Capital One Financial, the worst performer this year in the KBW Bank Index, agreed to pay $3.5 million to resolve U.S. regulatory claims the bank set aside inadequate reserves for auto loan losses in 2007.

Peter Schnall, Capital One's former chief risk officer, also agreed to pay $85,000 to settle, and David LaGassa, who managed the loan-loss forecasting, will pay $50,000, the Securities and Exchange Commission said yesterday in a statement. They didn't admit or deny the claims in settling.

Capital One's auto loan profits came primarily from subprime loans to borrowers with weaker credit histories, the SEC said. In 2007, Capital One's forecasting tool found that the deteriorating credit markets would increase losses; however, the bank failed to properly incorporate those findings in its financial reporting, according to the SEC.

As a result, the bank underestimated by 18 percent the amount of funds it should set aside in the second quarter of 2007 and by 9 percent the following three months, according to the SEC.

"No consumers were affected, the SEC does not criticize the company's or the auto finance unit's reserves as of 2007 year end, and the settlement does not require a restatement of Capital One's financial results," Tatiana Stead, a company spokeswoman, said in an e-mailed statement. "The settlement will not affect any current or future business activities by Capital One."

Harry Weiss, an attorney at Wilmer Cutler Pickering Hale & Dorr LLP representing Schnall, and Michael Trager, LaGassa's lawyer at Arnold & Porter LLP, didn't respond to telephone calls seeking comment.

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