BOARO OF GOVERNORS
 

OF'TI-lE
 

FEDERAL RESERVE SYSTEM 

WASHINGTON, D_ [. 20551 

ADDRESS OFFICIAL CORRESPONDENCE 

TO THE BOARD 

December 21, 2007 

Andres L. Navarette, Esq. 

Managing Vice President and 

ChiefCounsel - Regulatory 

Capital One Financial Corporation 

1680 Capital One Drive 

McLean, Virginia 22102 

Dear Mr. Navarette: 

This is in response to the request by Capital One Financial 

Corporation ("Capital One"), on behalf of Capital One, National Association 

("CONA"), both in McLean, Virginia, for an exemption from section 23A of the 

Federal Reserve Act and the Board's Regulation W to permit CONA to acquire all 

the shares ofits affiliate, Capital One Auto Finance, Inc. ("Auto Finance"), Plano, 

Texas. l The proposed transaction is the final step in a reorganization by Capital 

One designed to streamline its corporate structure by consolidating its primary 

consumer and commercial banking operations into CONA. 

Section 23A and Regulation W limit the amount of "covered 

transactions" between a bank and any single affiliate to I0 percent ofthe bank's 

capital stock and surplus and limit the amount of covered transactions between a 

bank and all its affiliates to 20 percent of the bank's capital stock and surplus. 

"Covered transactions" include a bank's purchase of assets from an affiliate and a 

bank's extension of credit to an affiliate. The statute and regulation also require a 

bank to secure its extensions of credit to, and certain other covered transactions 

with, affiliates with prescribed amounts of collateral. In addition, section 23A and 

Regulation W prohibit a bank from purchasing low-quality assets from an affiliate. 

Regulation W provides that a bank's acquisition of a security issued 

by a company that was an affiliate ofthe bank before the acquisition is treated as a 

1 12 U.S.C. § 371c; 12 CFRpart223. 
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purchase of assets by the bank from an affiliate if (i) the company becomes an 

operating subsidiary ofthe bank as a result ofthe transaction and (ii) the company 

has liabilities at the time ofthe acquisition? Auto Finance is currently an affiliate 

ofCONA and would become an operating subsidiary ofCONA immediately after 

the reorganization. At the time of the restructuring, Auto Finance would have 

outstanding liabilities. Accordingly, Capital One's transfer of all the capital stock 

of Auto Finance to CONA would be an asset purchase subject to the quantitative 

and qualitative limitations of section 23A and Regulation W. The Regulation W 

value of the covered transaction would be approximately - the total 

liabilities of Auto Finance at the time ofthe reorganization.3 

To accomplish the reorganization, Capital One has requested an 

exemption from section 23A and Regulation W to permit CONA to acquire all the 

shares of Auto Finance. Section 23A and Regulation W specifically authorize the 

Board to exempt, in its discretion, transactions or relationships from the 

requirements of the statute and rule if the Board finds such exemptions to be in the 

public interest and consistent with the purposes of section 23A.4 

The Board has approved exemptions under section 23A for one-time 

asset transfers that are part of a corporate reorganization and that are structured to 

ensure the quality ofthe transferred assets. As in previous cases reviewed by the 

Board, the proposed transaction in this case is a byproduct of a one-time corporate 

reorganization. Capital One is consolidating its automobile lending into CONA as 

part of a larger reorganization. According to Capital One, this exemption is in the 

public interest because the reorganization is expected to enhance the efficiency of 

its lending programs, to streamline its management, and to reduce its operating 

expenses. 

As part ofthis transaction, Capital One proposes to transfer 

approximately in low-quality assets to CONA. Section 23A and 

Regulation W prohibit a bank from purchasing low-quality assets from an affiliate. 

Under Board precedent, however, CONA would not be viewed as purchasing any 

low-quality assets from an affiliate as part of the proposed reorganization because 

2 See 12 CFR 223.3 1(a). 

3 See 12 CFR223.31(b). 

4 12 U.S.c. § 37Ic(f)(2); 12 CFR 223.43(a). 
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Capital One has committed to contribute to CONA•••••in cash to offset 

the low-quality assets.5 

In addition, Capital One has made the following commitments as part 

ofthe exemption request: 

I. Capital One commits that it will contribute funds to CONA in the 

amount ofthe book value of any low-quality assets that are transferred 

to CONA at the time that Auto Finance is transferred to CONA. 

