In our last game, Eleanor was cruising to an easy victory with 12 favor and a mission card requiring only 5 when she drew the Despairing corruption card. (no more than 3 favor on the hero sheet) Since the card was drawn 2 spaces away from the Finale and there was no way to acquire 2 more favor in a two player game it was a devastating blow, and my opponent questioned the wording... I think because in this case the card's effect was far worse than suffering defeat in combat. I guess I just want to verify that this card literally means "discard all favor in excess of 3, and you may possess no more than 3 favor".
That would be my reading as well.
Also, does exhaustion occur if you simply use all of the cards in your combat hand, but haven't exceeded your strength?
"Important: Before the start of any combat round, if a combatant
does not have any combat cards in his hand (or does not wish to
play cards), he declares himself exhausted." (p. 32)