By Pradeep Saran
Sep 17; 2023, 06:07 PM
Discover Financial Services is reportedly considering the potential sale of its student-loan business as part of its ongoing efforts to streamline operations following a series of regulatory challenges.
This unit holds a portfolio of private student loans valued at approximately $10.2 billion, making it an attractive prospect for alternative asset managers or rival student-loan platforms, according to undisclosed sources cited by Bloomberg. Nevertheless, no final decision has been reached, and the company might choose to retain the business.
It’s worth noting that this contemplation of a sale coincides with a recent leadership transition at Discover Financial Services, where CEO Roger Hochschild stepped down, and John Owen assumed the role of interim CEO. The company had previously halted stock buybacks due to concerns about compliance and is currently engaged in an internal review of compliance, risk management, and corporate governance.
Discover Financial Services stands out as one of the few lenders that continue to offer private student loans. The company has benefited from the federal moratorium on payments for federal student loans, as it allowed borrowers to allocate more funds towards paying down their private loans.
According to regulatory filings, the student-loan portfolio exhibits a lower write-off rate compared to Discover’s credit-card and personal-loan books. However, analysts are questioning whether the company intends to remain in the student-loan business as it seeks to simplify its product offerings.
It’s worth noting that Discover’s student-loan business has faced regulatory scrutiny in the past. In 2015, the company reached a consent order with the Consumer Financial Protection Bureau (CFPB) concerning its private student-loan servicing practices. Five years later, the CFPB found that Discover had not fully complied with the order from that investigation, resulting in the regulator requiring the company to implement a compliance plan and pay $35 million in penalties and redress for consumers.
The 2015 case stemmed from an earlier investigation by the CFPB, which revealed that Discover had been misrepresenting minimum amounts due on billing statements and withholding necessary tax information that customers needed to claim federal income tax benefits.