Capital One also commits that CONA will hold an amount ofriskbased capital equal to the book value of any low-quality assets that are 

transferred to CONA so long as CONA retains ownership or control 

ofthe transferred assets. For example, under this dollar-for-dollar 

capital requirement, the risk-based capital charge for each transferred 

low-quality loan asset would be 100 percent (equivalent to a 

1250 percent risk weight), rather than the 8 percent requirement 

(equivalent to a 100 percent risk weight) that would apply to a similar 

defaulted loan asset that is not a part ofthe transferred asset pool. 

2. Capital One commits for a four-year period following the contribution 

ofAuto Finance to make either (i) a cash payment to CONA equal to 

the book value at the end of each calendar quarter plus write-downs 

during that quarter by CONA of any transferred assets (other than 

those that were low-quality assets at the time ofthe initial transfer) 

that were low-quality assets at the end ofthat quarter; or (ii) quarterly 

purchases from CONA of any transferred assets (other than those that 

were low-quality assets at the time ofthe initial transfer) that were 

low-quality assets at the end ofthat quarter at a price equal to the 

book value at the end of that quarter plus write-downs during that 

quarter by CONA of any such transferred assets. Capital One will 

make the cash payment or will purchase the assets within 30 days 

after the end of each calendar quarter. Capital One also commits that 

CONA will hold an amount ofrisk-based capital equal to the book 

value of any transferred assets that become low-quality so long as 

CONA retains ownership or control ofthe transferred assets as 

5 See Board letters dated June 30, 2006, to Carl Howard, Esq. (Citigroup); 

December 22, 2004, to Winthrop N. Brown, Esq. (HSBC Bank); and February 27, 

2003, and August 28, 2001, to Carl Howard, Esq. (Citigroup). 
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described in the example above. 

3.	 Capital One commits for a four-year period following the contribution 

of Auto Finance to make cash contributions to CONA equal to (i) any 

amount that CONA is required to contribute to any securitization 

vehicle that is transferred to CONA at the time that Auto Finance is 

transferred to CONA to support the performance of that vehicle trust 

and (ii) the amount of any write-down during each calendar quarter of 

any transferred residual or retained interest in the vehicle. Capital 

One will make the cash contribution within 30 days after the end of 

each calendar quarter. Capital One also commits that CONA will 

hold additional capital equal to such amounts so long as CONA 

retains ownership or control ofthe exposures. 

4.	 Before the purchase of assets is consummated, a majority of CONA's 

directors will review and approve the transaction. 

As a condition ofthis exemption CONA must remain well capitalized 

based on the Office ofthe Comptroller ofthe Currency's risk-based capital 

guidelines and the modifications to those guidelines described in commitments 

(1) through (3) above. These commitments are similar to commitments relied on 

by the Board in previous cases.

6 These commitments have been modified, 

however, to clarify that the funds transferred by Capital One to CONA to support 

any low-quality assets will provide a cushion of additional capital in excess of 

CONA's required regulatory capital. The commitments ensure that these funds 

will remain available to the bank and may not be returned to Capital One through a 

dividend or a return of capital. 

Both Capital One and CONA are well capitalized and well managed 

and would remain so after the transaction. In addition, the Office of Comptroller 

ofthe Currency and the Federal Deposit Insurance Corporation have reviewed the 

transaction and informed the Board that they have no objection to the proposal. 

In light of these considerations and all the facts you have presented, 

the reorganization transaction appears to be consistent with safe and sound banking 

practices and on terms that would ensure the quality ofthe assets transferred. 

Accordingly, the transaction appears to be consistent with the purposes of 

6 See 12 CFR223.41(d). 
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section 23A, and the Director ofthe Division ofBanking Supervision and 

Regulation, pursuant to authority delegated by the Board, and with the concurrence 

ofthe General Counsel, hereby grants the requested exemption. 

This determination is specifically conditioned on compliance by 

Capital One, CONA, and Auto Finance with all the commitments and 

representations made in connection with the exemption request. These 

commitments and representations are deemed to be conditions imposed in writing 

in connection with granting the request and, as such, may be enforced in 

proceedings under applicable law. This determination is based on the specific facts 

and circumstances ofthe proposed transaction and may be revoked ifthere is a 

material change in those facts and circumstances or failure by Capital One, CONA, 

or Auto Finance to observe its commitments or representations. Granting this 

exemption does not represent a determination concerning the permissibility of any 

other transactions engaged in by Capital One, CONA, or Auto Finance that are 

subject to section 23A or Regulation W. 

Sincerely yours, 

Robert deY. Frierson 

Deputy Secretary of the Board 

cc:	 Federal Reserve Bank ofRichmond 

Federal Deposit Insurance Corporation 

Office ofComptroller ofthe Currency