Federal Register / Vol. 75, No. 14 / Friday, January 22, 2010 / Proposed Rules 3647 

The processing office will explain 

program requirements, public 

information requirements and provide 

guidance on preparation of items 

necessary for final determination. 

(b) The Processing Official will 

determine if the application is properly 

assembled. If not, the applicant will be 

notified within fifteen federal working 

days as to what additional submittal 

items are needed. 

(c) The Processing Official and 

Approval Official will coordinate their 

reviews to ensure that the applicant is 

advised about eligibility and anticipated 

fund availability within 45 days of the 

receipt of a completed application. 

(d) The Processing Official will 

submit the following to the Approval 

Official: 

(1) ‘‘Water and Waste Project 

Information Summary’’; 

(2) Form RD 442–3, ‘‘Balance Sheet’’ 

or a financial statement or audit that 

includes a balance sheet; 

(3) Letter of Conditions; 

(4) Form RD 1942–46, ‘‘Letter of Intent 

to Meet Conditions’’; 

(5) Form RD 1940–1, ‘‘Request for 

Obligation of Funds’’; 

§ 1774.17 Grant closing and disbursement. 

(a) Grant closing. RUS Bulletin 1780– 

12 ‘‘Water or Waste System Grant 

Agreement’’ will be completed and 

executed in accordance with the 

requirements of grant approval. The 

grant will be considered closed when 

RUS Bulletin 1780–12 has been 

properly executed. Processing officials 

or Approval officials are authorized to 

sign the grant agreement on behalf of 

RUS. 

(b) Grant disbursements. Agency 

policy is not to disburse grant funds 

from the Treasury until they are actually 

needed by the applicant. If an approved 

grant includes applicant or other 

contributions, then these funds will be 

disbursed before the disbursal of any 

Agency grant funds. 

(c) Payment for project costs. Project 

costs will be monitored by the RUS 

processing office. Invoices will be 

approved by the borrower and 

submitted to the Processing Official for 

concurrence. The review and 

acceptance of project costs by the 

Agency does not attest to the correctness 

of the amounts, the quantities shown or 

that the work has been performed under 

the terms of the agreements or contracts. 

(d) Use of remaining funds. Funds 

remaining after all costs incident to the 

basic project have been paid or provided 

for will not include applicant 

contributions if SEARCH grants funds 

are financing less than 100 percent of 

the project. Funds remaining may be 

considered in direct proportion to the 

amounts obtained from each source. 

Remaining funds will be handled as 

follows: 

(1) Remaining funds may be used for 

eligible grant purposes as described in 

1774.14 of this subpart, or 

(2) Grant funds not expended will be 

canceled. Prior to the actual 

cancellation, the borrower, its attorney 

and its engineer will be notified of RUS’ 

intent to cancel the remaining funds. 

§ 1774.18 Reporting requirements, 

accounting methods and audits. 

All Agency grantees will follow the 

reporting requirements as outlined in 7 

CFR 1780.47. 

§ 1774.19 Applications determined 

ineligible. 

If at any time an application is 

determined ineligible, the processing 

office will notify the applicant in 

writing of the reasons. The notification 

to the applicant will state that an appeal 

of this decision may be made by the 

applicant under 7 CFR Part 11. 

§ 1774.20 Conflict of interest. 

Any processing or servicing activity 

conducted pursuant to this part 

involving authorized assistance to Rural 

Development employees with Water and 

Environmental Programs responsibility, 

members of their families, known close 

relatives, or business or close personal 

associates, is subject to the provisions of 

subpart D of part 1900 of this title. 

Applicants of this assistance are 

required to identify any known 

relationship or association with an RUS 

employee. 

§§ 1774.21–1774.23 [Reserved] 

§ 1774.24 Exception authority. 

The Administrator may, in individual 

cases, make an exception to any 

requirement or provision of this part 

which is not inconsistent with the 

authorizing statute or other applicable 

law and is determined to be in the 

Government’s interest. Requests for 

exceptions must be made in writing by 

the State Director and supported with 

documentation to explain the adverse 

effect on the Government’s interest, 

propose alternative course(s) of action, 

and show how the adverse effect will be 

eliminated or minimized if the 

exception is granted. The exception 

decision will be documented in writing, 

signed by the Administrator, and 

retained in the files. 

§§ 1774.25–1774.99 [Reserved] 

§ 1774.100 OMB Control Number. 

The information collection 

requirements in this part will not be 

effective until approved by the Office of 

Management and Budget (OMB), subject 

to the submission of a paperwork 

package to OMB and assigned an OMB 

Control Number. 

Dated: January 15, 2010. 

Jonathan Adelstein, 

Administrator, Rural Utilities Service. 

[FR Doc. 2010–1213 Filed 1–21–10; 8:45 am] 

BILLING CODE 3410–15–P 

FARM CREDIT ADMINISTRATION 

12 CFR Part 652 

RIN 3052–AC51 

Federal Agricultural Mortgage 

Corporation Funding and Fiscal 

Affairs; Risk-Based Capital 

Requirements 

AGENCY: Farm Credit Administration. 

ACTION: Proposed rule. 

SUMMARY: The Farm Credit 

Administration (FCA, Agency, us, or 

we) proposes to amend our regulations 

on the Risk-Based Capital Stress Test 

(RBCST or model) used by the Federal 

Agricultural Mortgage Corporation 

(Farmer Mac or the Corporation). We 

propose to update the model to address 

recent additions to Farmer Mac’s 

program authorities, specifically the 

authority for Farmer Mac to finance 

rural utility loans. We are also 

proposing to revise the existing 

treatment of risk mitigations of general 

obligations for the AgVantage Plus 

program and related structures, as 

established in Version 3.0 of the model. 

Finally, we propose revising the 

treatment of counterparty risk on nonprogram investments in the model by 

adjusting the haircuts applied to those 

investments to keep the model 

consistent with statutory requirements 

for calculating Farmer Mac’s regulatory 

minimum capital level. 

DATES: You may send us comments by 

March 8, 2010. 

ADDRESSES: We offer a variety of 

methods for you to submit comments on 

this proposed rule. For accuracy and 

efficiency reasons, commenters are 

encouraged to submit comments by email or through the Agency’s Web site. 

As facsimiles (fax) are difficult for us to 

process and achieve compliance with 

section 508 of the Rehabilitation Act, we 

are no longer accepting comments 

submitted by fax. Regardless of the 

method you use, please do not submit 

your comment multiple times via 

different methods. You may submit 

comments by any of the following 

methods: 


erowe on DSK5CLS3C1PROD with PROPOSALS-1
3648 Federal Register / Vol. 75, No. 14 / Friday, January 22, 2010 / Proposed Rules 

1Pub. L. 110–246, 122 Stat. 1651 (June 18, 2008) 

(repealing and replacing Pub. L. 110–234). 

2Public Law 92–181, 85 Stat. 583 (December 10, 

1971). 

3 73 FR 31937 (June 5, 2008). 

4FCA currently treats Farmer Mac’s portfolio 

investments in rural utility loans as non-program 

investments. 

5AgVantage Plus is a program created by Farmer 

Mac in 2006 to provide guarantees on timely 

repayment of principal and interest on notes issued 

by the counterparty. The notes are secured by 

obligations of issuer, which obligations are, in turn, 

backed by Farmer Mac eligible loan assets. 

6Emery, K., Ou. S., Tennant, J., Matos, A., Cantor, 

R. ‘‘Corporate Default and Recovery Rates, 1920– 

2008,’’ published by Moody’s Investors Service, 

February 2009; Default Rates, page 31, Recovery 

Rates (Severity Rate—1 minus Senior Unsecured 

Average Recovery Rate), page 26. 

• E-mail: Send us an e-mail at regcomm@fca.gov. 

• FCA Web site: http://www.fca.gov. 

Select ‘‘Public Commenters,’’ then 

‘‘Public Comments,’’ and follow the 

directions for ‘‘Submitting a Comment.’’ 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• Mail: Joseph T. Connor, Associate 

Director for Policy and Analysis, Office 

of Secondary Market Oversight, Farm 

Credit Administration, 1501 Farm 

Credit Drive, McLean, VA 22102–5090. 

You may review copies of all 

comments we receive at our office in 

McLean, Virginia, or on our Web site at 

http://www.fca.gov. Once you are in the 

Web site, select ‘‘Public Commenters,’’ 

then ‘‘Public Comments,’’ and follow the 

directions for ‘‘Reading Submitted 

Public Comments.’’ We will show your 

comments as submitted, but for 

technical reasons we may omit items 

such as logos and special characters. 

