Discover accused of deceit, will refund $200 million

A Discover logo is seen in a window at the entrance of a shop in Cambridge, Mass., on Monday. Discover Bank is paying $214 million to settle charges that it pressured credit-card customers to buy costly add-on services such as payment protection and credit monitoring.
A Discover logo is seen in a window at the entrance of a shop in Cambridge, Mass., on Monday. Discover Bank is paying $214 million to settle charges that it pressured credit-card customers to buy costly add-on services such as payment protection and credit monitoring.

— Discover Financial Services has agreed to pay $200 million in refunds to more than 3.5 million cardholders who bought credit-protection services over the phone, plus another $14 million in civil penalties to banking regulators.

The Consumer Financial Protection Bureau and the Federal Deposit Insurance Corp. jointly investigated Discover for deceptive telemarketing and sales practices that included misleading customers into thinking the services, such as identity theft protection and credit score tracking, were free.

While neither admitting nor denying the allegations, Discover agreed it will not engage in similar acts in the future and will fully inform potential customers of all of the costs and conditions of telemarketed or otherwise advertised products and services. The company also agreed to strengthen its compliance and audit programs.

The agencies said that from December 2007 through August 2011, Discover marketed the products, which also included payment protection and wallet protection services, to its credit-card customers by implying that they were being offered a free benefit rather than having to pay for a service.

Discover billed the fees for the services directly to the customers’ credit cards.

Those actions violated Section 5 of the Federal Trade Commission Act, and portions of the Consumer Financial Protection Act, which was part of the Dodd-Frank financial regulation law enacted in July 2010 in response to the financial crisis. The FDIC also charged Discover with engaging in unsafe or unsound banking practices.

The enforcement action is the second by the consumer bureau since it started up in July 2011. The bureau and the Office of the Comptroller of the Currency in July jointly charged Capital One, the bank and credit card company, with similar deceptive practices. Capital One agreed to pay $150 million in customer refunds and $60 million in fines to the two regulators.

Richard Cordray, the director of the consumer bureau, said the agency expects that more such enforcement actions will follow.

“We are signaling as clearly as we can that other financial institutions should review their marketing practices to ensure that they are not deceiving or misleading consumers into purchasing financial products or services,” he said.

David Helms, chairman and chief executive of Discover, said in a statement: “We have worked hard to earn the loyalty of our card members and we are committed to marketing our products responsibly. As always, we will continue to strive to deliver the highest standards of customer service and satisfaction.”

Discover, based in Riverwoods, Ill., announced the enforcement action and tentative settlement Friday afternoon, and the consent order was approved by the agencies Monday.

Current and former Discover customers will not have to take any action to receive the refunds, the regulatory agencies said. Current cardholders will receive a refund directly to their account, and former cardholders will receive a check or have any outstanding balance reduced by the amount of the refund.

The amounts of the refunds will depend on when customers purchased and how long they held the included products, the agencies said.

Only those customers who were charged for the services but did not use them are eligible.

The agencies said Discover sold the products to about 4.7 million customers; about 3.5 million of those are eligible for refunds.

Regulators said Discover customers were charged $9.99 per month for identity-theft protection, $7.99 per month for credit-score tracking and $2.99 per month for wallet protection. The debt payment protection service was priced at 89 cents per$100 of credit card debt, the agencies said.

Discover Financial Services, which is scheduled to release third-quarter financial results on Thursday, must meet 15 pages of requirements, down to the size of the print on disclosures delivered to consumers under the consent order.

Isaac Boltansky, Washington policy strategist with Compass Point Research & Trading LLC, said the effect of the regulators’ crackdown will be to reduce the revenue that credit card companies make from add-on products.

“The whole market for these is going to shrink,” Boltansky said. “It has to. We have to expect restraints on these products.”Information for this article was contributed by Carter Dougherty of Bloomberg News.

Front Section, Pages 1 on 09/25/2012

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