Discover Financial Services is exploring the potential sale of its student-loan business as the company seeks to clean up operations in the aftermath of a series of regulatory lapses, according to people familiar with the matter.
(Bloomberg) — Discover Financial Services is exploring the potential sale of its student-loan business as the company seeks to clean up operations in the aftermath of a series of regulatory lapses, according to people familiar with the matter.
The unit, which includes a $10.2 billion portfolio of private student loans, could fetch interest from alternative asset managers or rival student-loan platforms, some of the people said, asking not to be identified discussing confidential information. Deliberations are ongoing and Discover could opt to retain the business, according to some of the people.
A Discover spokesman declined to comment.
“We think it makes sense that DFS is considering selling this business, particularly if the price is right and helps the company accelerate the resolution of the outstanding compliance issues related to the student-lending vertical,” Keefe, Bruyette & Woods analysts led by Sanjay Sakhrani said in a note to clients.
A sale could free up $2 billion to $3 billion of capital for Discover, and could attract interest from companies including Navient Corp. and SoFi Technologies Inc., according to the analysts.
Discover last month announced the abrupt departure of Chief Executive Officer Roger Hochschild, replacing him on an interim basis with board member John Owen. The move came after the company earlier said it would temporarily suspend buybacks amid an internal review of compliance, risk management and corporate governance.
Read More: Discover CEO Resigns as Board Vows Renewed Compliance Focus
It was the second time in a year that the company had to suspend share repurchases over compliance concerns. Last year, Discover temporarily paused stock buybacks after it started an internal investigation into practices within its student-loan servicing business.
That business has long been in regulators’ crosshairs: In 2015, Discover agreed to a consent order with the Consumer Financial Protection Bureau over its private student-loan servicing practices. Five years later, it entered into another order resolving a CFPB investigation tied to the 2015 order.
With the latest order, Discover was required to implement a compliance plan and shell out $35 million in penalties and redress for consumers.
“We have made progress over the last 18 months on building out a better risk and compliance framework,” Owen told analysts and investors on a conference call last month. “We’re going to stay very focused on that and we have still a fair amount of work to do there.”
Private Loans
Discover is one of the few lenders to still offer private student loans. The Riverwoods, Illinois-based company has said it’s benefited from the broader moratorium on payments on federal student loans because it freed up borrowers to pay down more of their private loans.
The student-loan portfolio typically has a much lower write-off rate than Discover’s credit-card and personal-loan books, regulatory filings show. For instance, the company charged off about 1.2% of its student loans in the first six months of the year, compared with 3.4% of its card portfolio.
Still, in recent quarters, analysts have questioned whether the company plans to keep operating in the business even as it looks to simplify its offerings.
Asked about Discover’s student-loan business at a conference this week, Chief Financial Officer John Greene said executives have “continued to take a look at all our products, the returns and the use of capital, and try to work to optimize our allocation of capital. We’re going to continue to do that, and we’ve got more work to do.”
–With assistance from Jenny Surane and Bre Bradham.
(Updates with analysts’ comments starting in fourth paragraph.)
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