Capital One 2006 Annual Report Download - page 122

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104
payments to plaintiffs and for changes in policies and interchange rates for debit cards. Certain merchant plaintiffs have opted
out of the settlements and have commenced separate lawsuits. Additionally, consumer class action lawsuits with claims
mirroring the merchants allegations have been filed in several courts. Finally, MasterCard and Visa, as well as certain
member banks, continue to face additional lawsuits regarding policies, practices, products and fees.
With the exception of the Interchange lawsuits and the Amex lawsuit, the Corporation and its subsidiaries are not parties to
the lawsuits against MasterCard and Visa described above and therefore will not be directly liable for any amount related to
any possible or known settlements of such lawsuits. However, the Corporations subsidiary banks are member banks of
MasterCard and Visa and thus may be affected by settlements or lawsuits relating to these issues, including changes in
interchange payments. In addition, it is possible that the scope of these lawsuits may expand and that other member banks,
including the Corporations subsidiary banks, may be brought into the lawsuits or future lawsuits. In part as a result of such
litigation, MasterCard and Visa are expected to continue to evolve as corporate entities, including by changing their
governance structures as previously announced. During the second quarter of 2006, MasterCard successfully completed its
initial public offering and Visa revised its governance structure. Both entities now rely upon independent directors for certain
decisions, including the setting of interchange rates.
Given the complexity of the issues raised by these lawsuits and the uncertainty regarding: (i) the outcome of these suits,
(ii) the likelihood and amount of any possible judgments, (iii) the likelihood, amount and validity of any claim against the
member banks, including the Corporation and its subsidiary banks, (iv) changes in industry structure that may result from the
suits and (v) the effects of these suits, in turn, on competition in the industry, member banks, and interchange fees, the
Company cannot determine at this time the long-term effects of these suits.
Other Pending and Threatened Litigation
In January 2007, individual plaintiffs purporting to represent a class of cardholders filed an antitrust lawsuit (the Piñon
matter) against several issuing banks, including the Corporation, alleging among other things that the defendants conspired
to fix the level of late fees and over-limit fees charged to cardholders, and that these fees are excessive. The complaint
requests civil monetary damages, which could be trebled.
We believe that we have meritorious defenses with respect to this case and intend to defend this case vigorously. At the
present time, management is not in a position to determine whether the resolution of this case will have a material adverse
effect on either the consolidated financial position of the Corporation or the Corporations results of operations in any future
reporting period.
In addition, the Company also commonly is subject to various pending and threatened legal actions relating to the conduct of
its normal business activities. In the opinion of management, the ultimate aggregate liability, if any, arising out of any such
pending or threatened legal actions will not be material to the consolidated financial position or results of operations of the
Company.
Tax issues for years 1995-1999 are pending in the U.S. Tax Court. The ultimate resolution of these issues is not expected to
have a material effect upon the Corporations operations or financial condition.
Note 21
Related Party Transactions
In the ordinary course of business, executive officers and directors of the Company may have consumer loans issued by the
Company. Pursuant to the Companys policy, such loans are issued on the same terms as those prevailing at the time for
comparable loans to unrelated persons and do not involve more than the normal risk of collectibility.
Note 22
Off-Balance Sheet Securitizations
Off-balance sheet securitizations involve the transfer of pools of consumer loan receivables by the Company to one or more
third-party trusts or qualified special purpose entities in transactions that are accounted for as sales in accordance with SFAS
140. Certain undivided interests in the pool of consumer loan receivables are sold to investors as asset-backed securities in
public underwritten offerings or private placement transactions. The proceeds from off-balance sheet securitizations are
distributed by the trusts to the Company as consideration for the consumer loan receivables transferred. Each new off-balance
sheet securitization results in the removal of consumer loan principal receivables equal to the sold undivided interests in the
pool from the Companys consolidated balance sheet (off-balance sheet loans), the recognition of certain retained residual
interests and a gain on the sale. The remaining undivided interests in principal receivables of the pool, as well as the unpaid
billed finance charge and fee receivables related to the Companys undivided interest in the principal receivables are retained
by the Company and recorded as consumer loans on the Consolidated Balance Sheet. The amounts of the remaining