FDIC Probing Discover Payment Protection

RIVERWOODS, Ill. ( TheStreet) -- Shares of Discover Financial Services ( DFS) were down 2% Friday morning, after the company disclosed that the Federal Deposit Insurance Corp. was "reviewing the Company's marketing practices with respect to its fee-based products, including its payment protection fee product, which could lead to an enforcement action."

Discover reported the FDIC scrutiny and possible regulatory action in its first-quarter 10-Q filing with the Securities and Exchange Commission. The filing added that Discover also has eight class action cases pending against it, also "in relation to the sale of the Company's payment protection fee product."

The company's Payment Protection service allows a credit card customer to put loan payments "on hold for up to 2 years in the event of disability, hospitalization, or other qualifying events, depending on the product level," also offering death benefits to borrowers, depending on the state in which a borrower resides.

The Payment Protection service also allows a borrower to put "payments on hold for 1 billing period for the following Celebration Events," including marriage, childbirth, retirement, graduation and other events.

A disclosure page on the company's website, says that the fee for the service is a credit card borrower's "total balance at the end of each monthly billing period (including any partial monthly billing period at the beginning of your enrollment), multiplied by 89¢ per $100."

Considering that on an annual basis, the fee would come to over 10.5%.

Discover said in a statement that the company is "engaged in constructive dialogue with the FDIC as it reviews the marketing practices of our fee-based products."

The New York Times reported in June of last year, that one of the class action lawsuits against Discover, accused the company of using deceptive business practices to market the Payment Protection service, quoting David S. Paris, of Paris Ackerman & Schmierer, the lead firm for a class action suit against Discover, as saying that some customers who had declined to sign up for the service when called by a Discover representative, had still been enrolled "unilaterally."

On June 15, JPMorgan Chase ( JPM) was fined $2 million by the Office of the Comptroller of the Currency for "high pressure sales taxes" of a similar Credit-protection product.

-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.