Discover Facing FDIC, CFPB Enforcement Action on Payment Protection Plans

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Discover Financial Services is bracing for a joint enforcement action from the Federal Deposit Insurance Corporation and the Consumer Financial Protection Bureau over the marketing of its credit card payment protection products, the company disclosed in a regulatory filing posted late Thursday afternoon.

The action would be the first federal enforcement action against any bank for its payment protection product, and could potentially be the first enforcement action taken by the newly formed CFPB.

An enforcement action on payment protection plans could be a significant financial hit for Discover, which has made its "fee based" products a significant profit center. Since the company's 2007 IPO, profits on debt cancellation and deferment plans have skyrocketed. In the year ending Nov. 30, 2010, the company posted $234.2 million in income on the products, up from just $73.9 million in 2007.

The company in its latest 10-K filing also raised its estimate of "the aggregate range of reasonably possible losses" in excess of what it has already accrued for legal and regulatory proceedings to $100 million. But it says that figure does not include the "threatened" joint enforcement action because the company "is not able to estimate a reasonably possible range of losses given that, among other factors, the CFPB is a new agency for which no precedent has been established for enforcement matters." The company had last reported in a third quarter Securities and Exchange Commission filing that it estimated such losses at $0 to $40 million.

"Before the FDIC's and the CFPB's review began, Discover Bank made changes to both its fee-based products and program, and Discover Bank believes its current business practices substantially address the regulators' concerns. The enforcement action could include civil monetary penalties, significant restitution and additional business practice changes," the company warns in its latest filing.

"The exposure to loss for this matter could materially exceed the estimate discussed above, which could have a material adverse impact on the Company's near-term net income," the company adds in the filing.

That Discover was already under scrutiny by the FDIC was already known. The bank announced in September that the FDIC had notified the bank that it "plans to take an enforcement action."

Payment protection plans are fee-based products that consumers can buy to either suspend or cancel credit card debt in the case of unemployment, illness or death.

The products have been derided by consumer advocates for years. Discover last fall separately settled class-action litigation and a suit by the Minnesota attorney general's office over the marketing of its payment protection and other fee-based products.

Many of the other large credit card issuers have also been the subject of class-action suits across the country over their payment protection plans.

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