Capital One 2004 Annual Report Download - page 36

and such deposits may not pay rates that significantly exceed the rates paid on deposits of similar maturity from
the institution’s normal market area or the national rate on deposits of comparable maturity, as determined by the
FDIC, for deposits from outside the institution’s normal market area.
Liability for Commonly-Controlled Institutions
Under the “cross-guarantee” provision of the Financial Institutions Reform, Recovery and Enforcement Act of
1989 (“FIRREA”), insured depository institutions such as the Bank and the Savings Bank may be liable to the
FDIC with respect to any loss or reasonably anticipated loss incurred by the FDIC resulting from the default of,
or FDIC assistance to, any commonly controlled insured depository institution. The Bank and the Savings Bank
are commonly controlled within the meaning of the FIRREA cross-guarantee provision.
Investment Limitation and Qualified Thrift Lender Test
Federally-chartered savings banks such as the Savings Bank are subject to certain investment limitations. For
example, federal savings banks are not permitted to make consumer loans (i.e., certain open-end or closed-end
loans for personal, family or household purposes, excluding credit card loans) in excess of 35% of the savings
bank’s assets. Federal savings banks are also required to meet the QTL Test, which generally requires a savings
bank to maintain at least 65% “portfolio assets” (total assets less (i) specified liquid assets up to 20% of total
assets, (ii) intangibles, including goodwill and (iii) property used to conduct business) in certain “qualified thrift
investments” (residential mortgages and related investments, including certain mortgage backed and mortgage
related investments, small business related securities, certain state and federal housing investments, education
loans and credit card loans) on a monthly basis in nine out of every twelve months. Failure to qualify under the
QTL Test could subject the Savings Bank to substantial restrictions on its activities, including the activity
restrictions that apply generally to bank holding companies and their affiliates and potential loss of grandfathered
rights under the GLB Act. As of December 31, 2004, 81% of the Savings Bank’s portfolio assets were held in
qualified thrift investments, and the Savings Bank was in compliance with the QTL Test.
Subprime Lending Guidelines
On January 31, 2001, the federal banking agencies, including the Federal Reserve and the OTS, issued
“Expanded Guidance for Subprime Lending Programs” (the “Guidelines”). The Guidelines, while not
constituting a formal regulation, provide guidance to the federal bank examiners regarding the adequacy of
capital and loan loss reserves held by insured depository institutions engaged in “subprime” lending. The
Guidelines adopt a broad definition of “subprime” loans which likely covers more than one-third of all
consumers in the United States. Because our business strategy is to provide credit card products and other
consumer loans to a wide range of consumers, a portion of our loan assets would likely be viewed by the
examiners as “subprime.” Thus, under the Guidelines, bank examiners could require the Bank or the Savings
Bank to hold additional capital (up to one and one-half to three times the minimally required level of capital, as
set forth in the Guidelines), or additional loan loss reserves, against such assets. As described above, as of
December 31, 2004 the Bank and the Savings Bank each met the requirements for a “well-capitalized”
institution. Federal examiners, however, have wide discretion as to how to apply the Guidelines and there can be
no assurances that the Bank or the Savings Bank may not be required to hold additional regulatory capital against
such assets.
For purposes of the Subprime Guidelines, we treat as “subprime” all loans in the Bank’s and the Savings Bank’s
programs that are targeted at customers either with a Fair, Isaac and Company (“FICO”) score of 660 or below or
with no FICO score. The Bank and the Savings Bank hold on average 200% of the total risk-based capital
requirement that would otherwise apply to such assets.
FFIEC Account Management Guidance
On January 8, 2003, the Federal Financial Institutions Examination Council (“FFIEC”) released Account
Management and Loss Allowance Guidance (the “Guidance”). The Guidance applies to all credit lending of
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