Investors dumped shares of Farmer Mac yesterday after the farm-loan financier said its federal regulator was proposing rules that would effectively eliminate its inherent competitive advantage over commercial banks or thrifts.

Shares in the District-based Federal Agricultural Mortgage Corp., as it is formally known, slid $4.16, to close at $18.59 yesterday in heavy New York Stock Exchange trading, after the company said the proposed Farm Credit Administration rule forcing it to seek a formal rating from a credit agency would "adversely effect" its business. The rule would make it more expensive for Farmer Mac to borrow money and possibly make it more difficult for most of its customers to buy its debt.

Farmer Mac was created in 1988 by Congress as a government-sponsored enterprise (GSE) -- private but with certain advantages, such as a backup line of credit with the Treasury. It was established to provide a source of ready cash for farm mortgages, similar to the role played by much larger GSEs Freddie Mac and Fannie Mae in the residential mortgage market.

Farmer Mac buys farm mortgages directly from lenders and holds them as investments or sells them in the form of mortgage-backed securities to investors. Most of its business is with the banks and independent associations that make up the Farm Credit System.

In recent years, Farmer Mac has grown rapidly, leading critics on Wall Street and among the Farm Credit System's private-sector competitors to lobby Congress and the Bush administration to impose tougher capital standards and more stringent regulation on Farmer Mac. Earlier this year, the Government Accountability Office issued a report critical of Farmer Mac's investment strategy, particularly its off-balance-sheet investments and its purchase of assets not directly related to its mission.

Nancy C. Pellett, chairman of the Farm Credit Administration, which regulates both Farmer Mac and the Farm Credit System, told the House Agriculture Committee in June that she agreed with much of the GAO report and that her agency was implementing new oversight initiatives on Farmer Mac. Included in those initiatives was the proposal the would require Farmer Mac to get a formal credit rating.

"The rule is designed to bring us in line with other financial regulators," Dana Wyckoff, a spokeswoman for the FCA, said yesterday.

Most bank regulations, as well as regulations governing Fannie Mae and Freddie Mac, require a system of "risk-weighting" of assets, whereby an institution must set aside more capital for assets with more risk.

Now, all Farmer Mac-guaranteed securities are automatically assumed to have the lowest risk of any nongovernmental investment a Farm Credit bank can make. A bank that purchases the securities must set aside 20 percent of the security's value to cover the risk of a default. Farmer Mac is accorded its low risk-weighting without having to get a rating from an agency.

The rule would require Farm Credit System banks and associations to use the 20 percent risk weighting only for securities rated AA or better. On unrated securities, the Farm Credit System banks would have to set aside capital equal to the value of the securities, which would essentially make it impossible for them to buy those securities.

Farm Credit System banks and associations are "a major segment" of Farmer Mac's customer base. Farmer Mac has never sought an independent credit rating, and it said it could offer "no assurance" that it would receive a AA rating or better.

Farmer Mac officials did not return calls seeking comment last night. "Farmer Mac would get a credit rating if it felt it was desirable and necessary to do so," chief executive Henry E. Edelman told analysts during a conference call yesterday.

In a statement, Farmer Mac said that "there are good and sufficient reasons the proposed regulation should not be adopted in its current form." In the 90-day comment period that begins next week, the company will give its reasons why the rule should be scrapped or changed. Wyckoff said that if the rule is adopted it would not become fully effective for 18 months after the comment period, which may be extended.

Farmer Mac also said its earnings fell in the second quarter because of how it must account for its hedging activities. Profitability was also hurt by the shrinking difference between what its assets yield in interest and what it pays to fund those assets.

Farmer Mac earned $2.5 million (16 cents a share) in the quarter, compared with $8.9 million (70 cents) in the same quarter a year earlier. On June 30, its total assets were $4.1 billion, compared with $4.3 billion a year earlier.