiplying the base value 

of equity before any rate change from Farmer 

Mac’s interest rate risk measurement results, 

the linearly interpolated estimated effective 

duration of equity, and the percentage change 

in interest rates. In addition, the earnings 

effect of the measured dollar change in the 

market value of equity is estimated by 

multiplying the dollar change by the blended 

cost of funds rate found on the ‘‘Assumptions 

& Relationships’’ worksheet. Next, divide by 

2 the computed earnings effect to 

approximate the impact as a theoretical 

shock in the interest rates that occurs at the 

mid-point of the income cycle from period t0

to period t1. The measured dollar change in 

the market value of equity and related 

earnings effect are then adjusted to reflect 

any tax-related benefits. Tax adjustments are 

determined by including the measured dollar 

change in the market value of equity and the 

earnings effect in the tax calculations found 

in the ‘‘Income Statements’’ worksheet. This 

approach ensures that the value of equity 

reflects the economic loss or gain in value of 

Farmer Mac’s capital position from a change 

in interest rates and reflects any immediate 

tax benefits that Farmer Mac could realize. 

Any tax benefits in the module are posted 

through the income statement by adjusting 

the net taxes due before calculating final net 

income. Final net income is posted to 

accumulated unretained earnings in the 

shareholders’ equity portion of the balance 

sheet. The tax section is also described in 

section 4.5 entitled, ‘‘Income Statements.’’

c. After one cycle of income has been 

calculated, the balance sheet as of the end of 

the income period is then generated. The 

‘‘Balance Sheet’’ worksheet shows the 

periodic pro forma balance sheets in a format 

convenient to track capital shifts through 

time. 

d. The stress test considers Farmer Mac’s 

balance sheet as subject to interest rate risk 

and, therefore, the capital position reflects 

mark-to-market changes in the value of 

equity. This approach ensures that the stress 

test captures interest rate risk in a meaningful 

way by addressing explicitly the loss or gain 

in value resulting from the change in interest 

rates required by the statute. 

4.7 Capital 

The ‘‘Capital’’ worksheet contains the 

results of the required capital calculations as 

described below, and provides a method to 

calculate the level of initial capital that 

would permit Farmer Mac to maintain 

positive capital throughout the 10-year stress 

test period. 

5.0 Capital Calculation 

a. The stress test computes regulatory 

capital as the sum of the following: 

(1) The par value of outstanding common 

stock; 

(2) The par value of outstanding preferred 

stock; 

(3) Paid-in capital; 

(4) Retained earnings; and 

(5) Reserve for loan and guarantee losses. 

b. Inclusion of the reserve account in 

regulatory capital is an important difference 

compared to minimum capital as defined by 

the statute. Therefore, the calculation of 

reserves in the stress test is also important 

because reserves are reduced by loan and 

guarantee losses. The reserve account is 

linked to the income statement through the 

provision for loan-loss expense (provision). 

Provision expense reflects the amount of 

current income necessary to rebuild the 

reserve account to acceptable levels after loan 

losses reduce the account or as a result of 

increases in the level of risky mortgage 

positions, both on- and off-balance sheet. 

Provision reversals represent reductions in 

the reserve levels due to reduced risk of loan 

losses or loan volume of risky mortgage 

positions. The liabilities section of the 

‘‘Balance Sheets’’ worksheet also includes 

separate line items to disaggregate the 

Guarantee and commitment obligation 

related to the Financial Accounting 

Standards Board Interpretation No. 45 (FIN 

45) Guarantor’s Accounting and Disclosure 

Requirements for Guarantees, Including 

Indirect Guarantees of Indebtedness of 

Others. This item is disaggregated to permit 

accurate calculation of regulatory capital 

post-adoption of FIN 45. When calculating 

the stress test, the reserve is maintained at 

zero to result in a risk-based capital 

requirement that includes reserves, thereby 

making the requirement comparable to the 

statutory definition of regulatory capital. By 

setting the reserve requirement to zero, the 

capital position includes all financial 

resources Farmer Mac has at its disposal to 

withstand risk. 

