Discovering a response to new regulation

The financial crisis may be long over, but Discover Financial Services General Counsel Kathryn McNamara Corley has two daily reminders: The Federal Reserve and the Consumer Financial Protection Bureau.

As a result of the 2008 crisis, the Riverwoods-based credit card company is now under the purview of both those regulators, effectively tripling the number of agencies keeping tabs on its activity.

So, how does that impact a general counsel?

In a 2009 newspaper interview, Corley, who goes by Kelly, said, “I’m very comfortable with risk.” Reminded of that comment in an August interview, she joked, “That must have been before the crisis.”

Clarifying, she said, “I’m still not afraid of risk. What I’ve done in my approach post-financial crisis is my team and I have talked a lot about risk assessment. And risk assessment is on a continuum from ‘It would be crazy to do that,’ to ‘That’s completely safe.’ And most of the things we look at are not on either end of the spectrum. They’re somewhere in the middle.”

Good thing, then, that someone whose entire career has involved responding to regulators is at the helm of the 60-lawyer legal department.

After graduating college and continuing after law school, Corley worked in government relations roles for 17 years at Discover and its former parent companies — Sears, Roebuck & Co., Dean Witter and Morgan Stanley — before being named senior vice president, general counsel and secretary at Discover in 1999.

In 2008, she earned the title of executive vice president. This summer marks her 33rd year at the company and its predecessors.

“Being able to translate (the views of regulators) for business people is really key, and that’s what she does extraordinarily well. That background is hugely important for a company like Discover,” said Christine A. Edwards, whom Corley credits with convincing her to go to law school when Edwards was her boss during a government relations internship at Sears in 1982.

Edwards, now chair of Winston & Strawn LLP’s bank regulatory practice, said Corley splits her time between Chicago and Washington, D.C., where she is well-known and well-respected among lobbyist groups and regulators.

“I think that’s extraordinarily useful to the company,” Edwards said, adding, “What more would you like? What more could you ask for in a general counsel?”

Corley said her experience in Washington helps shape her company’s response to new regulations that she said can be unclear. One concept she stresses: Transparency.

“Transparency with your regulators, right now, is really, really important because the expectations are heightened but they’re not always perfectly clear,” Corley said.

Discover’s regulatory requirements increased as a result of two separate events.

The first came in December 2008. Like many other financial firms at the time, Discover became a bank holding company in a move that allowed it access to $1.2 billion in emergency funds. The move also came with Federal Reserve oversight.

While that money has long been paid back to the U.S. Treasury and the company’s stock has surged more than eight times since its recession low, the Federal Reserve maintains its role as regulator of all bank holding companies.

The CFPB was created in 2010 through the Wall Street reform known as the Dodd-Frank Wall Street Reform and Consumer Protection Act. As a consumer-focused finance company offering credit cards, student loans, personal loans, home loans and banking services, Corley said the CFPB “is very important to us.”

Corley said the consumer finance regulator takes a different approach than others, which she described as “principles-based,” referring to a provision that allows the CFPB to prosecute what it deems “unfair, deceptive or abusive acts and practices,” known as a UDAAP standard.

“The other regulators have statutes, guidance and regulations that they’ve used to guide the industry,” Corley said.

“The CFPB has this UDAAP or fairness standard, which is not black and white. It’s a principles concept. And guiding a consumer-lending company through a fairness-based analysis of whether something is appropriate or not appropriate from a legal standpoint is a different analysis than we’ve gone through before.”

That is why communicating with regulators is so important, Corley said.

“It helps you understand why they’re so interested in a topic, and it helps you get ahead of it,” she said.

In addition to coordinating the company’s response to new regulations, Corley has been busy restructuring her legal department.

The department had been made up of two main groups: A group of regulatory-focused lawyers mostly in Washington, D.C., and a group of advisory lawyers who provide general legal advice for the company’s various lines of business.

Corley recently created a group which she refers to as “The Center of Excellence.” The lawyers in that group have developed a deep understanding of a handful of “high-risk” issues for the company, including privacy, UDAAP, fair lending standards and rules regarding lending to U.S. service members.

When a lawyer who advises, say, the credit card business, spots a privacy issue, it is routed to a privacy specialist.

“They’re a resource to go to that’s in-house versus outside counsel and we also have the benefit of having a coordinated approach to those particular topics,” Corley said.

She expects the new group will make the company’s use of outside counsel more efficient by tailoring more specific questions for its law firms.

She has sought cost efficiency from law firms in other ways. That includes developing a small list of firms that handle the bulk of the company’s legal work and provide alternative fee arrangements such as capped fees and success-based fees. She has also hired legal outsourcers such as Axiom Law as well as offshore legal outsourcers.

“Coupling preferred providers where you develop a relationship, some trust and experience with some flexibility on these fee arrangements allows you to capture as much savings as you can,” she said.

Born in Salt Lake City, Corley lived in Colorado, Arizona and California by the sixth grade, as her family followed her ball-bearing salesman father.

After settling in Yorba Linda, Calif., she received an undergraduate degree in political science from the University of Southern California. After college, she traveled across the country to work as an intern for Sears’ government relations department in the nation’s capital.

Having “caught the bug” of Washington, D.C., she stayed at Sears in a junior role as it was diversifying its financial services products. While there, she attended George Mason University School of Law, earning her law degree in 1989.

When Sears divested Dean Witter and Discover, Edwards became the company’s general counsel and Corley ran the company’s government relations unit until 1997. At that point, the company was sold to Morgan Stanley and Corley continued in her role there until moving to Chicago in 1999 to become general counsel of Discover.

Discover Financial Services was spun off to become an independent company in 2007.

“I feel like I’ve had so many different experiences working for different companies and have been afforded the opportunity to learn, grow and change right along with the companies as they are learning and changing,” Corley said.