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The Reform Act authorizes state officials to enforce regulations issued by the CFPB and to enforce the Reform Act's
general prohibition against unfair, deceptive or abusive practices, and makes it more difficult than in the past for federal
financial regulators to declare state laws that differ from federal standards to be preempted. To the extent that states enact
requirements that differ from federal standards or state officials and courts adopt interpretations of federal consumer laws that
differ from those adopted by the CFPB, we may be required to alter or cease offering products or services in some jurisdictions,
which would increase compliance costs and reduce our ability to offer the same products and services to consumers nationwide,
and we may be subject to a higher risk of state enforcement actions.
Legislative and regulatory initiatives related to the student loan market may have a significant impact on our strategy of
profitably growing our student loan portfolio.
We have invested in the growth of our private student loan portfolio, including through the acquisition of SLC in
December 2010 and the acquisition of additional private student loans in September 2011. Our total student loans have grown
from $1.0 billion at November 30, 2010 to $7.3 billion at November 30, 2011. There is significant legislative and regulatory
focus on the student loan market, including by the CFPB, which has made it a priority area of focus. Under the Reform Act, the
CFPB and Department of Education (“DOE”) are required to prepare a report on private education loans and private
educational lenders by July 2012 that examines, among other things, the private education loan market; underwriting criteria
used by lenders; loan terms, conditions and pricing; consumer protections available to borrowers; and fair lending
considerations. The Reform Act also created a "Private Education Ombudsman" within the CFPB to receive and attempt to
informally resolve complaints about private student loans, and the CFPB plans to receive such complaints via its online
consumer complaint system. In addition, the Obama Administration has made changes to the federal student loan program
intended to make college more affordable and make it easier for students to repay their federal student loans. Congress or the
Administration may take actions that impact the student loan market in the future, including as a result of the CFPB and DOE
study. The possible impact of heightened scrutiny of the student loan market and its participants, including any resulting
legislative and regulatory initiatives, is uncertain and may adversely impact the profitability and growth of our private student
loan portfolio.
Legislative and regulatory reforms related to the debit card market may have a significant impact on our PULSE network
business and may result in decreases in our PULSE network volume and revenue.
The Reform Act contains several provisions that may adversely affect our PULSE network's business practices, network
transaction volume, revenue, and prospects for future growth. First, the Reform Act requires that interchange fees received by
certain payment card issuers on debit card transactions be “reasonable and proportional” to the issuer's cost in connection with
such transactions, as determined by the Federal Reserve. The Federal Reserve also has the power to regulate network fees to the
extent necessary to prevent circumvention of interchange regulation under the Reform Act. In addition, the Reform Act requires
the Federal Reserve to restrict debit card networks and issuers from requiring debit card transactions to be processed solely on a
single payment network or two or more affiliated networks, or from requiring that transactions be routed over certain networks.
The Federal Reserve issued final implementing regulations with respect to the interchange fee and routing provisions in June
2011, some of which became effective in October 2011. Regulations mandating that debit and prepaid card issuers participate
in two or more unaffiliated payment networks take effect April 1, 2012. Discover Network and PULSE have modified
operating rules, interchange fee schedules and existing agreements to ensure consistency with the Reform Act and Federal
Reserve implementing regulations. PULSE has increased its processing capacity for potential additional volume.
The Reform Act requirements may significantly affect the debit card market, decrease prospects for future growth of
debit products, negatively impact PULSE's transaction volume and revenue, and require costly system changes. For example,
the network participation requirements impact PULSE's ability to enter into exclusivity arrangements, which affect PULSE's
current business practices and may materially adversely affect its network transaction volume and revenue. Our transaction
processing revenue was $180 million and $150 million for the years ended November 30, 2011 and 2010, respectively. The
ultimate impact of these laws and regulations will depend upon the actions of our competitors and the behavior of other
marketplace participants. For example, the National Retail Federation, the Food Marketing Institute, the National Association
of Convenience Stores and two retailers have filed a federal lawsuit challenging the Federal Reserve implementing regulations
and, in particular, the interchange fee provisions, on the grounds that, among other things, the Federal Reserve did not properly
apply the Reform Act. It is uncertain how PULSE's business practices, network transaction volume, revenue, and prospects for
future growth, as well as the debit card market as a whole, may be impacted by the industry's competitive response to these new
requirements.
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