Daily News: April 25, 2013

SEC Charges Capital One With Understating Auto Loan Losses

The Securities and Exchange Commission said it has charged Capital One and two senior executives for understating millions of dollars in auto loan losses incurred during the months leading into the financial crisis.

The SEC said that its investigation found that in financial reporting for the second and third quarters of 2007, Capital One failed to properly account for losses in its auto finance business when they became higher than originally forecasted. The profitability of its auto loan business was primarily derived from extending credit to subprime consumers. As credit markets began to deteriorate, Capital One’s internal loss forecasting tool found that the declining credit environment had a significant impact on its loan loss expense. However, Capital One failed to properly incorporate these internal assessments into its financial reporting, and thus understated its loan loss expense by approximately 18% in the second quarter and 9% in the third quarter.

Capital One agreed to pay $3.5 million to settle the SEC’s charges. The two executives — former chief risk officer Peter A. Schnall and former divisional credit officer David A. LaGassa — also agreed to settle the charges against them.

“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,” said George Canellos, co-director of the Division of Enforcement. “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.”

Schnall agreed to pay an $85,000 penalty and LaGassa agreed to pay a $50,000 penalty to settle the SEC’s charges. Capital One and the two executives neither admitted nor denied the findings in consenting to the SEC’s order requiring them to cease and desist from committing or causing any violations of these federal securities laws.

To read the full SEC news release for more details about the case click here.