Dive Brief:

• During Thursday’s second-quarter earnings call, Discover Financial Services executives received a slew of questions about the company’s disclosure late Wednesday that it’s conducting an internal investigation of its student loan servicing practices and “related compliance matters.” They also were pelted with questions about the company’s decision to pause a share buyback program in light of the probe. 
• The Riverwoods, Illinois-based company said in its earnings press release that the probe is being conducted by a “board-appointed independent special committee” that reports to the full board.
• CEO Roger Hochschild declined to elaborate on the cost or duration of the investigation, but said the matter was taken into account when Chief Financial Officer John Greene reaffirmed unchanged expense guidance for the remainder of the year.

Dive Insight:

During Thursday’s earnings conference call with analysts, Hochschild said he was limited in what he could say about the investigation because it’s still underway, but that didn’t stop analysts from asking a bevy of questions about the matter.

Questions that essentially went unanswered included a query about whether there was some new development that prompted the investigation and another on whether regulators were involved in the probe.

They also asked about the expected duration of the probe and if prior consent orders with the Consumer Financial Protection Bureau related to the student loan servicing program influenced the company’s actions for the probe.

They also had questions about Discover’s related decision to suspend a $4.2 billion share buyback program, asking whether the repurchases would be accelerated after the probe is done, among other queries. The company has repurchased $1.5 billion in shares so far this year, according to an earnings presentation.

Student loans “have been part of a political football, if you will, and sensitivities around proper servicing are high,” an analyst report from the financial firm William Blair said Thursday. “Discover has historically been a very cautious and appropriate control-based company, and any issues in the student loan space should be quickly corrected.” 

Regarding its student loan practices, Discover’s most recent 10-K filing with the Securities and Exchange Commission notes company subsidiaries Discover Bank, The Student Loan Corporation and Discover Products “are subject to a consent order with the Consumer Financial Protection Bureau regarding certain private student loan servicing practices.” 

In December 2020, Discover signed a consent order with the CFPB under which it agreed to pay $35 million after it violated a prior order from the agency with respect to its private student loan services. In that prior 2015 order, the CFPB alleged that Discover had misstated minimum amounts due on its billing statements for student loans, also misstated tax information required for certain tax benefits and engaged in illegal debt collection. 

The initial consent order expired five years later, but the subsequent December 2020 CFPB order required Discover subsidiaries involved to agree to another consent order to resolve the federal agency’s investigation into Discover Bank’s compliance with the initial order. 

Discover is “required to implement a redress and compliance plan and must pay at least $10 million in consumer redress to consumers who may have been harmed and paid a $25 million civil money penalty to the CFPB,” Discover’s 10-K filing in February says.

Hochschild confirmed during the call both the consent order and the investigation “are in the area of student loan servicing,” but wouldn’t elaborate. A Discover spokesperson declined to provide further comment about the investigation, when it began, its expected cost or the members of the special committee.

The investigation prompted Discover to suspend the share buyback program, executives said during Thursday’s second quarter earnings call.

Hochschild said the decision to pause share buyback was made by Discover, and not required by regulators. He wouldn’t provide a timing estimate as to when share repurchasing would resume. “As soon as we can, we hope to restart the buyback,” he said. 

When an analyst asked if unchanged expense guidance for this year meant the company expects the probe to be wrapped up by the end of the year, Hochschild said he “wouldn’t necessarily link those two.”

In its presentation, Discover maintained prior guidance that operating expenses are expected to rise less than 10% this year over 2021.

“What we can say is, we do not see anything that would change our view that non-marketing expenses this year would grow in the low single digits,” the CEO said. “And we did indicate that we would hope to have it concluded, but it’s done by an independent committee that reports to the board.”

The termination of the buyback “has nothing to do with” the company’s capital levels, Hochschild said, and it “does not necessarily require the investigation to be fully complete for us to resume. There are many complex factors that go into it.”

Discover reported net income of $1.1 billion for the second quarter, down 35% from $1.7 billion a year earlier. Revenue, taking into account interest expense, was $3.2 billion for the quarter, down 10% from $3.6 billion in the second quarter of 2021.

Discover is “very well capitalized and positioned to soon resume its fast pace of repurchases,” the William Blair report said. It also noted that Discover’s board earlier this year authorized a $4.2 billion repurchase program that should buttress repurchases following the pause. 

The probe “is unlikely to have a material effect on Discover’s business over the medium to long term,” a separate report Thursday from William Blair projected.