Discover student loan survey overshadows strong sales | PaymentsSource

Shares of Discover Financial Services fell about 10% on Thursday morning after the financial services giant said it was temporarily freezing share buybacks while it conducts an independent investigation into its student loan operations at the request of its board of directors.

The move raises concerns about a potential breach of two previous Consumer Financial Protection Bureau consent decrees that have haunted Discover for several years.

Discover CEO Roger Hochschild did not disclose details or any regulatory reason for the investigation during a conference call with analysts on Thursday, other than to say the investigation focuses on “the management practices of student loans and related compliance issues”.

Analysts said the decision to temporarily suspend buyouts suggests fines for any further disciplinary action by the CFPB could be steep.

“We interpreted the Board’s action to temporarily suspend the buyout as communicating to investors that, at a minimum, there is a risk of a significant fine, so it is best to conserve capital pending the outcome of the independent review and any potential regulatory action,” Morgan Stanley analysts said in a note to investors Thursday.

Discover has already faced two consent orders from the CFPB. The first one decree of consent in 2015 focused on violations regarding student loan interest calculation and payment collection practices.

A systems migration issue in 2017 caused Discover to mistakenly withdraw funds from millions of consumer accounts, in violation of the terms of the original consent order.

Discovering in 2020 was ordered to pay consumers at least $10 million aggrieved by its policies plus a $25 million civil penalty. The second consent order stated that any future violation of the same order would result in additional penalties.

During the second quarter, organic student loan growth at Discover increased 4% and personal loans grew at the same rate, the company said.

Discover’s core credit card business remains strong. Sales were up 18% in the quarter from a year earlier, and charge rates remain low at 1.8% in the second quarter, 32 basis points below the year-ago figure.

Inflation has accounted for about 2% to 3% of recent sales growth, Discover said.

Discover increased the number of new card accounts by 39% in the second quarter compared to the previous year. While marketing expenses increased by $79 million, or 45%, year over year, operating expenses remained flat.

Hochschild said the Fed’s plans for tighter monetary policy could increase the risk of a recession, but so far he sees no impending economic slowdown based on the behavior of Discover customers.

“We also saw our payment rate increase last quarter, which means that in our consumer segment, household liquidity remains very strong,” Hochschild said in an interview Thursday.

Discover’s revenue in the quarter was $3.2 billion, down 10% from a year earlier, which the company attributed to stock gains in the year former. Net income for the quarter was $1.1 billion, down 35% from the same period a year earlier due to negative comparisons with equity investments and a strong release of loan loss reserves last year.

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