Discover 2015 Annual Report Download - page 46

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challenging regulatory environment for private student loans and a competitive marketplace. For more information on
the regulatory environment, see "Management's Discussion and Analysis of Financial Condition and Results of
Operations — Regulatory Environment and Developments — Consumer Financial Services — Private Student Loans"
and Note 20: Litigation and Regulatory Matters to our consolidated financial statements. Slow economic recovery
combined with government and regulatory focus on higher education costs, student lending and competitive factors,
such as the need to offer fixed interest rates and competition from non-traditional lenders such as financial technology
firms, may present challenges to managing and growing our private student loan business in the future, and could
cause us to restructure our private student loan product in ways that we may not currently anticipate. In addition,
changes that adversely affect the private student loan market generally may negatively impact the profitability and
growth of our student loan portfolio.
We may experience unanticipated losses as a result of mortgage loan repurchase and indemnification obligations
under agreements with secondary market purchasers.
While we closed our mortgage origination business, Discover Home Loans, in 2015, we may be required to
repurchase mortgage loans originated by Discover Home Loans that have been sold to secondary market purchasers in
the event there are breaches of certain representations and warranties contained within the sales agreements, such as
improper underwriting, fraud, or other origination defects. We also may be required to indemnify certain purchasers
and others against losses they incur in the event of breaches of representations and warranties and in various other
circumstances, and the amount of such losses could exceed the repurchase amount of the related loans. We would
need to find alternative purchasers for, or arrange with a third party to service, any loans that we are required to
repurchase.
Consequently, we are exposed to credit risk, and potentially funding risk, associated with sold loans due to the
risk we may be required to repurchase these loans. We establish reserves in our consolidated financial statements for
potential losses related to the risk of having to repurchase mortgage loans we have sold. The adequacy of the reserves
and the ultimate amount of losses incurred will depend on, among other things, the actual future mortgage loan
performance, the actual level of future repurchase and indemnification requests, the actual success rate of claimants,
actual recoveries on the collateral and macroeconomic conditions. The reserves we establish may not be adequate and
losses incurred could adversely affect our financial condition and results of operations.
Acquisitions or strategic investments that we pursue may not be successful and could disrupt our business, harm our
financial condition or reduce our earnings.
We may consider or undertake strategic acquisitions of, or material investments in, businesses, products,
portfolios of loans or technologies in the future. We may not be able to identify suitable acquisition or investment
candidates, or even if we do identify suitable candidates, they may be difficult to finance, expensive to fund and there is
no guarantee that we can obtain any necessary regulatory approvals or complete the transactions on terms that are
favorable to us. We generally must receive federal regulatory approvals before we can acquire a bank, bank holding
company, deposits or certain assets or businesses. For additional information regarding bank regulatory limitations on
acquisitions and investments, see "Business — Supervision and Regulation — Acquisitions and Investments."
To the extent we pay the purchase price of any strategic acquisition of or investment in cash, it may have an
adverse effect on our financial condition; similarly, if the purchase price is paid with our stock, it may be dilutive to our
stockholders. In addition, we may assume liabilities associated with a business acquisition or investment, including
unrecorded liabilities that are not discovered at the time of the transaction, and the repayment or settlement of those
liabilities may have an adverse effect on our financial condition.
We may not be able to successfully integrate the personnel, operations, businesses, products, or technologies of
an acquisition or investment. Integration may be particularly challenging if we enter into a line of business in which we
have limited experience and the business operates in a difficult legal, regulatory or competitive environment. We may
find that we do not have adequate operations or expertise to manage the new business. The integration of any
acquisition or investment may divert management's time and resources from our core business, which could impair our
relationships with our current employees, customers and strategic partners and disrupt our operations. Acquisition and
Investments also may not perform to our expectations for various reasons, including the loss of key personnel, customers
or vendors. If we fail to integrate acquisitions or investments or realize the expected benefits, we may lose the return on
these acquisitions or investments or incur additional transaction costs, and our business, reputation and financial
condition may be harmed as a result.