Identifying information that you 

provide, such as phone numbers and 

addresses, will be publicly available. 

However, we will attempt to remove email 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 

Laura McFarland, Senior Counsel, 

Office of the General Counsel, Farm 

Credit Administration, McLean, VA 

22102–5090, (703) 883–4020, TTY 

(703) 883–4020. 

SUPPLEMENTARY INFORMATION: 

I. Objective 

The objective of this proposed rule is 

to ensure that the RBCST for Farmer 

Mac continues to determine regulatory 

capital requirements in a manner that 

remains consistent with statutory 

requirements. 

II. Background 

Farmer Mac is a stockholder-owned 

instrumentality of the United States, 

chartered by Congress to establish a 

secondary market for agricultural real 

estate, rural housing mortgage loans, 

and rural utility loans as well as to 

facilitate capital markets funding for 

USDA-guaranteed farm program and 

rural development loans. Farmer Mac’s 

Class C non-voting and Class A voting 

common stocks are listed on the New 

York Stock Exchange under the symbols 

AGM and AGM.A, respectively. FCA, an 

independent agency in the executive 

branch of the Federal Government, is 

the safety and soundness regulator of 

Farmer Mac. FCA regulates Farmer Mac 

through the Office of Secondary Market 

Oversight (OSMO). 

Section 5406 of the Food, 

Conservation and Energy Act of 2008 

(2008 Farm Bill) 1 amended the 

definition of ‘‘qualified loan’’ in Title 

VIII of the Farm Credit Act of 1971, as 

amended, (Act) 2 to include rural utility 

loans. This change gave Farmer Mac the 

authority to purchase and guarantee 

securities backed by loans to rural 

electric and telephone utility 

cooperatives as program business. The 

2008 Farm Bill further directed FCA to 

estimate the credit risk on the portfolio 

covered by this new authority at a rate 

of default and severity reasonably 

related to the risks in rural electric and 

telephone facility loans. 

The existing RBCST (Version 3.0) for 

Farmer Mac is contained in subpart B of 

part 652,3 and is used to determine the 

minimum level of regulatory capital 

Farmer Mac must hold to maintain 

positive capital during a 10-year period, 

as characterized by stressful credit and 

interest rate conditions. Version 3.0 of 

the RBCST was developed according to 

the provisions of section 8.32 of the Act 

before Farmer Mac was given rural 

utility authority and thus lacks a 

component to directly recognize the 

credit risk on such loans.4 At the time 

of the Farm Bill’s enactment, Farmer 

Mac held approximately $1.3 billion of 

such loans in its non-program 

investment portfolio. At the end of the 

first quarter 2009, Farmer Mac held $1.4 

billion in loans to rural electric 

cooperatives in its program loan 

portfolio. 

Based on the provisions of the 2008 

Farm Bill, we are proposing to amend 

the RBCST (Version 3.0) to account for 

Farmer Mac’s new authority to finance 

rural electric and telephone utility 

cooperatives. We are also proposing to 

address the existing adjustment factors 

for recognizing the risk-mitigating 

effects of an issuer’s general obligation 

to Farmer Mac by applying increases (or 

‘‘haircuts’’) to the historical default rates 

by whole-letter credit rating. In our rule 

published in June 2008, we established 

a method to recognize the riskmitigating effects of the issuer’s general 

obligation to Farmer Mac under the 

product referred to as ‘‘AgVantage 

Plus.’’ 5 RBCST Version 3.0 recognized 

the risk mitigation provided by the 

general obligation by reducing the ageadjusted dollar losses estimated on the 

subject loans by a General Obligation 

Adjustment (GOA) factor derived from 

average historical default rates of 

corporate bond issuers with similar 

whole-letter credit ratings as reported by 

a nationally recognized statistical rating 

organization (NRSRO).6 We now 

propose to apply stress generally to the 

current GOA factors and to further 

discount them to recognize the level of 

concentration risk associated with an 

individual counterparty’s general 

obligation. 

We are also proposing conforming 

changes to the haircuts on non-program 

investments. Our existing rule applies a 

method to account for counterparty risk 

on non-program investments by 

applying a discount (or ‘‘haircut’’) to the 

yields of non-program investments, 

scaled according to average credit 

ratings, with a 10-year phase-in. We are 

proposing modifications to the haircut 

levels applied to non-program 

investments to increase the severity of 

the haircuts. 

III. Section-by-Section Analysis 

The purpose of this proposed rule is 

to revise the risk-based capital 

regulations that apply to Farmer Mac to 

reflect changes in Farmer Mac’s 

financing authorities, operations, and 

business practices. The issues addressed 

in this proposed rule include: (1) 

Treatment of program loan volume in 

the rural utility cooperative sector; (2) 

modification of the GOA factors 

(initially established in RBCST Version 

3.0) to reflect greater prudence in the 

assumptions regarding the relationship 

between risk and pricing of Farmer 

Mac’s exposure to certain structures 

known as ‘‘AgVantage Plus’’ and other 

similar arrangements that may arise in 

the future; and (3) modification of 

haircuts on non-program investments to 

retain consistency with the risk levels 

recognized by whole-letter rating 

category in the proposed modifications 

to GOA factors discussed in item ‘‘2’’ 

above. We refer to the version of the 

model proposed here as ‘‘Version 4.0 

(proposed).’’ 


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Federal Register / Vol. 75, No. 14 / Friday, January 22, 2010 / Proposed Rules 3649 

7 In evaluating the suitability of empirical data 

sources, we examined historical loan performance 

data of the U.S. Department of Agriculture’s (USDA) 

loan programs and interviewed market participants 

including the National Rural Utility Cooperative 

Financing Corporation, CoBank, and USDA’s Rural 

Utility Service. 

8For a detailed explanation of the empirical 

frequency-based approach, see 64 FR 61740 

(November 12, 1999) and 66 FR 19048 (April 12, 

2001). 

9For a summary of the foundations of extreme 

value theory, see: Embrechts, P., Resnick, S., 

Samorodnitsky, G., ‘‘Extreme Value Theory as a Risk 

Management Tool’’, Cornell University, 1996. 

A. Credit Loss Estimation on Rural 

Utility Loans [§§ 652.50 and 652.65(b); 

Appendix A to Part 652] 

1. Guarantee Fee 

We propose to amend § 652.50 by 

adding a definition for guarantee fees 

charged on rural utility loans to 

distinguish treatment of these fees from 

those assessed against all other loans 

guaranteed by Farmer Mac. Guarantee 

fees are made up of Farmer Mac’s 

estimate of likely long-term average 

annual losses on the investment, plus 

fee loads to cover operating costs and 

return-on-equity requirements. Section 

8.10 of the Act establishes a limit on the 

guarantee fees Farmer Mac may charge, 

but the 2008 Farm Bill, when 

establishing the authority for Farmer 

Mac to deal in rural utility loans as 

program business, stated that this 

authority be handled in a manner 

reasonably related to the risks specific 

to rural utility loans. Based on this, we 

propose adding a ‘‘rural utility guarantee 

fee’’ definition to § 652.50 to clarify that 

rural utility guarantee fees are 

distinguished from those guarantee fees 

discussed in section 8.10 of the Act. 

Unlike all other fees under section 8.10 

of the Act, we propose that the model 

use rural utility guarantee fees as a 

component of its loss estimation 

calculation. We also propose that the 

definition differentiate between onbalance sheet and off-balance sheet rural 

utility volume to recognize that onbalance sheet guarantee fee rates may 

need to be imputed from Farmer Mac’s 

earnings spread, while off-balance sheet 

guarantee fee rates would always be 

contractually explicit. In each case, the 

intent is to isolate the earnings rate on 

the volume. In structuring the definition 

in this manner, we want to be clear that 

whether that earnings rate an explicitly 

set guarantee fee in a contract or not, we 

would apply the proposed credit risk 

multiple to Farmer Mac’s net cash flow 

rate, i.e., either the contractual 

guarantee fee rate (in the case of offbalance sheet rural utility exposure) or 

Farmer Mac’s earnings spread (in the 

case of on-balance sheet rural utility 

exposure). The earnings spread is the incoming cash flow rate (as a percent of 

outstanding principal) minus Farmer 

Mac’s total funding rate on that volume. 

As a conforming technical change, we 

propose amending sections 1.0.a., 4.1.b., 

4.2.b.(2), and 4.2.b.(3) of the model in 

Appendix A of part 652 to add rural 

utility guarantee fees. 

