Friday, July 8, 2011
The FDIC is reviewing allegations contained in 2010 complaints made in federal class-action lawsuits that question Discover's marketing of the monthly fee it charges for Payment Protection. In addition, a complaint filed by the Minnesota attorney general's office also takes issue with Discover concerning Payment Protection, as well as with other consumer protection-related services issued by Discover.
The fourth largest U.S. card brand said in its quarterly report that in June 2011 it reached tentative settlements in eight class-action lawsuits consolidated in the U.S. District Court for the Northern District of Illinois. "These class actions challenge the company's marketing practices with respect to its payment protection fee product to card members under various state laws and the Truth in Lending Act," Discover said in its report.
The suits allege Discover falsely advertises its payment protection program. "Discover sells payment protection through misleading statements, incomplete statements and misrepresentations," said the complaint, noting that the program is marketed to cardholders with "subprime" lines of credit.
"Discover manipulates the payment protection sales process by either 1) enrolling cardholders in Payment Protection without advance notice or consent by the cardholder, and 2) misrepresenting to cardholders that Payment Protection will 'Preserve your lifestyle – and protect your Discover Card payment history – when life's events disrupt your finances' by putting their account on hold during the benefit period," according to the complaint.
Payment Protection reportedly charges 89 cents for every $100 of cardholders' monthly account balances. The complaint noted that Discover asks no eligibility questions of the cardholders before enrollment and does not inform cardholders of its terms and conditions, such as exclusions and grounds for denial of service, until after they sign up for the plan.
"The Payment Protection claims process is so difficult, onerous and discretionary that, on information and belief, only 3-5 percent of premiums paid by cardholders are ever paid out as benefits," adds the complaint. "Cardholders who are denied benefits do not receive refunds of premiums paid." Discover's quarterly report said the company has reached a preliminary settlement of the class-action suits. The agreement is waiting for judicial approval before it will be finalized. No specifics of the agreement were released.
The lawsuit filed by Minnesota Attorney General Lori Swanson in December 2010 takes a more shotgun approach to its complaint. Swanson challenges Discover's marketing of not only Payment Protection, but also plans labeled Identity Theft Protection and Wallet Protection, as well as another service called Credit Score Tracker. In addition to the cost of Payment Protection, Identity Theft Protection and Wallet Protection cost $12.99 and $2.99 per month respectively, while Credit Score Tracker is $7.99 per month.
On an annualized basis, a consumer with a $5,000 monthly credit card balance would be charged $534 for Payment Protection, according to the attorney general. Furthermore, Swanson quoted Discover's 2009 annual report that said the card brand received $295 million that year from customers enrolled in fee-based products programs – an 18 percent increase from 2008.
According to the complaint, Payment Protection is similar to credit insurance in that it purports to protect the borrower from defaulting if an unanticipated event disrupts the borrower's source of income. "But unlike credit insurance, Payment Protection does not actually make monthly payments as they come due each month," the complaint said. "Instead, Payment Protection only suspends the borrower's obligation to make monthly payments temporarily."
Other Discover products – Credit Score Tracker, Identity Theft Protection and Wallet Protection – charge unnecessary fees, according to the attorney general's complaint. Swanson also takes Discover to task over what she calls the card brand's "aggressive and deceptive" telemarketing practices to get cardholders to enroll in these programs.
Many customers do not understand what, or even if, they signed up for one of the programs, the attorney general alleges, and Discover does not refund payments after consumers discover they are in programs they either didn't want or never authorized. Swanson accuses Discover of lying to consumers by telling them they enrolled in programs that customers never agreed to enter.
"Discover is in a position to do this because, unlike a typical telemarketer, it is the consumer's credit card company and already has their credit card number," the complaint asserts.
Discover admits in its quarterly report that the FDIC investigation could result in an enforcement action. But the card brand promised in the report it will "vigorously defend all claims asserted against it."
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