Discover 2010 Annual Report Download - page 71

Legislation Addressing Credit Card Practices
In May 2009, the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the “CARD Act”) was enacted.
The CARD Act made numerous changes to the Truth in Lending Act, affecting the marketing, underwriting, pricing, billing
and other aspects of the consumer credit card business. Several provisions of the CARD Act became effective in August
2009, but most of the requirements became effective in February 2010 and others became effective in August 2010.
Certain provisions of the CARD Act have required us to make fundamental changes to our business practices and
systems. We have made modifications to products, pricing, marketing strategies and other business practices designed to
be in compliance with the law, to be attractive to consumers and to provide a good return for our stockholders. Certain
CARD Act requirements, however, have reduced and will continue to reduce our interest income and loan fee income.
See “Risk Factors” for more information. The long-term impact of the CARD Act ultimately depends upon consumer
behavior and the actions of our competitors, in addition to further Federal Reserve and BCFP interpretation of the
provisions.
The CARD Act also requires the Federal Reserve and the Government Accountability Office to conduct various studies,
including a review of 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.
Asset-Backed Securities Regulations
While we have capacity to issue new asset-backed securities from our credit card securitization trusts, there has been
uncertainty in the securitization market as a result of revised accounting standards and related guidance from the FDIC as
well as proposed new Securities and Exchange Commission (“SEC”) rules governing the issuance of asset-backed
securities and additional requirements contained in the Reform Act.
FDIC Rule
The ability of issuers of asset-backed securities to obtain necessary credit ratings for their issuances has been based, in
part, on the FDIC’s safe-harbor rule entitled Treatment by the Federal Deposit Insurance Corporation as Conservator or
Receiver of Financial Assets Transferred by an Insured Depository Institution in Connection with a Securitization or
Participation, which provides that the FDIC, as conservator or receiver, will not, using its power to disaffirm or repudiate
contracts, seek to reclaim or recover assets transferred in connection with a securitization, or recharacterize them as
assets of the insured depository institution, provided such transfer meets the conditions for sale accounting treatment
under GAAP. Pursuant to FASB guidance for transfers of financial assets, effective for us on December 1, 2009, certain
transfers of assets to special purpose entities (including Discover Bank’s transfer of assets to the Discover Card Master
Trust) no longer qualify for sale accounting treatment.
In March 2010, the FDIC published a transitional rule that preserved the safe-harbor treatment applicable under the
original FDIC safe harbor rule for beneficial interests in securitizations of revolving assets issued on or prior to
September 30, 2010 so long as those securitizations would have complied with the original safe harbor under GAAP in
effect prior to November 15, 2009. On September 27, 2010, the FDIC approved a final rule that preserves the safe-
harbor treatment applicable to revolving trusts and master trusts that issued any securities on or prior to September 27,
2010, which includes the trusts used in our credit card securitization program. Other legislative and regulatory
developments, namely the proposed SEC Regulation AB II, the securitization and rating agency provisions of the Reform
Act and the federal banking agencies’ notice regarding their consideration of replacement of the ratings-based approach
for assessing capital charges against securitization exposures, may, however, impact our ability and/or desire to issue
asset-backed securities in the future. See below for additional information.
SEC Regulation AB II
In April 2010, the SEC proposed revised rules for asset-backed securities offerings (“SEC Regulation AB II”) that, if
adopted, would substantially change the disclosure, reporting and offering process for public and private offerings of
asset-backed securities, including those offered under our credit card securitization program. The proposed rules, if
adopted in their current form, would, among other things, impose as a condition for the shelf registration of asset-backed
securities a requirement that the sponsor of the asset-backed securities offering hold a minimum of 5% of the nominal
amount of each of the tranches sold or transferred to investors (or, in the case of revolving master trusts, an originator’s
interest of a minimum of 5% of the nominal amount of the securitization exposures) and not hedge those holdings. Issuers
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