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Discover credit card company, Discover Financial Services, faces a tough year ahead. The 6ht largest U.S. credit-card issuer by customer spending, estimates a regulatory enforcement probe on their marketing practices by the Consumer Financial Protection Bureau and the Federal Deposit Insurance Corp may hurt their net income over $100,000,000.

Here’s the kicker – Discover may ultimately owe the government a lot of money in sanctions because of illicit marketing of “fees.” The company announced both the Consumer Financial Protection Bureau and Federal Deposit Insurance Corp. alerted Discover of a planned joint enforcement action against them over their marketing of fee- based products, including payment protection.

According to the Government Accountability Office, credit card companies collected $2.4 billion in fees for debt protection products in 2009.” Discover owns the nation’s fourth-largest payments network after Visa, MasterCard, and American Express, so who knows what the final sticker shock will be.

A regulatory and enforcement investigation of such magnitude could be devastating to Discover shareholders. It could dig deeper into Discover Financial Services practices, going well beyond the marketing of the Discover credit card. What if the feds also turn stones on the company’s electronic payment services, student and personal loan services, ant marketing of savings products and money market accounts? Discover Financial Services also operates a national automated teller machine (ATM)/debit network Shares of Discover Financial Services (NYSE:DFS) opened in January 27, 2012 below their pivot of $27.82.

The turmoil for Discover in defending itself against legal and regulatory issues started well before the Consumer Financial Protection Bureau probe. In 2010, Minnesota Attorney General Lori Swanson sued the company, alleging “their telemarketers failed to tell consumers when they were agreeing to purchase optional, fee-based services, including payment protection.”

As a result, Discover entered into a consent judgment to settle the lawsuit. Earlier the Discover credit card company also agreed to a preliminary settlement of eight class-action cases that also attacked its marketing tactics. Thus, it appears that Discover had been bleeding at the seams for a number of years now. But, the carnage continues…

In the emergence of the CFPB, one thing’s for certain – many former illegal credit card practices will soon come to a screeching halt. On July 21, the new agency assumed federal consumer law enforcement on banks with more than $10 billion in assets. Unlike the FTC, it has complete power to write new rules and absolute jurisdiction over most credit card companies. The CFPB sanction can be as much as $1,000,000 per violation, per day!

Richard Cordray, former Ohio Attorney General, just became the CFPB top honcho and will be considering whether new rules are needed for debt protection products of the sort at issue in the Minnesota lawsuits. Being a new agency with a recently appointed director, credit card companies are in the clouds not knowing how the CFPB intends to exercise its regulatory, supervisory, examination and enforcement authority.

Discover also announced, “Should the CFPB discourage the use of products we offer or steer consumers to other products or services that it deems to be preferable, we could suffer reputation harm and a loss of customers.” Perhaps hearing it from the horse’s mouth will give you a clearer perspective of the might of the CFPB over rogue financial institutions.

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TransUnion reports that the practice of credit cardholders giving priority to credit card payments over mortgage payments, which originated since 2008, continues to flourish. And, with the gradual progress to the U.S. economy, there’s no end in sight to the twisted trend.

Why have the tables turned?

For many decades, Americans made their mortgage payments a “paramount” financial responsibility. Obviously, their homes were their most vital assets. However, three years ago, the carnage of the mortgage lending crisis triggered by greedy Wall Street lunged homeowners with troubled mortgages into then abyss of missed mortgage payments. But, the massive mortgage payment defaults makes perfect sense…

Ramifications of the banks’ shoddy mortgage loans finally came to roost as homeowners, many victims of unemployment, where stuck in the predicament of spiked mortgage payments that they could hardly afford. Then, a resulting wave of foreclosures caused the real estate market to bottom out.

With no liquidity on their properties, once a most prized asset, one could hardly blame the ensuing derelict behavior of consumers. What is a sane person to do with a piece of property that’s depleted of all of its equity? The bottom line is that if your property (asset) has no liquidity, you can’t refinance or take out a home equity loan on your mortgage to pay down debts, or satisfy other basic living necessities.

Sadly, even as the economy gradually improves, TransUnion analysts prognosticate there’s no immediate prospect of changes in the horizon. They report that the proportion of consumers falling behind on monthly credit card payments remains at near-record lows.

Banks may have received a government bailout. But, the present tell tale signs are still a reality too grim for many mortgage lenders to bear. In the final pages of the closing chapter, movements from common citizens like Occupy Wall Street, and the developing movement of defiant homeowners squatting on their foreclosed properties, are giving the mortgage banking industry a come-uppance. Plus, reaping what they sowed, banks face yet another stream of foreclosures right around the corner – more sage Americans continue weighing their options in giving preferential treatment to their credit cards over mortgage payments.

Odd as it seems, in these still pressing financial times, credit cards are a more liquid, more valuable commodity for many folks to preserve. At least for now, despite the disdain of their usurious interest rates, credit card companies prevail as the lesser of the two evils.

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