2. Credit Risk 

We propose to amend the model in 

Appendix A of part 652 to include rural 

utility program volume. We propose 

clarifying the applicability of individual 

sections of the model to the rural utility 

portfolio. We also propose adding new 

sections 2.6, 4.1.e., and 4.3.e. to 

calculate losses for rural utility loans. 

This proposed rule applies a stylized 

approach to characterizing credit risk 

for rural utility program volume by 

multiplying the dollar-weighted average 

rural utility guarantee fee by a factor of 

two to characterize average annual loss 

rates. A data set suitable to build a 

reliable default probability loss function 

was not available due to the fact that 

historical losses in the electric 

cooperative sub-sector of the utilities 

industry have been extremely rare.7 The 

industry is characterized by low 

frequency of default and instances of 

default appear largely unrelated to 

specific underwriting decisions. 

Further, even among that small 

proportion of historical instances of 

nonperforming loans in the data we 

obtained, restructured credit defaults 

have in many instances become more 

profitable with deferred obligations 

carried at accumulating rates higher 

than the loan interest rates. For that 

reason, an empirical frequency-based 

analog for estimating credit risk, as was 

used to arrive at the model’s approach 

to estimating agricultural loan risks, is 

not feasible.8

If there were no alternative but to use 

the available data set, rural utility loans’ 

unique features (e.g., few loans, very 

large loan sizes, often with unique 

individual project features) would 

compel us to adjust for extreme value 

possibilities.9 Extreme value theory 

(EVT) employs methods to assign 

probability to possible outcomes in 

ranges beyond those included in the 

data. EVT provides a means to limit the 

relative probability assigned to sample 

outcomes and the probability assigned 

to ranges beyond the most extreme 

observed values. In such cases, simply 

relying on the empirical maximum loss 

value is not acceptable. For example, 

EVT is often applied by hydrologists 

who, when designing levees, are not 

satisfied with building protection 

against historical high-water marks 

when the maximum severity of water 

level in the historical data is not an 

acceptable level of protection to attain. 

Rather, they must protect against more 

severe high-water scenarios. However, 

in an EVT context, the wide divergence 

in the character of rural utility losses in 

the available data may have resulted in 

an even less reliable estimate of the 

‘‘worst case’’ through a constructed limit 

under EVT theory. Therefore, we also 

rejected the EVT approach. 

We next considered a cash-flow 

divergence (CFD) approach. A CFD 

approach would focus on losses related 

to the stress associated with delayed 

receipts of cash flows expected under 

the original amortization schedule. Even 

if the loan is ultimately profitable due 

to a restructuring, the CFD model would 

reflect the stress associated with 

funding the loan during the workout 

period. However, CFD models did not 

offer a reliable measure of loss 

experience that was significantly 

correlated with observable differences 

in loan underwriting characteristics in 

the data set. 

Rather than basing the estimate of 

credit risk on data deemed unsuitable 

for reasons stated above, we propose to 

base a credit risk characterization on 

rural utility guarantee fees charged by 

Farmer Mac. We believe that the Farmer 

Mac rural utility guarantee fee 

represents the best available reference 

point, or benchmark, for quantifying 

credit risk because an alternative 

approach deemed acceptable for 

depicting the probability measures 

associated with default was not 

available. Version 4.0 (proposed) would 

impose stressed annual credit loss rates 

on loans in the rural utility portfolio by 

multiplying the dollar-weighted average 

rural utility guarantee fee by a factor of 

two. We discuss the rationale behind 

the selection of a factor of two in section 

III.C. of this preamble. 

Farmer Mac bases its fees on an 

evaluation of credit-related variables 

associated with the loans and the 

interrelations among those variables, as 

well as the counterparties’ access to 

alternative forms of liquidity through 

the capital markets (i.e., an analysis of 

return opportunities related to what the 

market will bear). Among the creditrelated variables are the modified debt 

service coverage ratios, long-term, debtto-net utility plant ratio, debt-to-equity 

ratio, guaranteed supply contracts in 

place (if any), the level of discretion the 

borrower has to set electric rates, and 

the level of diversification in the 

borrower’s customer base. The 

guarantee fee is, in part, Farmer Mac’s 

estimate of the long-term average annual 

credit losses, i.e., its assessment of 


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3650 Federal Register / Vol. 75, No. 14 / Friday, January 22, 2010 / Proposed Rules 

10Emery, K., Ou. S., Tennant, J., Matos, A., Cantor 

R., ‘‘Corporate Default and Recovery Rates, 1920– 

2008,’’ published by Moody’s Investors Service, 

February 2009; Default Rates, page 31, Recovery 

Rates (Severity Rate = 1 minus Senior Unsecured 

Average Recovery Rate, page 24). 

average net credit risk embedded in 

those variables. 

We propose a multiple of two be 

applied to the rural utility guarantee 

fees to represent stressed rural utility 

loan losses and to place the amount 

generally in the tail of the distribution 

(discussed more fully in section III.C. of 

this preamble). The multiple of two in 

this case is less than the value chosen 

to apply stress in the case of 

modifications to the GOA factors for 

general obligation risk mitigation on 

AgVantage Plus counterparties because 

in the case of the GOA factors we have 

good information on the historical 

average default rates—which we do not 

have in the case of rural utility loans. 

We propose using a multiple of the 

Farmer Mac rural utility guarantee fee as 

a proxy for loss rates because of the 

unsuitability of the data as discussed 

above. We recognize that the use of this 

loss rate proxy results in a different 

factor than in the case of the GOA 

factors. Our intent is to stress rural 

utility loss rates only and, since the 

proportion of the guarantee fees 

attributable to expected average annual 

losses will vary due to the necessarily 

coarse level of precision targeted in this 

treatment, we elected not to propose 

some portion of the guarantee fee as the 

assumed average credit risk coverage 

component. Such an approach would 

have added a level of calculation 

complexity that is disproportionate to 

the coarse level of precision achievable 

given data limitations. Therefore, we 

reduced the multiple we would have 

applied to a more precise average credit 

loss component of the guarantee fee (i.e., 

some percentage of the total fee times 

three) down to two times the entire 

guarantee fee. We believe the proposed 

approach is consistent with the 

statutory credit risk target for 

agricultural loans since it targets a range 

meant to approximate a reasonable but 

stylized worst-case scenario. 

By basing the loss estimate on a factor 

that Farmer Mac controls (rural utility 

guarantee fee), Farmer Mac could 

manipulate its minimum capital 

requirement through its guarantee fee 

pricing. However, the natural alignment 

of incentives to build capital and grow 

earnings renders the scenario 

implausible. If Farmer Mac were capital 

constrained, the incentive to take on 

large volumes of significantly 

underpriced rural utility loan exposure 

is more than offset by counterbalancing 

pressures from the continuing level of 

the proposed loss proxy relative to any 

guarantee fee regardless of whether it is 

abnormally low (i.e., double that rate). 

For this reason, we view as extremely 

unlikely the scenario where Farmer Mac 

would reduce its guarantee fee below a 

level that might be appropriate for 

purposes of pricing the risk Farmer Mac 

assumes in the transaction in order to 

reduce the regulatory capital minimum 

requirement calculated on that volume. 

Further, additional offsetting pressures 

to this scenario can be found in the 

statutory leverage maximum 

requirements and ongoing oversight and 

supervisory risk monitoring by FCA, as 

well as Farmer Mac’s internal control 

structures (also monitored by FCA). 

Additionally, we note that while no 

new regulatory language is necessary, 

implicit in section 2.4 of the Appendix, 

is the proposal that if the contractual 

terms of an AgVantage Plus rural utility 

investment include overcollateral, it be 

treated in a manner consistent with the 

model’s current treatment of such 

overcollateral in AgVantage Plus 

structures. Also consistent with current 

RBCST treatment, we propose that when 

rural utility loan pools submitted to 

Farmer Mac include overcollateral that 

is not contractually required, all 

submitted loans be modeled and the 

total pool loss estimate factored down 

proportionately. We further propose to 

apply no age adjustment to rural utility 

loss estimates because, unlike other 

credit loss estimates in the RBCST, rural 

utility loss rates are already 

characterized as average annual loss 

rates, not lifetime loss rates. Therefore, 

any aging affects are considered to be 

subsumed into that annual average. 

Finally, consistent with the proposed 

revisions to the GOA factors discussed 

below, we propose those GOA factors 

applied to rural utility AgVantage Plus 

volume be revised to reflect the relative 

concentration of rural utility loans in 

the portfolio of the issuer. 

