Consumer Groups Criticize Capital One's Plans To Expand

Consumer groups at a public hearing Tuesday criticized Capital One Financial Corp.'s (COF) lending practices and argued that the bank's plan to buy ING Groep NV's (ING, INGA.AE) U.S. online-banking business, ING Direct USA, would make the firm so risky and complex it could topple the financial system.

Also, an organization representing community banks added its voice to the stream of complaints and urged federal regulators to not only block the Capital One-ING Direct USA deal, but all acquisitions and mergers involving financial institutions with over $100 billion in assets.

The group, Independent Community Bankers of America, highlighted the proposal as evidence of the 2010 Dodd-Frank financial law's shortcomings. The group says the law created to help prevent future financial crises is failing to help smaller banks compete with larger firms, and it's also failing to stop the banking system from growing more concentrated.

"One of the critical goals of the Dodd-Frank Act was not only to end too-big-to-fail, but also to level the playing field between the megabanks and the rest of the industry," said Independent Community Bankers of America Senior Vice President Chris Cole. "So far, community banks have not seen much movement towards either goal."

Capital One's $9 billion plan to buy ING Direct USA would make the McLean, Va., bank the fifth-largest U.S. bank by deposits. It is the first acquisition the Fed is reviewing under new laws requiring regulators to judge whether a bank acquisition would create a firm so risky that the government would have to bail it out if it were to falter.

At the hearing, some local neighborhood development groups, such as the Northern Virginia Affordable Housing Alliance, said the bank has proven to be a good partner in helping to boost financial literacy and create affordable housing options in blighted cities.

Also, banking analysts have said they expect the Fed to approve Capital One's proposal despite widespread scrutiny. If the Fed were to reject the acquisition, it could have a chilling effect on other bank deals, they say, while disputing claims that Capital One would become the kind of giant bank Dodd-Frank sought to prevent.

"The too-big-to-fail argument I don't see as valid," said Scott Valentin, an analyst with FBR Capital Markets & Co. He added that Capital One isn't heavily involved in complicated financial activities such as holding and trading derivatives. Size alone is unlikely to be a factor for the Fed to reject the deal, and Congress has already passed limits on the kinds of problematic credit card practices consumers groups are most worried about, said Valentin.

Still, the steady stream of complaints about the planned expansion is putting the bank on the defensive and forcing it to explain how the deal will benefit the public.

Capital One officials said the acquisition will enable it to create jobs and make more loans at a time when other banks are struggling to make such moves. During the hearing, the company announced plans to invest $180 billion over 10 years in low- and moderate-income communities if its deal to acquire online banking business ING Direct USA goes through as planned.

"We want to reassure all the consumers, small businesses and communities we serve of our continuing and substantial commitment to provide products and services that will continue to meet their needs," said a Capital One spokeswoman.

Still, the commitment didn't immediately quell critics' concerns, and consumer groups said they would need some time to thoroughly review the company's plan.

"Words are nice. Facts matter," said John Taylor, president of the National Community Reinvestment Coalition.

Taylor argues that Capital One's proposal to acquire ING Direct, as well as the bank's recently-announced plan to acquire HSBC Holding PLC's (HBC, HSBA.LN, 0005.HK) credit card business, undermines Dodd-Frank's goal to make the financial system more stable.

He and other groups at the hearing said Capital One has not extended enough credit to small businesses and underserved communities. They argue that the bank doesn't provide enough home loans, charges too many fees and focuses too heavily on credit card practices that saddle vulnerable consumers with debt.

"You have a duty to deny Capital One's application to buy ING Direct," Taylor said in his testimony to Fed staffers.

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

--Matthias Rieker contributed to this story.