A suit accuses the company of using deceptive telemarketing to enroll customers in extra services.
The Minnesota attorney general's office on Monday accused one of the nation's largest credit-card companies of fraudulently enrolling thousands of consumers into financial products they didn't want or need.
The lawsuit alleges that Discover Financial Services used "highly deceptive and misleading telemarketing calls" to trick cardholders into signing up for pricey services that the company marketed as ways for consumers to protect themselves against unwanted charges.
In taking legal action, Attorney General Lori Swanson joined a growing list of consumer advocates who argue that credit card "extras," such as identity theft protection and credit score monitoring, are too expensive and ought to be regulated more closely. Though such products are widespread, Swanson accused Discover of taking an unusually aggressive sales approach.
The suit alleges that Discover's telemarketers lulled cardholders into thinking they were getting a "courtesy call," then read a sales script so quickly -- often running sentences together and skipping over key words -- that many cardholders reflexively said, "Yes," or, "OK." Discover treated these responses as agreements to sign up for a new product, even when there was no clear consent and the customer did not understand the terms, the lawsuit alleges.
Swanson said these deceptive sales tactics could have affected "tens upon tens of thousands of Minnesotans," resulting in millions of dollars in unauthorized charges to consumers. "This is a case of a credit card company playing 'gotcha' instead of playing fair with its customers," she said at a news conference.
One consumer, Delbert Engler, 55, of Dent, Minn., said he was charged $900 in fees on his Discover card before he noticed that he had been enrolled in a service that he never authorized. "I couldn't understand a word the person said on the phone," Engler, a machine operator for the U.S. Postal Service, said of his conversation with Discover. "But I'm still paying interest on that $900."
In a written statement, Discover spokeswoman Leslie Sutton said the company would not comment on the specifics in the suit, but added, "It's not in Discover's interest to sell a product that doesn't enhance our relationship with our card members." She added that these add-on products can be "cancelled at any time," and that Discover will provide full refunds to people who decide to cancel within 90 days.
"The vast majority of our card members, however, maintain the products for the benefits they offer," she said.
Specifically, the lawsuit contends that Discover and an affiliated processing company duped consumers into signing up for:
• Payment protection, which allows customers to defer payment of their credit card bill in the event of certain hardships, such as unemployment. This plan costs $0.89 each month for every $100 of outstanding balance, or $534 per year on a $5,000 balance.
• Identity theft protection, marketed as assistance in monitoring the customers' accounts for fraud and unauthorized charges. This costs $12.99 per month.
• Wallet protection, marketed as helping the consumer report lost or stolen wallets.
• Credit ScoreTracker, marketed as assistance in monitoring a person's credit score.
These add-on products are widespread and have become a lucrative source of revenue. Last year, Discover collected $295 million from fee products, up 38 percent from $215 million in 2007, according to the company's financial statements.
Many consumer advocates object to the stiff monthly fees that often accompany these products. "If you're coughing up $500 for a payment protection plan, that's $500 that could go toward knocking down that card balance or $500 that could go into a savings account," said Greg McBride, a senior financial analyst for Bankrate.com.
Swanson alleged that Discover's telemarketers used "an array of deceptive tactics," such as "speed-reading" through sales scripts, to get people to make positive responses.
"Some telemarketers, while speed-reading the disclosure in a monotone, intentionally run sentences together without pausing for periods, and then pause where there is no period ... ." the lawsuit said. "Another tactic is to speed-read, slur, or skip altogether the substantive terms such as 'enrollment.'"
Monday, Swanson played a number of tapes of Discover telephone calls with Minnesota consumers, which she obtained through a subpoena. During one call, Brad Sparish, 50, of Cottage Grove, asked a Discover telemarketer, "I'm not automatically enrolled now, am I?" according to a tape obtained by the attorney general's office. The telemarketer indicated he was simply mailing him the forms and was "absolutely under no obligation" to participate. Yet, about two months later, Sparish discovered $60 in unwanted charges on his credit-card statement.
"I can't tell you what the guy was pitching," he said.
In another call, a man who appeared to be a Discover telemarketer rushed through a description of the terms of the "payment protection" product to Jill Amundson, 41, of Minneapolis. Uninterested and busy making dinner, Amundson demanded that she not be enrolled in anything without seeing paperwork. The telemarketer's response to Amundson's demand was unintelligible, according to a tape of the call.
Months after that conversation, Amundson, discovered $181 in charges for a new monthly product. "I was shocked," she said. "There was absolutely nothing in that call that could have been perceived as an expression of interest or a 'Yes.'"
The lawsuit is unlikely to dampen efforts by companies to sell such products, predicts Gail Hillebrand, senior attorney for the Consumers Union in San Francisco. Credit card companies are under increased pressure to find new sources of fee income since President Obama last year signed the CARD Act, which puts new limits on interest rates and fees.
"The credit card industry is always trying new ways to generate more fees," Hillebrand said. "They're like a marshmallow. If you push on one place, they'll pop up somewhere else."
Staff writer Paul Walsh contributed to this report. Chris Serres 612-673-4308