Discover Financial Says CFPB Probe May Have ‘Adverse Impact’ on Net Income
Discover Financial Services (DFS), the sixth-biggest U.S. credit-card issuer by customer spending, said a federal probe into the lender’s marketing practices may hurt net income.
The Consumer Financial Protection Bureau and the Federal Deposit Insurance Corp. have told Discover they plan to take a joint enforcement action over the company’s marketing of fee- based products, including payment protection, the Riverwoods, Illinois-based firm said yesterday in an annual filing.
“The exposure to loss for this matter could materially exceed” the $100 million Discover estimates it may cost to resolve all legal and regulatory issues, the lender said in the filing. This “could have a material adverse impact on the company’s near-term net income.”
Minnesota Attorney General Lori Swanson sued the firm in 2010, claiming that its telemarketers failed to tell consumers when they were agreeing to purchase optional, fee-based services, including payment protection. Discover entered into a consent judgment in November to settle the lawsuit and earlier agreed to a preliminary settlement of eight class-action cases challenging its marketing tactics, regulatory filings show.
On July 21, the consumer bureau assumed enforcement of federal consumer laws on banks with more than $10 billion in assets, giving it jurisdiction over most card issuers. In September, Discover said that the FDIC, which had authority over consumer issues at Discover before July 21, decided to bring an enforcement case regarding the lender’s marketing practices.
Richard Cordray
The CFPB, led by former Ohio Attorney General Richard Cordray, has said it will consider whether new rules are needed for debt protection products of the sort at issue in the Minnesota lawsuits. The Government Accountability Office said card issuers collected $2.4 billion in fees for debt protection products in 2009.
“Because the CFPB has been recently established and its director has been only recently appointed, there is significant uncertainty as to how the CFPB will exercise and implement its regulatory, supervisory, examination and enforcement authority,” Discover said in yesterday’s filing. “Should the CFPB discourage the use of products we offer or steer consumers to other products or services that it deems to be preferable, we could suffer reputation harm and a loss of customers.”
Discover, led by Chief Executive Officer David Nelms, 50, owns the nation’s fourth-biggest payments network after Visa Inc., MasterCard Inc. and American Express Co.
Leslie Sutton, a spokeswoman for Discover, declined to comment, as did Jen Howard at the CFPB and the FDIC’s Greg Hernandez.
Discover climbed 1.9 percent, or 51 cents, to $27.96 at 4 p.m. in New York. The shares have advanced 35 percent in the past year, the second-best performance in the 81-company Standard & Poor’s 500 Financial Services Index.
To contact the reporter on this story: Donal Griffin in New York at dgriffin10@bloomberg.net; Carter Dougherty in Washington at cdougherty6@bloomberg.net
To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net; Maura Reynolds at mreynolds34@bloomberg.net
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