The proposed amendments to the 

model in Appendix A of part 652 

discussed above includes amending the 

table of contents and section headings 

2.1, 2.2, 2.3 and 2.5; adding new 

sections 2.6, 4.1.e., and 4.3.e.; and 

amending the contents of sections 2.0 

and 4.2.b.(1)(A) to reflect the treatment 

of the rural utility authority. As 

conforming technical changes, we 

propose redesignating existing 

paragraphs (b)(5) and (b)(6) as (b)(6) and 

(b)(7) and adding a new paragraph (b)(5) 

to § 652.65 to indicate that the model in 

Appendix A of part 652 is to be used to 

calculate credit loss rates for rural 

utility loans. 

B. Modification of the Treatment of 

Loans Backed by an Obligation of the 

Counterparty and Loans for Which 

Pledged Loan Collateral Volume 

Exceeds Farmer Mac-Guaranteed 

Volume [§§ 652.50 and 652.65(d); 

Appendix A to Part 652] 

We propose to amend sections 2.4.b.3, 

2.4.b.4, 4.1.f., and 4.2.b. of the model in 

Appendix A of part 652 to increase the 

GOA factors, address counterparty 

concentration risks, and ensure 

AgVantage Plus volume maturities are 

recognized in the model. 

1. GOA Factors—Treatment of Loan 

Volume 

In Version 3.0 of the RBCST, we 

established a treatment for program loan 

volume backed by the obligation of a 

counterparty under a general obligation 

(e.g., AgVantage Plus). The derivation 

and application of the GOA factors in 

the current version of the RBCST can be 

summarized as follows: (1) Five levels 

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

BBB and unrated’’ that are mapped to 

the various NRSRO rating categories, 

which include pluses (‘‘+’’) and minuses 

(‘‘¥’’) to the whole-letter categories; (2) 

apply default rate factors equal to the 

average cumulative issuer-weighted 10- 

year corporate default rates by whole 

letter category from 1920 through the 

most recent year, as published by 

Moody’s Investor Services; (3) apply a 

factor equal to the 10-year corporate 

default rates on Speculative-Grade 

bonds published in the same report for 

issuers that are rated below BBB or are 

unrated; 10 (4) adjust the rate to obtain 

an estimated loss rate related to a 

general obligation of the AgVantage Plus 

counterparty, with a given credit rating 

by considering the loss-severity rate as 

implied by senior unsecured bond 

recovery rates published in the same 

annual Moody’s report (i.e., 1 minus 

recovery rate). 

We now propose revising the GOA 

factors by stressing the historical 

corporate bond loss rates to levels 

intended to represent stressed 

conditions instead of average 

conditions. The proposed rule would 

modify the adjustment factors through 

the application of increases (or 

‘‘haircuts’’) to the estimated historical 

loss rates by whole-letter credit rating 

category. Currently, Version 3.0 

effectively assumes that there is no 

relationship between agricultural stress 


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Federal Register / Vol. 75, No. 14 / Friday, January 22, 2010 / Proposed Rules 3651 

and major stress on the issuer’s overall 

financial condition (i.e., in industry 

sectors unrelated to agriculture to which 

the issuer also has significant exposure). 

Thus, the average corporate bond 

default and recovery rates are currently 

assumed to represent an appropriate 

degree of stress to that component of the 

model. 

While we remain convinced of the 

appropriateness of the existing overall 

approach, we believe using the average 

default and recovery rates is not 

sufficiently conservative. A conclusion 

that, while not driven by it, is 

nevertheless underscored by the recent 

crisis in the financial services sector. 

Our proposed revisions to the GOA 

factor would change existing 

assumptions in Version 3.0 to recognize 

the potential scenario that agricultural 

stress and major stress on the issuer’s 

overall financial condition could occur 

at the same time. That is, the proposed 

changes to the GOA factors would 

assume a degree of positive correlation 

between the financial strength of the 

issuer and the loans underlying 

AgVantage Plus issuance. A resulting 

assumption would be that an individual 

firm’s default and recovery experience 

likely differs from the average 

experience of similarly rated firms 

across average historic conditions. The 

result would be a model representing a 

stressed loss scenario, not an average 

loss scenario. 

The proposed treatment is consistent 

with a scenario under which Farmer 

Mac’s risk increases as the value of the 

issuer’s general obligation declines 

simultaneously with the value of the 

underlying loan collateral. The revised 

factors and their components are set 

forth in the table below: 

Whole letter rating Default rate 

(percent) 

Severity rate 

(percent) 

GOA factor 

ver. 3.0 

(percent) 

Proposed 

GOA factor 

(percent) 

AAA .................................................................................................................. 0.86 54.51 0.47 1.41 

AA .................................................................................................................... 2.27 54.51 1.23 3.70 

A ....................................................................................................................... 3.13 54.51 1.71 5.13 

BBB .................................................................................................................. 7.02 54.51 3.83 11.48 

Below BBB and unrated .................................................................................. 27.23 54.51 14.84 44.52 

As the table illustrates, we propose to 

increase the historical loss rates by a 

factor of three. As in the current RBCST 

version, these figures would be updated 

annually, or as an updated version of 

the Moody’s report on Default and 

Recovery Rates of Corporate Bond 

Issuers becomes available. We discuss 

the rationale behind the selection of the 

factor in section III.C. of this preamble. 

2. GOA Factors—Concentration Ratios 

We also propose modifying GOA 

factors to recognize the risk associated 

with a counterparty’s (also referred to as 

the AgVantage Plus issuer) loan 

portfolio concentration in the industry 

sector used in an AgVantage Plus 

issuance. We believe we should 

recognize a reduction in the riskmitigating value of a counterparty’s 

general obligation due specifically to its 

loan portfolio concentration in the same 

industry sector as the loans underlying 

an AgVantage Plus pool. We are 

proposing to estimate that by reducing 

the value of the GOA factors 

proportionate to the counterparty’s 

exposure to that sector in its total 

portfolio. The proposed revision would 

recognize conditions that stress the 

underlying assets, as well as the 

counterparty’s financial position 

generally. The proposed change is 

expected to simultaneously reduce the 

risk-mitigating value of both the 

underlying portfolio and the general 

obligation. 

We further propose that the Director 

of OSMO (Director) make final 

determinations of concentration ratios 

on a case-by-case basis. These 

determinations would define industry 

sectors broadly when there is limited 

availability of concentration data of a 

given counterparty. Specifically, we 

propose modifying section 2.4.b.3.A. of 

Appendix A to allow the Director to 

make final determinations of 

concentration ratios on a case-by-case 

basis by using publicly reported data on 

counterparty portfolios, nonpublic data 

submitted and certified by Farmer Mac 

as part of its RBCST submissions, and 

generally recognizing two rural utility 

sectors-rural electric cooperatives and 

rural telephone cooperatives. The 

following are two illustrative examples 

of how the Director would generally 

arrive at such determinations. First, if 

the underlying AgVantage Plus portfolio 

were rural electric utility cooperative 

loans and the counterparty’s loan and 

lease portfolio were publicly reported to 

contain 25-percent electric utility loans, 

the Director would likely determine the 

concentration ratio at 25 percent, absent 

any other unique aspects of the 

counterparty’s business. Second, if an 

AgVantage Plus underlying portfolio of 

agricultural loans has a counterparty 

whose portion of agricultural loans is 

not disaggregated from some larger 

portfolio segment in its publicly 

available disclosures, the Director 

would use the most appropriate 

publicly disclosed aggregated portfolio 

data to set the concentration ratio. In 

this final example, Farmer Mac could 

obtain the disaggregated portfolio 

information and certify to its accuracy 

in its quarterly RBCST submission in 

lieu of the Director relying on publicly 

disclosed aggregated portfolio data. 

This proposed approach would 

continue to accept that the GOA factors 

should recognize that there are two 

levels of risk mitigation provided to 

Farmer Mac by the AgVantage Plus 

structure: the issuer’s general obligation 

to Farmer Mac and the value of the 

underlying loan collateral. The revised 

approach would further recognize the 

relative difference in an induced 

correlation between the parent obligor 

and the underlying collateral that is 

likely to arise through portfolio 

concentrations. It would also scale the 

GAO factors for counterparty portfolio 

concentrations to reflect the Agency’s 

view that the correlation between a 

significant decline in a highly 

concentrated issuer’s overall financial 

condition and the underlying 

AgVantage Plus loan portfolio is likely 

to be high relative to a more diversified 

counterparty. 

