Discover Financial Services’ shares fell as much as 3% July 1 after disclosing that the Federal Deposit Insurance Corp. is reviewing its marketing of payment-protection and other fee-based products.
The Riverwoods, Ill.-based credit card lender said July 1 in an earnings filing with the Securities and Exchange Commission that the FDIC’s review could lead to an enforcement action by the FDIC.
“We are engaged in constructive dialogue with the FDIC as it reviews the marketing practices of our fee-based products,” A Discover spokesperson wrote in an emailed statement provided in response to question, adding that the company is “committed to providing quality products that offer real value to consumers and marketing them clearly and transparently.”
The company declined to discuss specific details of the FDIC review, the latest challenge Discover has faced over its marketing of fee-based products, which include payment protection, identity theft protection and credit score monitoring.
Such products generated $412.5 million in income for Discover in fiscal 2010, up 40% from a year earlier. Part of the increase was attributable to the addition of income from securitized loans under new accounting rules that were adopted.
Discover’s payment-protection plan allows borrowers to put their payments on hold for up to 24 billing periods as a result of a disability, family death, job loss and other hardship events. Cardholders also can postpone payments for one billing cycle in the event of marriage, new job, graduation, move or other events if they use the service, according to Discover’s website.
The company is named in eight pending class actions over its marketing for payment protection. The plaintiffs accuse it of violating state laws and the Truth In Lending Act. However, in June Discover entered a preliminary global settlement addressing all pending class actions. The settlement is awaiting approval, according to the SEC filing.
Discover disclosed the FDIC’s review in a line of its 10-Q earnings report for the most recent fiscal quarter.
The Minnesota Attorney General’s Office filed a lawsuit against the company in December for its sales tactics for payment protection, identity theft and other services, accusing Discover of making “aggressive, misleading, and deceptive telemarketing calls to sign people up for these products,” according to a press release (
In some instances Discover charged cardholders for the services even if the customers did not agree to sign up for them, the agency said. Its press release said the service costs 89 cents for every $100 of outstanding balance a cardholder carries each month.
The Minnesota Attorney General’s office did not immediately respond to a request for comment on Friday.
Beverly Harzog, a credit card expert with Credit.com Inc., said most credit card issuers offer payment-protection products. These generally range in price from 85 cents to 99 cents per $100 of the outstanding balance a cardholder carries, she says.
“I don’t recommend this,” Harzog says. “I prefer to advise people to have their emergency savings account first for the sorts of issues that these payment protection plans are supposed to help you with.”
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