5.1 Method of Calculation 

a. Risk-based capital is calculated in the 

stress test as the minimum initial capital that 

would permit Farmer Mac to remain solvent 

for the ensuing 10 years. To this amount, an 

additional 30 percent is added to account for 

managerial and operational risks not 

reflected in the specific components of the 

stress test. 

b. The relationship between the solvency 

constraint (i.e., future capital position not 

less than zero) and the risk-based capital 

requirement reflects the appropriate earnings 

and funding cost rates that may vary through 

time based on initial conditions. Therefore, 

the minimum capital at a future point in time 

cannot be directly used to determine the riskbased capital requirement. To calculate the 

risk-based capital requirement, the stress test 

includes a section to solve for the minimum 

initial capital value that results in a 

minimum capital level over the 10 years of 

zero at the point in time that it would 

actually occur. In solving for initial capital, 

it is assumed that reductions or additions to 

the initial capital accounts are made in the 

retained earnings accounts, and balanced in 

the debt accounts at terms proportionate to 

initial balances (same relative proportion of 

long- and short-term debt at existing initial 

rates). Because the initial capital position 

affects the earnings, and hence capital 

positions and appropriate discount rates 

through time, the initial and future capital 

are simultaneously determined and must be 

solved iteratively. The resulting minimum 

initial capital from the stress test is then 

reported on the ‘‘Capital’’ worksheet of the 

stress test. The ‘‘Capital’’ worksheet includes 

an element that uses Excel’s ‘‘solver’’ or ‘‘goal 

seek’’ capability to calculate the minimum 

initial capital that, when added (subtracted) 

from initial capital and replaced with debt, 

results in a minimum capital balance over 

the following 10 years of zero. 

PART 655—FEDERAL AGRICULTURAL 

MORTGAGE CORPORATION 

DISCLOSURE AND REPORTING 

REQUIREMENTS 

3. The authority citation for part 655 

continues to read as follows: 

Authority: Sec. 8.11 of the Farm Credit Act 

(12 U.S.C. 2279aa–11). 

Subpart B—Reports Relating to 

Securities Activities of the Federal 

Agricultural Mortgage Corporation 

§ 655.50 [Amended] 

4. Section 655.50 is amended by 

removing the word ‘‘should’’ and 

adding in its place, the word ‘‘must’’ in 

the second sentence of paragraph (c). 

Federal Register / Vol. 70, No. 221 / Thursday, November 17, 2005 / Proposed Rules 69709 

Dated: November 10, 2005. 

Jeanette Brinkley, 

Secretary, Farm Credit Administration Board. 

[FR Doc. 05–22730 Filed 11–16–05; 8:45 am] 

BILLING CODE 6705–01–P 

DEPARTMENT OF TRANSPORTATION 

Federal Aviation Administration 

14 CFR Part 71 

[Docket No. FAA–2005–22856; Airspace 

Docket No. 05–AAL–36] 

Proposed Establishment of Class E 

Airspace; Toksook Bay, AK 

AGENCY: Federal Aviation 

Administration (FAA), DOT. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: This action proposes to 

establish Class E airspace at Toksook 

Bay, AK. A new Standard Instrument 

Approach Procedure (SIAP) is being 

published for the Toksook Bay Airport. 

Adoption of this proposal would result 

in establishment of Class E airspace 

upward from 700 feet (ft.) and 1,200 ft. 

above the surface at Toksook Bay, AK. 

DATES: Comments must be received on 

or before January 3, 2006. 

ADDRESSES: Send comments on the 

proposal to the Docket Management 

System, U.S. Department of 

Transportation, Room Plaza 401, 400 

Seventh Street, SW., Washington, DC 

20590–0001. You must identify the 

docket number FAA–2005–22856/ 

Airspace Docket No. 05–AAL–36, at the 

beginning of your comments. You may 

also submit comments on the Internet at 

http://dms.dot.gov. You may review the 

public docket containing the proposal, 

any comments received, and any final 

disposition in person in the Dockets 

Office between 9 a.m. and 5 p.m., 

Monday through Friday, except Federal 

holidays. The Docket Office (telephone 

1–800–647–5527) is on the plaza level 

of the Department of Transportation 

NASSIF Building at the above address. 

An informal docket may also be 

examined during normal business hours 

at the office of the Manager, Safety, 

Alaska Flight Service Operations, 

Federal Aviation Administration, 222 

West 7th Avenue, Box 14, Anchorage, 

AK 99513–7587. 

FOR FURTHER INFORMATION CONTACT: Gary 

Rolf, Federal Aviation Administration, 

222 West 7th Avenue, Box 14, 

Anchorage, AK 99513–7587; telephone 

number (907) 271–5898; fax: (907) 271–

2850; email: gary.ctr.rolf@faa.gov. 

Internet address: http:// 

www.alaska.faa.gov/at. 

SUPPLEMENTARY INFORMATION: 

Comments Invited 

Interested parties are invited to 

participate in this proposed rulemaking 

by submitting such written data, views, 

or arguments as they may desire. 