3. Technical Changes 

We propose to amend § 652.50 by 

adding a definition for ‘‘AgVantage Plus’’ 

to clarify that, while ‘‘AgVantage Plus’’ 

is a product name used by Farmer Mac, 

we propose applying it throughout this 

subpart to refer both specifically to 

AgVantage Plus volume currently in 

Farmer Mac’s portfolio as well as other 

similarly structured program volume 

that Farmer Mac might finance in the 

future under other names. We also 

propose conforming changes to the 

model at Appendix A of part 652 to 

replace the term ‘‘Off-Balance Sheet 

AgVantage’’ with ‘‘AgVantage Plus.’’ 

Since the introduction of the 

AgVantage product, volume has 


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11The selected target confidence level is based on 

the Central Limit Theorem of statistics which holds 

that, if the distribution is approximately normal, 

about 99.7 percent of the values will fall within 

three standard deviations of the mean. The 

selection of this confidence level is supported by 

similar targets used by regulated entities of the 

Farm Credit System in their research and 

development work on economic capital which is 

being done with significant oversight by FCA, as 

well as in the literature of other regulatory entities 

including the Bank of International Settlements’ 

Basel Committee on Banking Supervision (BCBS). 

See, BCBS working paper Basel II: International 

Convergence of Capital Measurement and Capital 

Standards: a Revised Framework, June 2004, pages 

73 (paragraph 156), 107 (paragraph 527(a) and (j) 

page 109. 

12See section 8.32(a)(1) of the Act. 

accumulated through a few very large 

individual deals as opposed to a 

constant, steady deal-flow. However, we 

do not believe it is reasonable to assume 

that such volume would backfill on a 

steady-state basis because there has not 

been sufficient historical experience 

demonstrating the incidence of 

AgVantage Plus volume renewing into 

similar structures at the termination of 

existing deals. Therefore, as additional 

clarifying changes, we propose adding 

to paragraph (d)(2) of § 652.65 a 

statement that AgVantage Plus volume 

is not replaced when it matures. We also 

propose explaining in the parenthetical 

of section 4.2.b. of the Appendix A that, 

while the stress test is run as a ‘‘steady 

state,’’ AgVantage Plus volume 

maturities will be recognized by the 

model. 

C. Using Two Different Multiples of 

Externally Referenced Benchmarks To 

Represent Stressed Default Risk 

In two of the proposed revisions, we 

use multiples of external points of 

reference (or ‘‘benchmark 

measurements’’) of average expected 

loss. Those revisions are: (1) 

Establishing a representation of rural 

utility credit losses, and (2) adjusting 

the GOA factors by stressing the 

historical corporate bond loss rates to 

levels intended to represent worst-case 

stress conditions. In both cases, the 

multiples were selected on the basis of 

the availability of historical information 

related to credit losses (or lack thereof 

in the case of rural utility loans) and the 

Agency’s overarching intent to represent 

losses in a reasonable worst-case 

context. We refer to that targeted worstcase scenario as the level of loss ‘‘in the 

tail’’ of any given probability 

distribution. The statistical vernacular 

‘‘in the tail’’ represents a level of loss 

severity sufficiently extreme that it 

would be a very low probability event. 

Targeting a low probability loss event 

(i.e., a scenario of very high losses, 

relatively) can be equivalently thought 

of as a high probability of capital 

adequacy (i.e., Farmer Mac’s solvency) 

even under severe loss conditions. 

While the relative terms ‘‘high’’ and 

‘‘low’’ remain unquantified targets thus 

far in the discussion, we now provide a 

generalized probabilistic description of 

the Agency’s view of capital adequacy 

for purposes of these proposed 

revisions. 

The proposed revisions reflect the 

Agency’s targeting a high confidence 

level (i.e., it has been noted that AA 

ratings often are used interchangeably 

with concepts like a 99.7 percent 

confidence level, or the level of 

probability below which an insolvency 

scenario would not be expected to 

occur).11 We refer to this description as 

‘‘generalized’’ because the calculation of 

the relevant probabilities is entirely 

dependent on the amount of 

information and data available to the 

Agency, and overreliance on a highly 

variable measure can induce 

unintended modeling variability and 

error. When the information and data 

are insufficient to draw specific 

inferences from the data, we can still 

use statistical theory to make 

generalized statements about probability 

if certain conditions are met. In the 

present context, the proposed multiples 

are used with the intent to target loss 

events that could be reasonably viewed 

as being ‘‘in the tail’’ of the distribution, 

without providing a false sense of 

accuracy based on data whose 

characteristics could be overly sensitive 

to small changes in experiences or 

assumptions. We believe our approach 

places the post-haircut corporate bond 

loss estimate in a range that provides a 

meaningfully stressful representation, 

consistent with possibly limited data, 

and reflects generally accepted 

statistical principles and relationships. 

If, for example, the coefficient of 

variation were equal to one, placement 

of the haircut loss rate estimate would 

be at a point on the distribution that 

generally corresponds to three standard 

deviations from the mean, which also 

corresponds to the 99.7-percent 

confidence level. Targeting the 

placement in this range is meant to be 

consistent with the Act’s credit risk 

targets for agricultural loans, which 

directs us to focus on not less than a 2- 

year worst-case historical loss 

experience in agricultural lending.12

Mathematical identification and 

reliability issues limit our ability to 

make specific statements regarding how 

to represent the loss probability. 

However, we can place some limits on 

the probability distances in any loss 

distribution through statistical 

relationships such as Chebychev’s 

theorem—which holds that the 

proportion of observations within some 

number of standard deviations from the 

mean must be at least some specific 

percentage, regardless of the shape of 

the distribution. This allows us to draw 

conclusions (though at a fairly coarse 

level) about the probability of events, 

even when we do not know the mean 

or the level of variation around the 

mean (or both) of the event we are trying 

to model. 

The multiple of three was selected for 

the GOA factors based on the 

recognition that the average historical 

default and recovery rates within each 

whole-letter rating category as reported 

by Moody’s provide a measure of central 

tendency that summarizes the varied 

individual experiences of investors who 

purchased bonds within each rating 

category at each point in time. If we 

were to apply a multiple using 

implications of Chebchev’s theorem to 

the GOA factor, the specific quantitative 

proportions involved in Chebychev’s 

theorem would require a multiple of 19 

or perhaps even higher in order to 

achieve the targeted confidence level 

(99.7 percent). We deemed this 

approach too conservative. However, if 

we assume the distribution is normal 

with a ceofficient of variation of 1, then 

a multiple of 3 is required to achieve the 

targeted confidence level. While we 

cannot directly observe the variation of 

default rates within each rating category 

(or recovery rates among senior secured 

borrowers within each year), the 

coefficients of variation of the time 

series of annual default rates in Moody’s 

2008 report vary from roughly two to 

three within the range of ratings AA to 

the speculative grade group through 

time. Like Chebychev’s theorem, we can 

also reasonably assume that the time 

series variation provides a lower bound 

on the cross sectional variation, were it 

observable, and that the proposed 

multiple is therefore not particularly 

aggressive. 

D. Revise Haircuts on Non-Program 

Investments [Appendix A to Part 652] 

We propose changing the haircut 

levels for non-program investments in 

existing section 4.1.e. of Appendix A, 

renumbering the section as 4.1.f. 

Specifically, we propose revising these 

haircut levels to the same loss rate 

adjustment factors proposed for 

application on loans underlying 

guaranteed notes (i.e., AgVantage Plus) 

as discussed in section III.B.1 of this 

preamble. The proposed investment 

haircuts to recognize counterparty risk 

are as follows: 


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Whole letter credit rating Haircut 

(percent) 

AAA ............................................. 1.41 

AA ............................................... 3.70 

A ................................................. 5.13 

BBB ............................................. 11.48 

Below BBB and Unrated ............ 44.52 

We likewise propose to update these 

figures annually, or as an updated 

version of the Moody’s report on Default 

and Recovery Rates of Corporate Bond 

Issuers becomes available, just as we 

proposed for loss rate adjustment factors 

on loans underlying guaranteed notes. 

IV. Impact of the Proposed Revisions on 

Required Capital 

We have evaluated the impact of the 

proposed changes to Version 3.0 of the 

model. Our review indicates that 

changes related to the reclassification of 

rural utility volume as program business 

and the associated required application 

of worst-case credit risk, along with the 

recognition of more limited riskmitigation in the counterparty’s general 

obligation, would have the most 

significant impact on risk-based capital 

calculated by the model. The table 

below provides an indication of the 

impacts of the revisions in the quarter 

ended March 31, 2009. 

