CFPB and FDIC Team Up on $200 Million Action Against Discover

The Federal Deposit Insurance Corporation (FDIC) and the Consumer Financial Protection Bureau (CFPB) Monday announced a joint enforcement action with an order requiring Discover Bank to refund approximately $200 million to more than 3.5 million consumers and pay a $14 million civil penalty.  The action resulted from an investigation started by the FDIC, which the CFPB joined last year.

The joint investigation focused on deceptive telemarketing and sales tactics used by Discover to mislead consumers into paying for various credit card “add-on products” such as payment protection, credit score tracking, identity theft protection, and wallet protection.

The joint action is very similar to one announced by the CFPB over the summer, billed as its first major enforcement action.

The agencies jointly determined that Discover engaged in deceptive telemarketing tactics to sell the company’s credit card add-on products.  Payment Protection was marketed as a product that allows consumers to put their payments on hold for up to two years in the event of unemployment, hospitalization, or other qualifying life events.  Discover also sold its Credit Score Tracker, designed to allow a customer unlimited access to his or her credit reports and credit score.  The third product was Identity Theft Protection, which was marketed as providing daily credit monitoring.

Discover’s telemarketing scripts contained misleading language likely to deceive consumers about whether they were actually purchasing a product.  Discover’s telemarketers also often downplayed key terms and spoke quickly during the part of the call in which the prices and terms of the add-on products were disclosed.  Because of the misleading language in the scripts and the actions of Discover’s telemarketers, consumers were misled about the fact that there was a charge for the products, and in some cases, enrolled in programs without consumers’ express consent, according to the agencies.

Under the order, Discover has agreed to:

• Stop deceptive marketing: Discover is required to institute certain changes to its telemarketing of these products that are designed to ensure that these unlawful acts do not occur again.  Discover has also agreed to submit a compliance plan to the FDIC and the CFPB for approval, and to take specific corrective actions related to the products.

• Pay restitution to consumers who purchased the products: Discover will pay approximately $200 million in restitution to more than 3.5 million consumers who were charged for one or more of the products between December 1, 2007 and August 31, 2011.  Generally, all consumers affected by Discover’s deceptive practices regarding these products, except those who affirmatively made use of Payment Protection, will receive restitution, with amounts varying depending on when they purchased, and how long they held, the add-on products.  All consumers will receive at least 90 days’ worth of fees paid (minus any refunds they have already received), with approximately 2 million consumers receiving full restitution of all of the fees they paid (minus any refunds they have already received).

• Provide refunds or credits without any further action by consumers: Consumers are not required to take any action to receive their credit or check. If an affected consumer is still a Discover customer, he or she will receive a credit to his or her account.  If an affected consumer is no longer a Discover credit card holder, the consumer will receive a check in the mail or have any outstanding balance reduced by the amount of the refund.

• Submit to an independent audit: Compliance with the restitution terms of the order will be assured through the work of an independent auditor, who will report to the FDIC and the CFPB on Discover’s compliance with the joint FDIC-CFPB Consent Order.

• Pay a $14 million penalty: The FDIC and the CFPB imposed civil money penalties of $14 million.  Discover will pay $7 million of that penalty to the U.S. Treasury and $7 million to the CFPB’s Civil Penalty Fund.