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SEC Fines Capital One $3.5M Over Auto Loan Losses

The Securities and Exchange Commission (SEC) Wednesday charged Capital One Financial Corporation $3.5 million for its alleged misdeed in reserving for the impending auto-loan losses months before the financial crisis hit.

SEC said that Capital One, one of the nation’s largest banks, was not able to keep a good amount of money when the losses on auto loans went higher than what was forecasted.

SEC Division of Enforcement Co-Director George Canellos said, “Capital One failed in this responsibility by under-reporting expenses relating to its loan losses even as its own internal forecasting tool had signaled an increase in incurred losses due to the impending financial crisis.”

Capital One under-reported their expenses which supposed to have contributed to their auto-loan losses. It also experienced “significantly higher” loan charge-offs and delinquencies than what was expected, according to SEC.

Since Capital One had determined that the raised losses were caused by external economic factors, it should have added $72 million to their reserves for auto-loan losses in Q2 2007 and $85 million in the third quarter of the same year.

But because it failed to do so, it resulted in a total loan and lease provision for losses that is understated by 18 percent in the second quarter of 2007 and 9 percent in the third quarter.

Had Capital One factored in external factors in its report for the second quarter, its total loan-loss expense would have been $473 million which is 18 percent higher than it actually reported. And its total net income would have been $699 million, 7 percent less than it reported for the same period.

Two executives of the bank are also to settle charges against them.


Peter Schnall, Capital One’s former chief risk office, failed to raise the issue to the higher management and former credit officer David LaGassa was not able to ensure the inclusion of the external factors, such as the economic crisis and declining credit environment, in the loss forecast, according to SEC.

Schnall and LaGassa agreed to pay $85,000 and $50,000, respectively in settlement. However, the banks and the executives did not admit nor denied the allegations.

“The settlement will not affect any current or future business activities by Capital One,” a spokeswoman for the bank said. She also said that the company “continues to have confidence in Mr. Schnall and Mr. LaGassa and we believe that they can perform in their current roles with the company.”

Capital One had already paid millions of dollars to settle two separate cases this year.

It paid Consumer Financial Protection Bureau and Office of the Comptroller of the Currency (OCC) over $200 million for the alleged lapses in monitoring third-party sales of add-on products to credit card holders.

The U.S. Justice Department and the OCC not long after fined the bank more than $10 million over collection and other issues involving military borrowers.

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