CALCULATED REGULATORY MINIMUM CAPITAL, 3/31/2009 

[$ in thousands] 

0 ................... RBCST Version 3.0 (calculated as of 3/31/2009) ......................................................................... 40,061 ........................

1 ................... Revised Haircuts on Non-Program Investments ........................................................................... 40,505 444 

2 ................... Tripling of Version 3.0 GOA Factors ............................................................................................. 40,201 140 

3 ................... Credit Risk on Rural Utility Loans & Concentration Risk ............................................................. 60,999 20,938 

All Version 4.0 Proposed Effects .................................................................................................. 62,937 22,876 

As the table shows, the individual 

estimated impacts do not have an 

additive relationship to the total impact 

on the model output. This is due to the 

interrelationship of the changes with 

one another when they are combined in 

Version 4.0 (proposed). It is worth 

noting that the marginal effects are also 

not constant rate effects, but depend on 

the starting conditions and earnings 

spread of Farmer Mac and the 

magnitude of the effect considered. For 

example, as the volume in the rural 

utility category is increased, the rate of 

increase in the marginal minimum riskbased capital requirement begins to 

increase as the downward-pressure on 

that rate exerted by earnings from other 

activities are further diluted as those 

earnings become increasingly smaller in 

proportion to total estimated losses. The 

same effect is evident in other ways as 

risk increases and the offsetting effect of 

earnings is diminished relative to 

increased risk. For example, this effect 

would be observed, all else equal, with 

lower initial earnings spreads or higher 

AgVantage Plus counterparty 

concentrations, updated (and higher) 

Moody’s base corporate bond default 

rates, or ratings downgrades. Thus, the 

values in the table above are illustrative 

of the relative effects of the proposals in 

this rulemaking, given the conditions at 

March 2009, but can be materially 

affected by changes in starting 

conditions or risk compositions through 

time. 

V. Regulatory Flexibility Act 

Pursuant to section 605(b) of the 

Regulatory Flexibility Act (5 U.S.C. 601 

et seq.), FCA hereby certifies the 

proposed rule will not have a significant 

economic impact on a substantial 

number of small entities. Farmer Mac 

has assets and annual income over the 

amounts that would qualify it as a small 

entity. Therefore, Farmer Mac is not 

considered a ‘‘small entity’’ as defined in 

the Regulatory Flexibility Act. 

List of Subjects in 12 CFR Part 652 

Agriculture, Banks, Banking, Capital, 

Investments, Rural areas. 

For the reasons stated in the 

preamble, part 652 of chapter VI, title 12 

of the Code of Federal Regulations is 

proposed to be amended as follows: 

PART 652—FEDERAL AGRICULTURAL 

MORTGAGE CORPORATION FUNDING 

AND FISCAL AFFAIRS 

1. The authority citation for part 652 

continues to read as follows: 

Authority: Secs. 4.12, 5.9, 5.17, 8.11, 8.31, 

8.32, 8.33, 8.34, 8.35, 8.36, 8.37, 8.41 of the 

Farm Credit Act (12 U.S.C. 2183, 2243, 2252, 

2279aa–11, 2279bb, 2279bb–1, 2279bb–2, 

2279bb–3, 2279bb–4, 2279bb–5, 2279bb–6, 

2279cc); sec. 514 of Pub. L. 102–552, 106 

Stat. 4102; sec. 118 of Pub. L. 104–105, 110 

Stat. 168. 

Subpart B—Risk-Based Capital 

Requirements 

2. Amend § 652.50 by adding 

alphabetically the following definitions: 

§ 652.50 Definitions. 

* * * * * 

AgVantage Plus means both the 

product by that name used by Farmer 

Mac and other similarly structured 

program volume that Farmer Mac might 

finance in the future under other names. 

* * * * * 

Rural utility guarantee fee means the 

actual guarantee fee charged for offbalance sheet volume and the earnings 

spread over Farmer Mac’s funding costs 

for on-balance sheet volume on rural 

utility loans. 

3. Amend § 652.65 by: 

a. Redesignating paragraphs (b)(5) and 

(b)(6) as paragraphs (b)(6) and (b)(7); 

b. Adding a new paragraph (b)(5); 

c. Revising newly redesignated 

paragraph (b)(6) and paragraph (d)(2) to 

read as follows: 

§ 652.65 Risk-based capital stress test. 

* * * * * 

(b) * * * 

(5) You will calculate loss rates on 

rural utility loans as further described in 

Appendix A. 

(6) You will further adjust losses for 

loans that collateralize the general 

obligation of AgVantage Plus volume, 

and for loans where the program loan 

counterparty retains a subordinated 

interest in accordance with Appendix A 

to this subpart. 

* * * * * 

(d) * * * 

(2) You must use model assumptions 

to generate financial statements over the 

10-year stress period. The major 

assumption is that cashflows generated 

by the risk-based capital stress test are 

based on a steady-state scenario. To 

implement a steady-state scenario, when 

on- and off-balance sheet assets and 

liabilities amortize or are paid down, 

you must replace them with similar 

assets and liabilities (AgVantage Plus 

volume is not replaced when it 

matures). Replace amortized assets from 

discontinued loan programs with 

current loan programs. In general, keep 

assets with small balances in constant 

proportions to key program assets. 

* * * * * 

4. Amend Appendix A of subpart B, 

part 652 by: 

a. Revising the table of contents; 


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15Emery, K., Ou S., Tennant, J., Kim F., Cantor 

R., ‘‘Corporate Default and Recovery Rates, 1920– 

2007,’’ published by Moody’s Investors Service, 

February 2008—the most recent edition as of March 

2008; Default Rates, page 24, Recovery Rates 

(Severity Rate = 1 minus Senior Unsecured Average 

Recovery Rate) page 20. 

b. Revising the last sentence of section 

1.0.a.; 

c. Adding a new fourth sentence to 

section 2.0; 

d. Adding the words ‘‘for All Types of 

Loans, Except Rural Utility Loans’’ at the 

end of each heading for sections 2.1, 2.2, 

2.3, and 2.5; 

e. Revising section 2.4.b.3, b.3.A., and 

b.4; 

f. Adding a new section 2.6; 

g. Renumbering the footnote in 

section 3.0 from ‘‘15’’ to ‘‘16’’; 

h. Redesignating section 4.1.e. as new 

section 4.1.f., adding a new section 

4.1.e., and revising section 4.1.b. and 

newly redesignated section 4.1.f.; 

i. Revising section 4.2.b. introductory 

paragraph, paragraphs b.(1)(A)(v), 

b.(1)(A)(vi), the last sentence of 

paragraph b.(1)(B), the first sentence of 

paragraph b.(2), the last sentence of 

paragraph b.(3) and adding a new 

paragraph b.(1)(A)(vii); 

j. Adding a new section 4.3.e.; and, 

k. Revising the second sentence of 

section 4.4. 

The revisions and additions read as 

follows: 

Appendix A—Subpart B of Part 652— 

Risk-Based Capital Stress Test 

1.0 Introduction. 

2.0 Credit Risk. 

2.1 Loss-Frequency and Loss-Severity 

Models for All Types of Loans, Except 

Rural Utility Loans. 

2.2 Loan-Seasoning Adjustment for All 

Types of Loans, Except Rural Utility 

Loans. 

2.3 Example Calculation of Dollar Loss on 

One Loan for All Types of Loans, Except 

Rural Utility Loans. 

2.4 Treatment of Loans Backed by an 

Obligation of the Counterparty and 

Loans for Which Pledged Loan Collateral 

Volume Exceeds Farmer Mac-Guaranteed 

Volume. 

2.5 Calculation of Loss Rates for Use in the 

Stress Test for All Types of Loans, 

Except Rural Utility Loans. 

2.6 Calculation of Loss Rates on Rural 

Utility Volume for Use in the Stress Test. 

3.0 Interest Rate Risk. 

3.1 Process for Calculating the Interest Rate 

Movement. 

4.0 Elements Used in Generating Cashflows. 

4.1 Data Inputs. 

4.2 Assumptions and Relationships. 

4.3 Risk Measures. 

4.4 Loan and Cashflow Accounts. 

4.5 Income Statements. 

4.6 Balance Sheets. 

4.7 Capital. 

5.0 Capital Calculations. 

5.1 Method of Calculation. 

* * * * * 

1.0 Introduction 

a. * * * The stress test also uses historic 

agricultural real estate mortgage performance 

data, rural utility guarantee fees, relevant 

economic variables, and other inputs in its 

calculations of Farmer Mac’s capital needs 

over a 10-year period. 

