Capital One Defends Lending Practices At Hearing On ING Deal

Capital One Financial Corp. (COF) on Wednesday defended its credit card business amid critics' concerns that the bank is too focused on offering expensive plastic to the nation's riskiest borrowers.

Speaking at a U.S. Federal Reserve hearing on the bank's plan to buy ING Direct USA, Capital One General Counsel John Finneran said the bank does indeed provide credit cards to borrowers with less than perfect credit histories. But that's an offering that should be applauded not denounced, he said.

"Responsible lending to these borrowers is not only acceptable, but also provides a source of credit and purchasing power for these customers, and is thus necessary to the functioning of our economy," he said at the hearing held in San Francisco.

The argument is part of a broader policy debate over whether the Federal Reserve should approve Capital One's plans to buy ING Direct USA. The National Community Reinvestment Coalition and other public interest groups argue that Capital One is not worthy of expansion because it has not provided enough loans to the country's low-income communities and small businesses. The California hearing marked the third and final public forum on the controversial proposal.

Critics remain skeptical of the McLean, Va., bank's recent pledges to create new jobs and boost community lending if the acquisition is completed. Last month, Capital One announced a plan to invest $180 billion over 10 years in low and moderate-income communities if its ING deal is approved. The company also expects to add 3,600 new jobs in 2011 as well as 500 new jobs by 2013 in Delaware, where ING Direct USA is based.

Consumer groups, however, are focused on Capital One's lending practices. They want the bank to lend more by providing more traditional home loans and small business loans in underserved communities.

Banking analysts and even some of the bank's critics say the Federal Reserve is likely to approve Capital One's plan to acquire ING Direct USA. But public-interest groups are urging the Fed to add conditions to the deal that would require the bank to help communities in more states, even in areas where the bank has no physical bank branches.

"Capital One is not a responsible lender in California. There's no meaningful community reinvestment here," Alan Fisher, executive director of the California Reinvestment Coalition, told Fed staffers at the hearing. "Capital One is only going to be as responsible as you make them be. Otherwise, they will ignore places like California."

Fisher, who spoke at the hearing, also contended that the bank's $180 billion pledge is too small. He said a pledge of $650 billion over 10 years would be more appropriate based on the bank's size.

Capital One's proposed acquisition is providing the first big test of a Dodd-Frank measure requiring the Fed to scrutinize and potentially block bank deals that would create an institution so large that its failure would threaten the financial system.

Capital One is set to pay $9 billion for ING Direct USA and if regulators approve the deal, Capital One would become the fifth-largest U.S. bank by deposits. The bank has also announced plans to buy the U.S. credit-card business of HSBC Holdings PLC (HBC, HSBA.LN, 0005.HK) for about $2.6 billion.

Capital One's Finneran made it a point to address many of the consumer groups' arguments in his testimony. He noted that, as critics have pointed out, Capital One reduced mortgage lending and U.S. Small Business Administration lending between 2007 and 2009. However, the decline was a consequence of the financial crisis, a decline in demand and higher credit standards, he said.

"That does not mean, as some have asserted, that we have 'abandoned' small business lending," he said.

The Capital One official also disputed the idea that credit cards and auto loans are less beneficial than mortgage loans.

"Credit cards provide an essential electronic payment device to enable commerce in our modern economy (particularly online, where cash is not a viable substitute), as well as a flexible short-term source of liquidity and purchasing power," he said. "Automobiles are critical to our highly mobile workforce and a prerequisite to employment in many communities underserved by public transportation."

At the public hearings, opponents have consistently described Capital One as a risky, fast-growing predatory credit card company that has failed to help the cities within its lending territory.

However, Finneran suggested that the Fed focus on data it has gathered over the firms's 17-year history rather than critics' narratives.

"The Federal Reserve has all the data regarding the scope and performance of our businesses and can distinguish between grounded facts and unfounded hyperbole," Finneran said. "We have full confidence in the Federal Reserve's ability to reach the appropriate conclusion."

-By Maya Jackson Randall, Dow Jones Newswires; 202-862-6687, [e-mail]