CFPB Files Lawsuit Against Payment Processor and Executives

On Monday, the Consumer Financial Protection Bureau (CFPB) announced a lawsuit against payment processor Intercept Corporation, accusing the company of enabling their clients to withdraw millions of dollars of funds fraudulently from consumer accounts. The lawsuit also names two top Intercept executives, Bryan Smith and Craig Dresser, for allegedly ignoring “clear signs of brazen fraud” by their clients.

Intercept Corporation is a third-party payment processor located in Fargo, North Dakota. Smith is Intercept’s president and Dresser is its chief executive officer. Each own 50 percent of the company. Intercept transmits electronic funds transfers through the Automatic Clearing House on behalf of clients including payday lenders, auto-title lenders, debt collectors, and sales financing companies.

In the lawsuit, filed in the U.S. District Court for the District of North Dakota, the CFPB alleges that Intercept, Smith, and Dresser violated the Dodd-Frank Wall Street Reform and Consumer Protection Act’s prohibition against unfair acts and practices by processing payments for clients without properly investigating the business practices of those clients, even after being told of numerous complaints about their clients from banks and consumers.

The Bureau says that Intercept “ignored blatant warning signs of potential fraud” by its clients by helping them facilitate withdrawals and other unauthorized charges against consumers. Allegedly, the extremely high return rates for transactions associated with certain clients, as well as previous FTC enforcement action against clients like Scott Tucker, should have been clear red flags to Intercept to stop doing business with those clients.

In addition to allegedly ignoring the signs of fraud, the CFPB says that Intercept “ignored complaints from banks and consumers” about high return rates and unauthorized debits from their accounts, in some instances ignoring state law in the process. The Bureau also alleges that when a bank raised concerns about processing a payment related to a certain client, Intercept would just go to a different bank to process the payment rather than considering ending their relationship with the client.

The lawsuit is seeking monetary relief, injunctive relief, and penalties against Intercept, Smith, and Dresser under the Bureau’s UDAAP authority.

insideARM Perspective

In April of last year, insideARM reported that the CFPB had filed a lawsuit against a number of payment processors and telemarketer Global Connect for “enabling” fraudulent activity by processing payments for clients (Marcus Brown and Mohan Bagga) that they “knew, or should have known” were “engaged in unlawful conduct.” At that time, the CFPB referred to their action as part of a push to start “holding service providers accountable,” even though the payment processors in that example terminated their accounts with unscrupulous clients after they received complaints related to fraudulent behavior. The case is still working its way through the legal system, but so far judges have ruled that the companies should have known that the business practices in question were illegitimate.

In this new case, Intercept is alleged to have gone to extraordinary lengths to keep doing business with clients whose practices were being questioned by banks and consumers, in addition to ignoring those questions and complaints. Therefore, it appears there is less of a chance for Intercept to get a favorable resolution to the case.

Depending on the resolution of the action, the Intercept case could have a chilling effect on the technology environment in the debt collection industry. This case will need to be closely watched by ARM stakeholders.