Capital One 2014 Annual Report Download - page 110

We also engage in certain non-lending activities that may give rise to credit and counterparty settlement risk,
including the purchase of securities for our investment securities portfolio, entering into derivative transactions to
manage our market risk exposure and to accommodate customers, foreign exchange transactions, and customer
overdrafts. We provide additional information on credit risk related to our investment securities portfolio under
“Consolidated Balance Sheets Analysis—Investment Securities” and credit risk related to derivative transactions in
“Note 10—Derivative Instruments and Hedging Activities.”
Primary Loan Products
We provide a variety of lending products. Our primary loan products include credit cards, auto, home loans and
commercial.
•Credit cards: We originate both prime and subprime credit cards through a variety of channels. Our credit
cards generally have variable interest rates. Credit card accounts are underwritten using an automated
underwriting system based on predictive models that we have developed. The underwriting criteria, which are
customized for individual products and marketing programs, are established based on an analysis of the net
present value of expected revenues, expenses and losses, subject to a further analysis using a variety of stress
conditions. Underwriting decisions are generally based on credit bureau information, including payment
history, debt burden and credit scores, such as FICO, and on other factors, such as applicant income. We
maintain a credit card securitization program and selectively sell charged-off credit card loans.
•Auto: We originate both prime and subprime auto loans. Customers are acquired through a network of auto
dealers and direct marketing. Our auto loans generally have fixed interest rates and loan terms of 72 months
or less. Loan size limits are customized by program and are generally less than $75,000. Similar to credit card
accounts, the underwriting criteria are customized for individual products and marketing programs and based
on analysis of net present value of expected revenues, expenses and losses, subject to maintaining resilience
under a variety of stress conditions. Underwriting decisions are generally based on an applicant’s income,
estimated debt-to-income ratio, and credit bureau information, along with collateral characteristics such as
loan-to-value (“LTV”) ratio. We generally retain all of our auto loans, though we have securitized and sold
auto loans in the past and may do so in the future.
•Home loans: Most of the existing home loans in our loan portfolio were originated by banks we acquired.
The underwriting standards for these loans were less restrictive than our current underwriting standards.
Currently, we originate residential mortgage and home equity loans through our branches, direct marketing,
and dedicated home loan officers. Our home loan products include conforming and non-conforming fixed rate
and adjustable rate mortgage loans, as well as first and second lien home equity loans and lines of credit. In
general, our underwriting policy limits for these loans include: (1) a maximum LTV ratio of 80% for loans
without mortgage insurance; (2) a maximum LTV ratio of 95% for loans with mortgage insurance or for home
equity products; (3) a maximum debt-to-income ratio of 50%; and (4) a maximum loan amount of $3 million.
Our underwriting procedures are intended to verify the income of applicants and obtain appraisals to
determine home values. We may, in limited instances, use automated valuation models to determine home
values. Our underwriting standards for conforming loans are designed to meet the underwriting standards
required by the agencies at a minimum, and we sell most of our conforming loans to the agencies. We generally
retain non-conforming mortgages and home equity loans and lines of credit.
•Commercial: We offer a range of commercial lending products, including loans secured by commercial real
estate and loans to middle market industrial and service companies. Our commercial loans may have a fixed
or variable interest rate; however, the majority of our commercial loans have variable rates. Our underwriting
standards require an analysis of the borrower’s financial condition and prospects, as well as an assessment of
the industry in which the borrower operates. Where relevant, we evaluate and appraise underlying collateral
and guarantees. We maintain underwriting guidelines and limits for major types of borrowers and loan products
that specify, where applicable, guidelines for debt service coverage, leverage, LTV ratio and standard covenants
and conditions. We assign a risk rating and establish a monitoring schedule for loans based on the risk profile
of the borrower, industry segment, source of repayment, the underlying collateral and guarantees (if any) and
88 Capital One Financial Corporation (COF)