Dive Brief:
- Discover Financial Services this week signed an agreement with student loan servicer Nelnet, to handle the servicing of the card issuer’s student loan portfolio, Discover CFO John Greene said Thursday.
- Servicing migration is expected to take around six months, although it could take a month or two more, Greene said during the company’s fourth-quarter earnings conference call.
- While that’s occurring, Discover’s $10.4 billion student loan portfolio will be marketed for sale. The company expects a sale to occur in the second half of the year, Greene said. Executives at the Riverwoods, Illinois-based company expect the sale price to “go above par,” providing at least $2 billion worth of capital, he said.
Dive Insight:
Discover said in November it was exploring a sale of its student loan portfolio and transferring servicing of that portfolio to a third-party servicer. The company, facing multiple compliance-related issues recently, has run into regulatory scrutiny over its student loan business. That includes facing consent orders from the Consumer Financial Protection Bureau.
Lincoln, Nebraska-based Nelnet “is fully aware of the consent order requirements,” Greene told analysts during the company’s fourth-quarter earnings call. “They were chosen because they’ve got a track record in terms of being able to service a portfolio such as this, and they’ve dedicated both technology and resources to ensure a seamless transition,” he said.
Discover also set aside $80 million for a “customer remediation” reserve, which Greene said relates to the student loan issues. As the company seeks to identify and correct issues, “if we think it’s appropriate to refund customer payments, we’re going to do that,” he said.
“We identified a particular issue, largely within servicing for our student loan business,” Greene said. There was, however, a “gentle impact” in another business line, and the company continues to look across the business, he added.
“The lion’s share of that reserve relates to student loans and essentially, what we’re doing is trying to position the business and that product for a successful exit,” Greene said.
In December, Discover named Michael G. Rhodes its next CEO. Rhodes, previously the group head for Canadian personal banking at TD Bank Group, takes the helm at Discover in March. The card issuer had been searching for a new CEO since former CEO Roger Hochschild resigned abruptly last August, as the company wrestled with compliance issues.
In the fourth quarter, Discover’s net income plummeted 62% over the year-earlier quarter, to $388 million, while revenue net of interest expense rose 13%, to $4.19 billion, according to quarterly earnings materials. Its provision for credit losses increased by about $1 billion year-over-year, reaching $1.9 billion at the end of the fourth quarter. Discover’s net charge-off rate climbed to 4.11%, compared to 2.13% one year prior.
