--FDIC and CFPB have issued subpoenas and civil investigative
demand to Discover
--Regulators looking at payment protection plan and other
fee-based products
--Company says its estimate for possible losses above accrued
amounts is $110 million
(Adds comment from Discover spokeswoman in fourth paragraph,
details about lawsuits against the company and other banks in the
seventh to ninth paragraphs, and other details throughout.)
By Andrew R. Johnson
Federal regulators have issued subpoenas to Discover Financial
Services (DFS) related to an ongoing investigation of the
credit-card lender's marketing of add-on products, the company said
Tuesday.
The Federal Deposit Insurance Corp. and Consumer Financial
Protection Bureau served Discover with subpoenas and a "civil
investigative demand" for documents and testimony related to the
investigation, which the lender first disclosed last year, the
company said in its quarterly report filed with the Securities and
Exchange Commission.
In addition to disclosing the subpoenas, Discover also said its
"reasonably possible losses" over and above what it has already
accrued for litigation and regulatory matters could reach $110
million, up from a previous estimate of $100 million. Losses
stemming from the FDIC and CFPB review could "materially exceed"
that estimate, the filing said.
A spokeswoman for Discover said the increased estimate for
losses was a periodic adjustment and declined to comment on the
FDIC and CFPB investigation.
Mark Graf, chief financial officer of Discover, said in an
interview last week that the company believes its business
practices are "substantially in compliance with what the regulators
have ... told us they're looking for."
The investigation centers on additional products that Discover
markets to its credit-card customers, including a
payment-protection plan it advertises as a way to help borrowers
meet their debt obligations in the case of a job loss or other
financial hardship.
Discover and other credit-card lenders have faced several
lawsuits over so-called payment protection plans. Consumers have
alleged that banks have used aggressive or misleading sales tactics
to get consumers to sign up for the plans, and in some cases
enrolled customers in the services without their permission.
A U.S. District Court judge in Illinois last month approved a
settlement Discover reached with the plaintiffs in eight
class-action lawsuits against the company. In addition to payment
protection, the settlement also covered Discover's sale of
identity-theft protection, credit-score monitoring and a service
called Wallet Protection, Discover said in the filing Tuesday.
The Hawaii Attorney General in April filed lawsuits against
Discover, Bank of America Corp. (BAC), Barclays PLC (BCS, BARC.LN)
and other credit-card issuers over their payment-protection
products.
Such products have proven to be a major money-maker for
credit-card lenders.
U.S. consumers paid $2.4 billion in fees for such plans in 2009,
according to a March 2011 report from the Government Accountability
Office that looked at nine credit-card issuers, including Discover,
American Express Co. (AXP), Bank of America 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 first disclosed the FDIC was reviewing its marketing of
the products last year. In January 2012, the company said both the
FDIC and CFPB, which regulates providers of credit cards and other
consumer financial products, were planning to take a joint
enforcement action against the company.
Discover said it made changes to its products before the
regulators' review began, and it "believes its current business
practices substantially address the regulators' concerns."
The lender's revenue from add-on products was $101 million in
the fiscal second-quarter, down 3.8% from a year earlier.
Mr. Graf, the chief financial officer, attributed the decline in
such revenue to business practice changes "we implemented in order
to be responsive not only to what our customers have told us but
also to" regulator feedback.
Discover's shares closed down 0.3% at $33.51 Tuesday and were up
0.2% in after-hours trading.
Write to Andrew R. Johnson at andrew.r.johnson@dowjones.com