Discover Bank - the banking division of
Discover Financial Services
(
DFS
) - has arrived at an agreement in principle with the Federal
Deposit Insurance Corporation (FDIC) and Consumer Financial
Protection Bureau (CFPB) to refund $200 million to over 3.5 million
cardholders. The settlement is associated with an ongoing
litigation against the company.
Since December 2010, Discover has been facing several lawsuits
that accuse it of keeping customers uninformed about their buying
decisions pertaining to its add-on products. Its telemarketers
supposedly enrolled customers into expensive add-on programs
without their consent, while the consumers believed that the
products were free or they were only agreeing to consider the
purchase.
According to the lawsuits, Discover made deceptive telemarketing
calls to consumers offering them several optional, fees-based
products, including an identity-theft protection plan, a wallet
protection plan, a credit-score tracker and a payment protection
plan.
However, after informing consumers about the products, the
telemarketers used misleading and confusing terms, read scripts
quickly, and also omitted disclosures related to the product,
leaving consumers confused and misguided. Amid the confusion,
customers failed to realize that they were agreeing to buy the
product and the telemarketers refrained from informing them that
the products were not free.
Last year, Discover revealed in a regulatory filing that FDIC
was planning to take enforcement action against Discover Bank in
relation to its marketing policies for fee-based products. During
2011, FDIC investigated Discover's marketing policies for various
products including the payment protection plan and the
identity-theft protection plan. The findings of the investigation
led to the FDIC's decision of taking action against the
company.
However, now Discover has reached a settlement agreement with
FDIC and CFPB, whereby it will refund almost $200 million to
cardholders who purchased the aforementioned products via telephone
between December 2007 and August 2011. These customers will get
refunds equal to fees of at least 90 days. Almost 2 million of the
3.5 million recipients will be repaid their entire fee amount.
The agreement also requires Discover to amend its marketing
practices and appoint an independent auditor to supervise the
fulfillment of the orders. Further, the company will have to pay
civil monetary penalties amounting to $14 million, which will be
divided between FDIC and CFPB. However, the final approval from
both regulatory bodies is yet to be obtained. Meanwhile, Discover
will continue to market these products, albeit subject to
restrictions.
Discover's competitors include other financial services
companies such as
Capital One Financial Corp.
(
COF
) and
SLM Corp.
(
SLM
). The company currently carries a short-term Zacks #2 Rank (Buy).
We maintain a long-term 'Outperform' recommendation on the
stock.
CAPITAL ONE FIN (COF): Free Stock Analysis
Report
DISCOVER FIN SV (DFS): Free Stock Analysis
Report
SLM CORP (SLM): Free Stock Analysis Report
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