* * * * * 

2.0 Credit Risk 

* * * Loss rates discussed in this section 

apply to all loans, unless otherwise 

indicated. * * * 

* * * * * 

2.4 Treatment of Loans Backed by an 

Obligation of the Counterparty, and 

Loans for which Pledged Loan Collateral 

Volume Exceeds Farmer Mac-Guaranteed 

Volume 

* * * * * 

b. * * * 

3. Loans with a positive loss estimate 

remaining after adjustments in ‘‘1.’’ and ‘‘2.’’ 

above are further adjusted for the security 

provided by the general obligation of the 

counterparty. To make this adjustment in our 

example, multiply the estimated dollar losses 

remaining after adjustments in ‘‘1.’’ and ‘‘2.’’ 

above by the appropriate general obligation 

adjustment (GOA) factor based on the 

counterparty’s whole-letter issuer credit 

rating by a nationally recognized statistical 

rating organization (NRSRO) and the ratio of 

the counterparty’s concentration of risk in 

the same industry sector as the loans backing 

the AgVantage Plus volume, as determined 

by the Director. 

A. The Director will make final 

determinations of concentration ratios on a 

case-by-case basis by using publicly reported 

data on counterparty portfolios, nonpublic 

data submitted and certified by Farmer Mac 

as part of its RBCST submissions, and will 

generally recognize rural electric 

cooperatives and rural telephone 

cooperatives as separate rural utility sectors. 

The following table sets forth the GOA 

factors and their components by whole-letter 

credit rating (Adjustment Factor = Default 

Rate x Severity Rate x 3), which may be 

further adjusted for industry sector 

concentration by the Director.15

Whole-letter rating Default rate 

(percent) 

Severity rate 

(percent) 

V3.0 GOA factor 

(percent) 

V4.0 GOA factors 

(D × 3) 

(percent) 

Concentration 

ratio (e.g., 25%) 

(percent) 

Factor with concentration adjustment 1¥ ((1¥E) 

× (1¥F)) 

(percent) 

A B C F E F G 

AAA ...................... 0.897 54 0.48 1.41 25.00 26.06 

AA ........................ 2.294 54 1.24 3.70 25.00 27.78 

A ........................... 2.901 54 1.57 5.13 25.00 28.84 

BBB ...................... 7.061 54 3.82 11.48 25.00 33.61 

Below BBB and 

Unrated ............. 26.827 54 14.50 44.52 25.00 58.39 

* * * * * 

4. Continuing the previous example, the 

pool contains two loans on which Farmer 

Mac is guaranteeing a total of $2 million and 

with total submitted collateral of 110 percent 

of the guaranteed amount. Of the 10-percent 

total overcollateral, 5 percent is contractually 

required under the terms of the transaction. 

The pool consists of two loans of slightly 

over $1 million. Total overcollateral is 

$200,000 of which $100,000 is contractually 

required. The counterparty has a single ‘‘A’’ 

credit rating, a 25-percent concentration 

ratio, and after adjusting for contractually 

required overcollateral, estimated losses are 

greater than zero. The net loss rate is 

calculated as described in the steps in the 

table below. 

Loan A Loan B 

1 ................... Guaranteed Volume ...................................................................................................................... $2,000,000 

2 ................... Origination Balance of 2-Loan Portfolio ........................................................................................ $1,080,000 $1,120,000 


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Loan A Loan B 

3 ................... Age-Adjusted Loss Rate ............................................................................................................... 7% 5% 

4 ................... Estimated Age-Adjusted Losses ................................................................................................... $75,600 $56,000 

5 ................... Guarantee Volume Scaling Factor ................................................................................................ 90.91% 90.91% 

6 ................... Losses Adjusted for Total Overcollateral ...................................................................................... $68,727 $50,909 

7 ................... Contractually Required Overcollateral on Pool (5%) .................................................................... $100,000 

8 ................... Net Losses on Pool Adjusted for Contractually Required Overcollateral ..................................... $19,636 

9 ................... GOA Factor for ‘‘A’’ Issuer with 25% Concentration Ratio ........................................................... 28.84% 

10 ................. Losses Adjusted for ‘‘A’’ General Obligation ................................................................................. $5664 

11 ................. Loss Rate Input in the RBCST for this Pool ................................................................................. 0.28% 

* * * * * 

2.6 Calculation of Loss Rates on Rural 

Utility Volume for Use in the Stress Test 

You must submit the outstanding 

principal, maturity date of the loan, maturity 

date of the AgVantage Plus contract (if 

applicable), and the rural utility guarantee 

fee percentage for each loan in Farmer Mac’s 

rural utility loan portfolio on the date at 

which the stress test is conducted. You must 

multiply the rural utility guarantee fee by 

two to calculate the loss rate on rural utility 

loans under stressful economic conditions 

and then multiply the loss rate by the total 

outstanding principal. To arrive at the net 

rural utility loan losses, you must next apply 

the steps ‘‘5’’ through ‘‘11’’ of section 2.4.b.4 

of this Appendix. For loans under an 

AgVantage Plus-type structure, the calculated 

losses are distributed over time on a straightline basis. For loans that are not part of an 

AgVantage Plus-type structure, losses are 

distributed over the 10-year modeling 

horizon, consistent with other nonAgVantage Plus loan volume. 

* * * * * 

4.1 Data Inputs 

* * * * * 

b. Cashflow Data for Asset and Liability 

Account Categories. The necessary cashflow 

data for the spreadsheet-based stress test are 

book value, weighted average yield, weighted 

average maturity, conditional prepayment 

rate, weighted average amortization, and 

weighted average guarantee fees and rural 

utility guarantee fees. The spreadsheet uses 

this cashflow information to generate starting 

and ending account balances, interest 

earnings, guarantee fees, rural utility 

guarantee fees, and interest expense. Each 

asset and liability account category identified 

in this data requirement is discussed in 

section 4.2 ‘‘Assumptions and Relationships.’’ 

* * * * * 

e. Loan-Level Data for All Rural Utility 

Program Volume. The stress test requires 

loan-level data for all rural utility program 

volume. The specific loan data fields 

required for calculating the credit risk are 

outstanding principal, maturity date of the 

loan, maturity date of the AgVantage Plus 

contract (if applicable), and the rural utility 

guarantee fee percentage for each loan in 

Farmer Mac’s rural utility loan portfolio on 

the date at which the stress test is conducted. 

f. Weighted Haircuts for Non-Program 

Investments. For non-program investments, 

the stress test adjusts the weighted average 

yield data referenced in section 4.1.b. to 

reflect counterparty risk. Non-program 

investments are defined in § 652.5. The 

Corporation must calculate the haircut to be 

applied to each investment based on the 

lowest whole-letter credit rating the 

investment received from an NRSRO using 

the haircut levels in effect at the time. 

Haircut levels shall be the same amounts 

calculated for the GOA factor in section 

2.4.b.3 above. The first table provides the 

mappings of NRSRO ratings to whole-letter 

ratings for purposes of applying haircuts. 

Any ‘‘+’’ or ‘‘¥’’ signs appended to NRSRO 

ratings that are not shown in the table should 

be ignored for purposes of mapping NRSRO 

ratings to FCA whole-letter ratings. The 

second table provides the haircut levels by 

whole-letter rating category. 

FCA WHOLE-LETTER CREDIT RATINGS MAPPED TO RATING AGENCY CREDIT RATINGS

FCA Ratings Category .................. AAA .................. AA .................... A ....................... BBB .................. Below BBB and Unrated. 

Standard & Poor’s Long-Term ...... AAA .................. AA .................... A ....................... BBB .................. Below BBB and Unrated. 

Fitch Long-Term ........................... AAA .................. AA .................... A ....................... BBB .................. Below BBB and Unrated. 

Standard & Poor’s Short-Term ..... A–1+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 ......................................... .......................... Prime- MIG12 

VMIg1.

Prime-2 MIG2 

VMIG2.

Prime-3 MIG3 

VMIG3.

Not Prime, SG and Unrated. 

Fitch 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. 

