Discover Says Costs Related To Enforcement Action Could Exceed $100 Million
27 Gennaio 2012 - 12:55AM
Dow Jones News
Discover Financial Services (DFS) warned Thursday its costs
related to a regulatory action stemming from its marketing of
fee-based products could "materially exceed" $100 million.
The Riverwoods, Ill., credit-card lender is facing a joint
enforcement action by the Federal Deposit Insurance Corp. and
Consumer Financial Protection Bureau over its marketing of
payment-protection plans and other add-on services, the company
said in a filing with the Securities and Exchange Commission
Thursday. The company previously disclosed the FDIC's plans to take
action in a September regulatory filing.
Separately, the company said its estimate for "reasonably
possible losses" in excess of what it has already accrued for other
legal and regulatory proceedings is up to $100 million. The FDIC
and CFPB joint action is not included in that estimate but could
materially exceed that estimate, the company said.
Discover is not able to give a reasonable range for possible
losses for that matter because the "CFPB is a new agency for which
no precedent has been established for enforcement matters," among
other factors, it said.
The company's Discover Bank subsidiary already made changes to
its fee-based products before the FDIC and CFPB began its review,
the company said. "Discover Bank believes its current business
practices substantially address the regulators' concerns."
The regulators' enforcement action could include civil monetary
penalties, "significant restitution" and other business-practice
changes, the company said.
Among its fee-based services is a payment-protection plan
offered to customers for a monthly fee determined by the size of a
borrower's outstanding balance. The service allows a borrower to
defer monthly credit-card payments in the event of job loss,
medical problems or other serious event.
U.S. consumers paid $2.4 billion in fees for such plans in 2009,
according to a report last year from the Government Accountability
Office that looked at nine credit-card issuers, including Discover,
American Express Co. (AXP), Bank of America Corp. (BAC) and Capital
One Financial Corp. (COF).
Fees typically ranged from 85 cents to $1.35 per $100 of
outstanding balance each month, the GAO said, noting a "relatively
small proportion of the fees consumers pay for debt-protection
products is returned to them in tangible financial benefits."
Discover also offers identity-theft monitoring, credit-score
tracking and extended-warranty services. It generated $428 million
in revenue from fee-based products for the fiscal year ending Nov.
30, up 3.6% from a year ago.
The company has been named in a string of lawsuits in recent
years accusing it of using misleading marketing tactics to get
consumers to sign up for some of the services or enrolling them
without their consent.
A U.S. District Court judge in November gave preliminary
approval to a global settlement of eight class-action lawsuits
against Discover lodging such allegations. Final approval is
pending.
Separately, the attorneys general of Minnesota and West Virginia
have filed lawsuits against the company over similar allegations.
Discover entered a consent judgment to settle the Minnesota case in
November and plans to defend against claims in the West Virginia
matter, the company said in the Thursday filing.
The company is also cooperating with the Missouri Attorney
General in an investigation of its marketing practices.
Discover's shares closed up 1.9% at $27.96 Thursday but were
recently down 2 cents in after-hours trading.
-By Andrew R. Johnson, Dow Jones Newswires; 212-416-3214;
andrew.r.johnson@dowjones.com
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