NEW YORK (AP) — Discover Financial Services is facing an enforcement action by the Federal Deposit Insurance Corp. over the way it sold its payment protection, identity theft protection and other products.
The Riverwoods, Ill.-based credit card company said in a regulatory filing late Wednesday that the agency has notified its banking division that it plans to take action, following an investigation started several months ago. Discover said it is cooperating in the probe. The FDIC would not comment.
The investigation follows the filing of a series of class action lawsuits in various U.S. District Courts challenging the company's marketing.
At issue are its sales policies for several products:
- Payment protection: This service allows users to put Discover Card payments on hold for up to two years following a job layoff, disability, leave of absence, hospitalization, death of a spouse or domestic partner or federal or state disaster. It also allows one-month holds on payments following happier events like a marriage, childbirth, adoption, new job, retirement, moving or graduation.
- Identity theft protection: This service monitors credit reports for changes like new accounts, address changes and potentially negative information.
- Wallet protection: This lets customers register credit cards and then provides cancellation services for those cards if a wallet is stolen. Wallet protection includes a provision for wiring customers up to $1,000 in emergency cash in the event a wallet is stolen.
- Credit score tracker: This service gives customers online access to credit reports, scores and score change alerts.
Each product requires customers to choose monthly or annual billing. Fees vary, and some are at set prices and others based on card balances.
The company said that in June it reached a preliminary global settlement in the eight pending class-action suits over marketing of the products. That pact still needs a judge's approval. Details have not been released.
"An important point is that it's not the actual product that's in question, it's the way that it was sold," said analyst Sanjay Sakhrani of Keefe, Bruyette & Woods.
He noted the company said it changed its sales practices after the first case came up last year in California.
Sakhrani said Discover's credit protection businesses generate about 3% of the company's total revenue. The new sales policies do not seem to have hurt the business he said, noting that Discover's total fee income rose about 4% from last year, according to its fiscal third-quarter report released last week.
Sterne, Agee analyst Henry Coffey said investors should have expected the FDIC to take action — which he predicts will mean a fine for the company — once Discover revealed the investigation in June.
"We should have known there was going to be something come out of it," he said, even though the company apparently changed its policies before the FDIC probe began. "We're in a regulatory environment where the primary goal is shakedown, not to do things that are helpful for the consumers."
Coffey also said he wouldn't be surprised if more state attorneys general get involved in the class action suits.
Discover shares opened higher but then dipped on the news, giving up 43 cents to $23.45.
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