Discover Financial Services' recent decision to
The Illinois-based consumer lender recently determined that its internal systems weren't on par with what a professional servicing organization could provide for the student loan portfolio, Discover Chief Financial Officer John Greene said Tuesday. He noted that Discover was hit with federal consent orders related to student loans in 2015 and 2020, and that a 2023 consent order also touched on the product.
"When we looked at it, we have perennial issues in our ability to service that portfolio," Greene said in remarks at the Goldman Sachs U.S. Financial Services Conference.
In the months following the latest set of compliance issues with student loans — which coincided with the unexpected
He said that Discover ruled out the idea of retaining the student loan portfolio and fixing the servicing issues. He added: "We looked at an option to outsource servicing and retain the portfolio. And what we found is that the economics of that decision relative to a full exit weren't equal."
Discover has several hurdles to clear in its path to selling off its student loans. The firm has been seeking a replacement servicer that has previously dealt with loans that are subject to a consent order, Greene said. He added that Discover is close to deciding on a servicing firm, and said that it expects to complete the sale by the middle of next year.
The $143 billion-asset company previously said it plans to stop accepting new student loan applications in February 2024.
Riverwoods, Illinois-based Discover, a longtime provider of consumer credit cards and personal loans, announced an expansion into student loans in 2010, when its banking arm moved to acquire about $7 billion in student loan receivables from The Student Loan Corp.
Discover's student loan headaches began five years later, when the Consumer Financial Protection Bureau found that the company misstated the minimum amounts due on billing statements, as well as tax information that borrowers needed to get federal income tax benefits.
The bureau also said that Discover had engaged in illegal debt collection practices. Discover was required to refund $16 million to consumers, pay a penalty and fix the problems.
In 2020, the CFPB issued a second
Discover last year initiated an internal investigation of its student loan servicing. The company later resumed a stock buyback program it had put on hold when it launched the investigation. Discover has not publicly released the investigation's findings.
Bill Carcache, an analyst at Wolfe Research, wrote in a Dec. 4 research note that Discover's student loan business has made a "rather de minimis" contribution to the company's consolidated operating performance over the last decade.
He argued that selling the segment will enable the company to "more easily overcome the compliance challenges it has been facing."
Apart from student loans, Discover has been coping with missteps in its credit card operations, including the revelation in July that it overcharged certain merchants for 16 years. In September, Discover was hit with a new consent order from the
When Discover's math pointed to a greater advantage in selling the student loan operation outright, the firm saw a path forward that would also free up $10 billion in risk-weighted assets and $900 million in reserves, according to Greene.
Spinning off student loans will allow Discover to focus on the recent launch of its Cashback Debit account, plus credit cards, personal loans and other transactional lending products that generate "a high level of capital return," he said.
Greene also said that Discover is in the process of finalizing its decision to name a new CEO to replace Hochschild, who left the company over the summer.