FARMER MAC RBCST MAXIMUM

HAIRCUT BY RATINGS CLASSIFICATION

Ratings classification 

Non-program investment counterparties (excluding 

derivatives) 

(percent) 

Cash ............................... 0.00 

AAA ................................. 1.41 

AA ................................... 3.70 

A ..................................... 5.13 

BBB ................................. 11.48 

Below BBB or Unrated ... 44.52 

* * * * * 

4.2 Assumptions and Relationships 

* * * * * 

b. From the data and assumptions, the 

stress test computes pro forma financial 

statements for 10 years. The stress test must 

be run as a ‘‘steady state’’ with regard to 

program balances (with the exception of 

AgVantage Plus volume, in which case 

maturities are recognized by the model), and 

where possible, will use information gleaned 

from recent financial statements and other 

data supplied by Farmer Mac to establish 

earnings and cost relationships on major 

program assets that are applied forward in 

time. As documented in the stress test, 

entries of ‘‘1’’ imply no growth and/or no 

change in account balances or proportions 

relative to initial conditions with the 

exception of pre-1996 loan volume being 

transferred to post-1996 loan volume. The 

interest rate risk and credit loss components 

are applied to the stress test through time. 

The individual sections of that worksheet 

are: 

(1) * * * 

(A) * * * 

(v) Loans held for securitization; 

(vi) Farmer Mac II program assets; and 

(vii) Rural Utility program volume on 

balance sheet. 

(B) * * * The exceptions are that expiring 

pre-1996 Act program assets are replaced 

with post-1996 Act program assets and 

AgVantage Plus volume maturities are 

recognized by the model. 

(2) Elements related to other balance sheet 

assumptions through time. As well as interest 

earning assets, the other categories of the 

balance sheet that are modeled through time 

include interest receivable, guarantee fees 

receivable, rural utility guarantee fees 

receivable, prepaid expenses, accrued 


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3656 Federal Register / Vol. 75, No. 14 / Friday, January 22, 2010 / Proposed Rules 

interest payable, accounts payable, accrued 

expenses, reserves for losses (loans held and 

guaranteed securities), and other off-balance 

sheet obligations. * * * 

(3) Elements related to income and 

expense assumptions. * * * These 

parameters are the gain on agricultural 

mortgage-backed securities (AMBS) sales, 

miscellaneous income, operating expenses, 

reserve requirement, guarantee fees, rural 

utility guarantee fees, and loan loss 

resolution timing. 

* * * * * 

4.3 Risk Measures 

* * * * * 

e. The credit loss exposure on rural utility 

volume, described in section 2.6, 

‘‘Calculation of Loss Rates on Rural Utility 

Volume for Use in the Stress Test,’’ is entered 

into the ‘‘Risk Measures’’ worksheet applied 

to the volume balance. All losses arising from 

rural utility loans are expressed as annual 

loss rates and distributed over the weighted 

average maturity of the rural utility 

AgVantage Plus Volume, or as annual loss 

across the full 10-year modeling horizon in 

the case of rural utility Cash Window loans. 

* * * * * 

4.4 Loan and Cashflow Accounts 

* * * The steady-state formulation results 

in account balances that remain constant 

except for the effects of discontinued 

programs, maturing AgVantage Plus 

positions, and the LLRT adjustment. * * * 

Dated: January 19, 2010. 

Roland E. Smith, 

Secretary, Farm Credit Administration Board. 

[FR Doc. 2010–1205 Filed 1–21–10; 8:45 am] 

BILLING CODE 6705–01–P 

DEPARTMENT OF TRANSPORTATION 

Federal Aviation Administration 

14 CFR Part 39 

[Docket No. FAA–2010–0044; Directorate 

Identifier 2009–NM–084–AD] 

RIN 2120–AA64 

Airworthiness Directives; The Boeing 

Company Model 767–200, –300, and 

–300F Series Airplanes 

AGENCY: Federal Aviation 

Administration (FAA), DOT. 

ACTION: Notice of proposed rulemaking 

(NPRM). 

SUMMARY: We propose to adopt a new 

airworthiness directive (AD) for certain 

Model 767–200, –300, and –300F series 

airplanes. This proposed AD would 

require inspecting to verify the part 

number of the low-pressure flex-hoses 

of the flightcrew and supernumerary 

oxygen system installed under the 

oxygen mask stowage box at a flightcrew 

and supernumerary oxygen mask 

location, and replacing the flex-hose 

with a new non-conductive lowpressure flex-hose if necessary. This 

proposed AD results from reports of a 

low-pressure flex-hose of the flightcrew 

oxygen system that burned through due 

to inadvertent electrical current from a 

short circuit in an adjacent audio select 

panel. We are proposing this AD to 

prevent inadvertent electrical current, 

which can cause the low-pressure flexhoses used in the flightcrew and 

supernumerary oxygen systems to melt 

or burn, resulting in oxygen system 

leakage and smoke or fire. 

DATES: We must receive comments on 

this proposed AD by March 8, 2010. 

ADDRESSES: You may send comments by 

any of the following methods: 

• Federal eRulemaking Portal: Go to 

http://www.regulations.gov. Follow the 

instructions for submitting comments. 

• Fax: 202–493–2251. 

• Mail: U.S. Department of 

Transportation, Docket Operations, M– 

30, West Building Ground Floor, Room 

W12–140, 1200 New Jersey Avenue, SE., 

Washington, DC 20590. 

• Hand Delivery: U.S. Department of 

Transportation, Docket Operations, M– 

30, West Building Ground Floor, Room 

W12–140, 1200 New Jersey Avenue, SE., 

Washington, DC 20590, between 

9 a.m. and 5 p.m., Monday through 

Friday, except Federal holidays. 

For service information identified in 

this proposed AD, contact Boeing 

Commercial Airplanes, Attention: Data 

& Services Management, P.O. Box 3707, 

MC 2H–65, Seattle, Washington 98124– 

2207; telephone 206–544–5000, 

extension 1; fax 206–766–5680; e-mail 

me.boecom@boeing.com; Internet 

https://www.myboeingfleet.com. You 

may review copies of the referenced 

service information at the FAA, 

Transport Airplane Directorate, 1601 

Lind Avenue, SW., Renton, Washington. 

For information on the availability of 

this material at the FAA, call 425–227– 

1221 or 425–227–1152. 

Examining the AD Docket 

You may examine the AD docket on 

the Internet at http:// 

www.regulations.gov; or in person at the 

Docket Management Facility between 9 

a.m. and 5 p.m., Monday through 

Friday, except Federal holidays. The AD 

docket contains this proposed AD, the 

regulatory evaluation, any comments 

received, and other information. The 

street address for the Docket Office 

(telephone 800–647–5527) is in the 

ADDRESSES section. Comments will be 

available in the AD docket shortly after 

receipt. 

FOR FURTHER INFORMATION CONTACT: 

Robert Hettman, Aerospace Engineer, 

Cabin Safety and Environmental 

Systems Branch, ANM–150S, FAA, 

Seattle ACO, 1601 Lind Avenue, SW., 

Renton, Washington 98057–3356; 

telephone (425) 917–6457; fax (425) 

917–6590. 

SUPPLEMENTARY INFORMATION: 

Comments Invited 

We invite you to send any written 

relevant data, views, or arguments about 

this proposed AD. Send your comments 

to an address listed under the 

ADDRESSES section. Include ‘‘Docket No. 

FAA–2010–0044; Directorate Identifier 

2009–NM–084–AD’’ at the beginning of 

your comments. We specifically invite 

comments on the overall regulatory, 

economic, environmental, and energy 

aspects of this proposed AD. We will 

consider all comments received by the 

closing date and may amend this 

proposed AD because of those 

comments. 

We will post all comments we 

receive, without change, to http:// 

www.regulations.gov, including any 

personal information you provide. We 

will also post a report summarizing each 

substantive verbal contact we receive 

about this proposed AD. 

Discussion 

We have received reports of a lowpressure flex-hose of the flightcrew 

oxygen system that burned through due 

to inadvertent electrical current from a 

short circuit in an adjacent audio select 

panel. An electrical current went 

through the support structure to a 

flightcrew mask stowage box and 

through the low-pressure oxygen hose. 

This caused the spring inside the lowpressure oxygen hose to act as an 

electrical conductor and heat up, 

causing the hose to burn through. This 

condition, if not corrected, could cause 

the low-pressure flex-hose of the 

flightcrew or supernumerary oxygen 

system to melt or burn, resulting in 

oxygen system leakage and smoke or 

fire. 

Relevant Service Information 

We have reviewed Boeing Service 

Bulletin 767–35A0034, Revision 1, 

dated June 22, 2000. The service 

bulletin describes procedures for 

replacing the existing low-pressure flexhoses of the flightcrew and 

supernumerary oxygen systems 

installed under the oxygen mask 

stowage box at the flightcrew and 

supernumerary oxygen mask locations, 

with new non-conductive low-pressure 

flex-hoses of the oxygen system. 


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