CFPB Orders Discover to Pay $214 Million
On September 24, 2012, the Consumer Financial Protection Bureau (CFPB) settled an enforcement action against Discover Bank through a consent order that requires Discover to pay a $200 million refund to approximately 3.5 million consumers and forfeit $14 million as a civil money penalty. The action is only the agency’s second since forming in 2011. As part of its joint investigation with the FDIC, the CFPB concluded that Discover representatives engaged in deceptive marketing and sales tactics to mislead consumers into paying for certain credit card add-on products. The four “enhancement services” - Payment Protection, Credit Score Tracker, Identity Theft Protection, and Wallet Protection - generated $428 million of revenue for Discover just last year.
The CFPB found that Discover’s telemarketing scripts included misleading language that deceived customers into thinking the products were free “benefits” or that they would have the opportunity to review printed materials before being charged. According to the CFPB, the telemarketers also withheld crucial eligibility requirements that applied to certain payment protection benefits, such as exclusions for pre-existing medical conditions. At times, says the agency, Discover representatives processed the add-on product purchases without the customers’ consent and charged it to their Discover card. Finally, the CFPB claims that customer representatives at Discover would downplay key terms and speak unusually fast during parts of the call when prices and terms of the products were disclosed.
In the consent order between Discover and CFPB/FDIC, the company agreed to stop the challenged practices and submit a compliance plan for agency approval. An independent auditor will ensure that Discover complies with the $200 million restitution provision. Besides restitution, the parties agreed to a $14 million civil penalty that will be split evenly between the U.S. Treasury and CFPB’s Civil Penalty Fund.
The Discover settlement follows up on the CFPB’s July 2012 settlement for alleged deception related to similar add-on products. There, another financial services company agreed to provide nearly $150 million in restitution to
2 million customers as well as an additional $60 million in penalties, $25 million of which went to the CFPB. Importantly, some large financial companies have voluntarily stopped add-on product sales, while others remain in the agency’s
crosshairs. Regardless of size, financial services companies must stay abreast of the CFPB’s activities and recognize its growing power to investigate private credit companies with broad discovery requests and the threat of
significant penalties. These investigations also enhance the risk of revealing confidential information to the public and potentially open the door to private litigation. Today, a pension fund shareholder
sued Discover in Delaware court seeking documents to determine whether its officers and directors are liable for mismanagement or breaching their duty to shareholders in connection with the alleged deceptive marketing.
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