Capital One Financial Corp. will pay a $3.5 million fine to settle allegations of understating millions of dollars in auto-loan losses prior to the recession, said the U.S. Securities and Exchange Commission yesterday.
The SEC said the lender minimized its auto finance losses by 18% in the second quarter of 2007 and by 9% the following quarter, a time most lenders’ profits stemmed from subprime loans. The agency’s investigation discovered that Capital One Auto Finance’s charge-offs and delinquencies from October 2006 to 3Q07 greatly surpassed the lender’s forecasts.
Capital One, said the SEC, failed to report the losses it internally credited to weakening macroeconomic circumstances in 2Q07, and reported just one-third of third-quarter losses.
“Accurate financial reporting is a fundamental obligation for any public company, particularly a bank’s accounting for its provision for loan losses during a time of severe financial distress,” George Canellos, co-director of the division of enforcement, said in a statement. “Capital One failed in this responsibility by underreporting 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.”
Two former executives, Chief Risk Officer Peter Schnall and Divisional Credit Officer David LaGassa, were also charged with “deviating from established policies and procedures and failing to implement proper internal controls for determining its loan loss expense,” the statement said. Schnall agreed to pay an $85,000 penalty, while LaGassa will pay $50,000. Neither the bank nor the former executives admitted nor denied the charges were part of the settlements.
“Financial institutions, especially those engaged in subprime lending practices, must have rigorous controls surrounding their process for estimating loan losses to prevent material misstatements of those expenses,” said Gerald W. Hodgkins, associate director of the division of enforcement. “The SEC will not tolerate deficient controls surrounding an issuer’s financial reporting obligations, including quarterly reporting obligations.”
A Capital One statement confirmed the settlement, and ensured it would not affect current or future business. “No consumers were affected,” it said. “The SEC does not criticize the company’s or the auto finance unit’s reserves as of 2007 yearend, and the settlement does not require a restatement of Capital One’s financial results.”
Capital One is based in McLean, Va., and was the nation’s eighth-largest auto financier last year, with $27 billion in outstanding auto loans, according to the Auto Finance Big Wheels report.
