Fed Crackdown Threatens Earnings at Capital One

Capital One's (COF Quote) earnings look vulnerable to a government clampdown on the credit card industry practice of repeatedly hitting borrowers with hefty penalties.

Falls Church, Va.-based Capital One has posted bubble-era earnings growth even as the economy has slowed. In the first nine months of the year, per-share earnings surged 36% from a year ago, to $2.88.

That jump was mostly attributable not to the money Capital One makes from interest income, but to the hundreds of millions of dollars in late and over-limit fees paid by borrowers. Many of those fees were charged on subprime accounts, which are loans to people with tainted or incomplete credit histories.

Now, analysts are beginning to wonder what will happen to Capital One's profitability once new federal guidelines on fees take effect. Nervous about the massive growth subprime loans, four Washington banking regulators in July together issued some tough draft guidance on how lenders should manage their credit card accounts and book their provisions against bad loans. Lenders had time to comment on the guidelines, but the regulators are not expected to change the wording significantly in the final version, which could be issued imminently. ...