Discover Bank will refund $200 million to more than 3.5 million cardholders to settle charges that its telemarketers used deceptive tactics to sell credit card “add-on” products, such as credit score tracking and identity theft protection.
Discover also agreed to pay $14 million in civil penalties as part of the settlement, announced Monday by federal regulators.
A joint investigation by the Federal Deposit Insurance Corp. and the Consumer Financial Protection Bureau concluded that Discover had misled customers into buying four add-ons: payment protection, credit score tracking, identity theft protection and wallet protection. The company’s telemarketing scripts falsely implied that the add-ons were free “benefits,” regulators said. Fast-talking telemarketers skipped over costs and terms and failed to disclose eligibility requirements, they said. Some even charged consumers without their consent, the regulators said.
Under the settlement, Discover must stop using the sales tactics and submit to an independent audit.
Discover is the second major bank to reach such a settlement in recent months. In July, Capital One Bank agreed to refund $140 million to 2 million customers and pay an additional $25 million penalty after an investigation found that the bank’s vendors had used deceptive marketing tactics to pressure consumers into paying for add-ons.
“We continue to expect that more such actions will follow,” consumer bureau Director Richard Cordray said Monday in remarks to the news media. “In the meantime, 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.”
It’s the latest sign of stepped-up enforcement action from the Consumer Financial Protection Bureau, a controversial new agency that’s considered the signature achievement of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Bureau officials said Monday that they’d pursue violations of the law when they found them but that they couldn’t discuss ongoing investigations.
“I do think that the CFPB has obviously made it clear that they want to focus in on this, and I think the institutions understand they have to work with the regulators on this,” said Ken Clayton, chief counsel for the American Bankers Association. “My impression is that this is really about clarity and marketing and letting consumers figure out whether the product is good or bad for them.”
Discover cardholders who qualify for the refund will receive credits to their accounts. Those who no longer have Discover cards will get checks in the mail. The average refund works out to about $57, although the amount will vary depending on how long a customer has been paying add-on fees.
“We have worked hard to earn the loyalty of our card members, and we are committed to marketing our products responsibly,” Discover’s chairman and chief executive officer, David Nelms, said in a statement. “As always, we will continue to strive to deliver the highest standards of customer service and satisfaction.”
The settlement won’t dissuade Discover from offering add-on products, said Jon Drummond, a spokesman for Discover Financial Services. Regulators objected to the way the products were marketed, not to the products themselves, he said.
“Many of our card members continue to get value from these products, and some of them who need it feel that it’s a good value, especially those who’ve cashed in on it,” he said.
The consumer bureau is sending a strong message that it won’t allow credit card companies to make money by deceiving customers into buying products that don’t help them and aren’t worth the money, said Ed Mierzwinski, the consumer program director for U.S. PIRG, a nonprofit consumer advocacy group.
“If they were good products, people would buy them,” he said. “Instead, people have to be tricked into buying them.”