Discover Financial Services' stock price fell as much as 3% on Friday after the company disclosed that the Federal Deposit Insurance Corp. (FDIC) is reviewing its marketing of payment protection and other fee-based products.

The Riverwoods, Ill., credit card lender said Friday in its quarterly earnings filing with the Securities and Exchange Commission (SEC) that the FDIC's review could lead to an enforcement action against the company.

"We are engaged in constructive dialogue with the FDIC as it reviews the marketing practices of our fee-based products," a Discover spokeswoman wrote in an email in response to questions Friday, adding that it is "committed to providing quality products that offer real value to consumers and marketing them clearly and transparently."

Discover declined to discuss specific details of the FDIC review, the latest challenge it has faced over its marketing of fee-based products, which include payment or debt protection, identity theft protection and credit score monitoring. Such products generated $412.5 million in income for Discover in fiscal 2010, up 40% from the previous year. Income from debt deferment and settlement products rose 86%, to $234.2 million. The increases resulted in part from the addition of income from securitized loans included under new accounting rules.

Discover's share price dropped about 1%, to $26.48, Friday afternoon after falling to as low as $25.82 in the morning.

Its payment protection plan allows borrowers to put their payments on hold for up to 24 billing cycles as a result of a disability, family death, job loss and other hardship events. Cardholders can also postpone payments for one billing cycle in the event of marriage, new job, graduation, move or other events if they use the service, according to Discover's website.

Discover is named in eight pending class actions over its marketing of the payment protection product. The plaintiffs accuse it of violating state laws and the Truth in Lending Act. However, in June Discover entered a preliminary global settlement that addressed all pending class actions and is awaiting approval, according to the SEC filing.

The Minnesota Attorney General's office sued Discover in December for its sales tactics for payment protection, identity theft and other products. It accused Discover of making "aggressive, misleading and deceptive telemarketing calls to sign people up for these products," according to the agency. In some instances Discover charged cardholders for the services even if the customers did not agree to sign up for them, the Attorney General's office said. The agency said the service costs 89 cents for every $100 of outstanding balance a cardholder carries each month. The Minnesota Attorney General's office did not immediately respond to a request for comment on Friday.

Debt protection products are offered by most credit card issuers. Cardholders paid $2.4 billion in fees for debt protection on 24 million credit card accounts in 2009, according to a March report from the Government Accountability Office (GAO). The report was based on data from the nine largest U.S. credit card issuers.

The fees for such products range from 85 cents to $1.35 per month for every $100 of outstanding balance a cardholder carries.

"Fees for these products can be substantial, with the annual cost often exceeding 10% of the cardholder's average monthly balance," the GAO report said. In total, cardholders received $518 million in financial benefits in exchange for the costs they paid in 2009.

Such products will be partly under the purview of the Consumer Financial Protection Bureau after July 21. A letter from the bureau included in the GAO report said it plans to include debt protection products in its oversight of consumer financial products. The FDIC may also continue to have some jurisdiction, though, depending on specific practices involved, an FDIC spokesman wrote in an email.

Beverly Harzog, a credit card expert with Inc., said she discourages consumers from using payment protection. "I prefer to advise people to have their emergency savings account first for the sorts of issues that these payment protection plans are supposed to help you with," Harzog said.

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