Discover announced late Friday it has reached a tentative agreement with federal banking regulators to pay $214 million to settle charges over how it marketed its high-profit, low-payout credit card payment protection plan.
The payout includes $200 million in refunds to its cardholders who purchased the add-on products by telephone, plus $14 million in payments directly to the Consumer Financial Protection Bureau and the Federal Deposit Insurance Corp., which conducted the investigation into Discover Bank’s marketing practices.
“We have worked hard to earn the loyalty of our card members, and we are committed to marketing our products responsibly,” said David Nelms, chairman and chief executive officer of Discover, in a press release released Friday at 5 p.m. Eastern. “As always, we will continue to strive to deliver the highest standards of customer service and satisfaction.”
Payment protection plans were offered by most large credit card issuers to offer consumers a way to stay current on their credit card debts in case of unemployment or illness. They have been widely criticized because they cost a lot — typically 80 cents and $1 per month for every $100 in credit card debt covered — and deliver little due to their rules and exclusions. According to a 2011 report by the Governmental Accountability Office, the nine largest issuers reported that they collected $2.4 billion in fees for debt protection products. Of that, 55 percent — $1.3 billion — went to profit.
Discover is the second of the top tier card-issuing banks to announce a settlement with federal regulators over the plans’ marketing. In July, Capital One Bank agreed to pay $210 million in penalties and restitution for high-pressure sales tactics and deceptive marketing of its payment protection and credit monitoring plans. Other banks have altered or dropped their payment protection plans.
“We are putting companies on notice that these deceptive practices are against the law and will not be tolerated,” Richard Cordray, director of the Consumer Financial Protection Bureau (CFPB), said in a statement issued at the time. Neither federal agency involved in the Discover settlement issued an immediate comment on the Discover case.
Discover Bank’s parent, Discover Financial Services, had previously disclosed the existence of a federal investigation into its payment protection plan marketing practices. In its annual report, the corporation said it had made changes to its fee-based products and programs before the probe even began and that it “believes its current business practices substantially address the regulators’ concerns.”
See earlier coverage:Credit card protection plans draw state lawsuits, federal scrutiny, 7 questions to ask before buying credit card payment protection, Under pressure, banks dropping credit protection plans