Capital One Has Not Counted Chapter 7 Filers As Charge-Offs Previously; Auto Charge-Offs Surge By 50%+ Sequentially

Tyler Durden's picture

A humorous observation emerges from reading the fine print of Capital One's Monthly Charge Off And Delinquency Statistics. While the overall net charge off rate increased to 10.14% in December from 9.60% previously, a rather substantial jump, what jumps out of the page is the surge in Auto Finance net charge-offs which surged from 3.67% to 5.68%, a 50%+ move in one month.

November...

...And December

What is the reason for the sudden surge? Let's read the fine print:

December Auto Finance charge-offs reflect an accounting change in the recognition of charge-offs related to certain customers who have filed Chapter 7 bankruptcy, have not specifically reaffirmed the loan, but have chosen to remain current on their auto loan. Previously, the Company did not recognize these loans as charge-offs if customers remained current on the loan. Following the change, the Company now charges off these loans to the estimated net realizable value within approximately 30 days of receipt of bankruptcy information, unless customers specifically re-affirm the loan. This change resulted in a one-time increase to charge-offs of approximately $24 million, or approximately 153 basis points.

So let's get this straight: you are a CapitalOne borrower, and you have filed Chapter 7 bankruptcy protection. In other words, you are dunzo with paying off credit cards, revolving loans, non-revolving loans, yacht and country club payments, fired the butler, got rid of the underage nanny, cut up the Centurion, and are waiting for the repo men to come and take your outhouse and two donkeys, even as the third wife and kids are garnishing your wages, and the IRS is doing a full-blown tax audit. Yet because of some fluke the check to COF was in the mail, and while the bank was fully aware your FICO score was essentially 0, they still would not count you as a "charge off"...WTF!!!???

Can anyone please advise if this is standard practice? How much leeway do banks get by counting Chapter 7 cases as "current payors." Is this an auto-finance quirk specifically, or is the bottom about to fall out of the entire market as comparable such "adjustments" hite the global domestic card metric vertical? Does this mean charge offs are really about 50% higher than presented by the likes of Capital One, Discover, AXP, JPM, etc? Or is this merely yet another GAAP gimmick designed to obfuscate and extend-and-pretend the total mockery that lender balance sheets have become?

We would truly appreciate readers' feedback on this one cause we really are stumped by this lunacy.