Federal Regulators Subpoena Discover Over Add-On Products
06/26/2012| 06:53pm US/Eastern
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--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 (>> Discover Financial Services) 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. (>> Bank of America Corp), 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. (>> American Express Company), 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
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