Comments that provide the factual basis 

supporting the views and suggestions 

presented are particularly helpful in 

developing reasoned regulatory 

decisions on the proposal. Comments 

are specifically invited on the overall 

regulatory, aeronautical, economic, 

environmental, and energy-related 

aspects of the proposal. 

Communications should identify both 

docket numbers and be submitted in 

triplicate to the address listed above. 

Commenters wishing the FAA to 

acknowledge receipt of their comments 

on this notice must submit with those 

comments a self-addressed, stamped 

postcard on which the following 

statement is made: ‘‘Comments to 

Docket No. FAA–2005–22856/Airspace 

Docket No. 05–AAL–36.’’ The postcard 

will be date/time stamped and returned 

to the commenter. 

All communications received on or 

before the specified closing date for 

comments will be considered before 

taking action on the proposed rule. The 

proposal contained in this notice may 

be changed in light of comments 

received. All comments submitted will 

be available for examination in the 

public docket both before and after the 

closing date for comments. A report 

summarizing each substantive public 

contact with FAA personnel concerned 

with this rulemaking will be filed in the 

docket. 

Availability of Notice of Proposed 

Rulemaking’s (NPRM’s) 

An electronic copy of this document 

may be downloaded through the 

Internet at http://dms.dot.gov. Recently 

published rulemaking documents can 

also be accessed through the FAA’s Web 

page at http://www.faa.gov or the 

Superintendent of Document’s Web 

page at http://www.access.gpo.gov/nara. 

Additionally, any person may obtain 

a copy of this notice by submitting a 

request to the Federal Aviation 

Administration, Office of Air Traffic 

Airspace Management, ATA–400, 800 

Independence Avenue, SW., 

Washington, DC 20591 or by calling 

(202) 267–8783. Communications must 

identify both docket numbers for this 

notice. Persons interested in being 

placed on a mailing list for future 

NPRM’s should contact the FAA’s 

Office of Rulemaking, (202) 267–9677, 

to request a copy of Advisory Circular 

No. 11–2A, Notice of Proposed 

Rulemaking Distribution System, which 

describes the application procedure. 

The Proposal 

The FAA is considering an 

amendment to the Code of Federal 

Regulations (14 CFR Part 71), which 

would create new Class E airspace at 

Toksook Bay, AK. The intended effect of 

this proposal is to create Class E 

airspace upward from 700 ft. and 1,200 

ft. above the surface to contain 

Instrument Flight Rules (IFR) operations 

at Toksook Bay, AK. 

The FAA Instrument Flight 

Procedures Production and 

Maintenance Branch has developed a 

new SIAP for the Toksook Bay Airport. 

The new approach is the Area 

Navigation Global Positioning System 

Runway RWY 34, original. New Class E 

controlled airspace extending upward 

from 700 ft. and 1,200 ft. above the 

surface within the Toksook Bay Airport 

area would be established by this action. 

The proposed airspace is sufficient in 

size to contain aircraft executing the 

new instrument procedure at the 

Toksook Bay Airport. Airspace from 

1,200 ft. AGL and more than 12 miles 

from the shoreline will be excluded 

from this action. That controlled 

airspace outside 12 miles from the 

shoreline within 35 miles of the airport 

will be created in coordination with the 

FAA’s Airspace and Rules, Office of 

System Operations Airspace and AIM, 

by modifying existing Offshore Airspace 

Area; Norton Sound Low Control Area, 

in accordance with FAA Order 7400.2. 

The area would be depicted on 

aeronautical charts for pilot reference. 

The coordinates for this airspace docket 

are based on North American Datum 83. 

The Class E airspace areas designated as 

700/1200 foot transition areas are 

published in paragraph 6005 in FAA 

Order 7400.9N, Airspace Designations 

and Reporting Points, dated September 

1, 2005, and effective September 15, 

2005, which is incorporated by 

reference in 14 CFR 71.1. The Class E 

airspace designations listed in this 

document would be published 

subsequently in the Order. 

The FAA has determined that this 

proposed regulation only involves an 

established body of technical 

regulations for which frequent and 

routine amendments are necessary to 

keep them operationally current. It, 

therefore—(1) is not a ‘‘significant 

regulatory action’’ under Executive 

Order 12866; (2) is not a ‘‘significant 

rule’’ under DOT Regulatory Policies 

and Procedures (44 FR 11034; February 

26, 1979); and (3) does not warrant 

preparation of a regulatory evaluation as 

the anticipated impact is so minimal.