Discover 2009 Annual Report Download - page 65

• Generally require 45 days’ advance notice be provided prior to increasing any APR (as permitted by the CARD Act)
or other significant changes to account terms. Except for certain changes, the notice must include a statement of the
cardholder’s right to cancel the account prior to the effective date of the change;
• Prohibit the use of the two-cycle average daily balance method of calculating interest and prohibit the assessment of
interest on any portion of a balance that is repaid within the grace period;
• Require penalty fees (e.g., late fees and over-limit fees) to be “reasonable” and “proportional” to the consumer’s
violation of the account terms;
• Prohibit card issuers from imposing over-limit fees unless the cardholder has expressly opted-in to the issuer
authorizing such over-limit transactions, and imposes other limits on such fees;
• Require card issuers to review accounts at least every six months when an APR has been increased to determine
whether the APR should be reduced;
• Prohibit issuance of a credit card to a consumer under the age of 21 unless there is a co-signer over the age of 21
who has a means to repay or the individual under the age of 21 has an independent means to repay; and
• Require new billing statement disclosures, such as the length of time and cost of paying down the account balances if
only minimum payments are made.
A number of the CARD Act’s requirements reflect our existing practices and will not require modifications of policies or
procedures. Restrictions on risk management practices that have been commonplace in the industry already have
compelled us, and our competitors, to manage risk through more restrictive underwriting and credit line management,
reduce promotional offers and increase annual percentage rates. Certain provisions of the CARD Act, however, such as
those addressing limitations on interest rate increases, late and over-limit fees and payment allocation, are requiring us to
make additional fundamental changes to our current business practices and systems. For example, we have informed our
credit card customers that as of certain specified dates we will no longer charge over-limit fees, impose fees for payments
made over the telephone, or change interest rates on existing balances when a customer’s payments are late.
Full implementation of the CARD Act requires the promulgation of regulations by the Federal Reserve. The Federal
Reserve has issued final regulations implementing the majority of the provisions of the CARD Act. We are making
changes that the CARD Act requires to be implemented in a relatively short timeframe. Other changes must await final
regulatory guidance from the Federal Reserve. We are continuing to evaluate appropriate modifications to products,
revenue generation, marketing strategies and other business practices that will be in compliance with the law, will be
attractive to consumers and will provide a good return for our stockholders. The full impact of the CARD Act on us is
unknown at this time as it ultimately depends upon Federal Reserve interpretation of some of the provisions, successful
implementation of our strategies, consumer behavior, and the actions of our competitors.
The CARD Act also requires the Federal Reserve and the Government Accountability Office to conduct various studies,
including studies regarding interchange fees, reasons for credit limit reductions and rate increases, “small business”
cards, and credit card terms and disclosures. Based on the results of these studies, new requirements that negatively
impact us may be introduced as future legislation or regulation.
Other Credit Card and Student Loan Legislation
Congress may also consider other legislation affecting our business. Examples include a ceiling on the rate of interest
that can be charged on credit cards, restrictions on interchange fees and merchant rules established by the credit card
networks, authority for merchants to provide discounts to customers who use certain types of credit or debit cards, and
extending the provisions of the CARD Act to business cards.
We currently offer both federal and private student loans. In September 2009, the U.S. House of Representatives
passed the Student Aid and Fiscal Responsibility Act (“SAFRA”), which is currently under consideration in the U.S.
Senate. If passed in its current form, SAFRA would require all federal student loans to be made directly by the federal
government starting July 2010, rather than by private institutions through the Federal Family Education Loan Program.
Because SAFRA allows financial institutions to continue offering private student loans, we do not expect SAFRA to have
an impact on our ability to continue offering private student loans, even if we discontinue offering student loans under
federal programs.
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