Court Dismisses CFPB Complaint Against Payment Processor For Ignoring Red Flags

On March 17, 2017, a Federal Judge in North Dakota dismissed a lawsuit brought by the Consumer Financial Protection Bureau (CFPB) against a third-party payment processor and its top executives that alleged that the defendants had “systematically enabled” consumer lenders, debt collectors, and other clients to make unauthorized or illegal debits and charges from consumer bank accounts. 

The case is Consumer Financial Protection Bureau v. Intercept Corporation, d/b/a Intercept EFT, et.al. (Case No 3-16-cv-144, U.S. District Court, N.D.) 

The CFPB initiated this action on June 16, 2016. A copy of the complaint can be found here. 

Background

The CFPB filed the complaint against Defendants, Intercept Corporation, Bryan Smith, and Craig Dresser (collectively the Intercept defendants), containing two causes of action which alleged violations of the Consumer Financial Protection Act (“the CFPA”). Defendants filed a motion to dismiss the complaint under Rule 12 of the Federal Rules of Civil Procedure arguing that the Complaint failed to state a plausible claim. 

Key allegations in the complaint the court considered and accepted as true for purposes of the motion were:

• The CFPB is an independent agency of the United States set up to regulate the exchange of consumer financial products or services under federal consumer financial laws.
• The CFPB has the authority to pursue litigation to enforce those laws.
• Intercept is a third party payment processor in the business of processing the electronic transfer of funds through the Automated Clearing House (“ACH”) network on behalf of its clients.
• Bryan Smith is Intercept’s president and owns fifty percent of its shares.
• Craig Dresser is the CEO of Intercept and owns the remaining fifty percent of its shares.
• Intercept is a “covered person” and a “service provider” under the CFPA.
• Smith and Dresser are “related persons” under the CFPA because of their status as officers of Intercept. 

The CFPB also alleged the following: 

“As a third party payment processor, Intercept provides its clients with access to banks in order to facilitate the debiting and crediting of funds electronically from consumer bank accounts. Intercept’s clients include consumer lenders, auto title lenders, sales finance companies, and debt collectors. Businesses and individuals utilize third party processors like Intercept when they are unable to establish their own relationships with banking institutions or because it is more administratively convenient. 

Intercept’s clients are known as “Originators.” When an Originator sends a request to Intercept, Intercept conveys the request to its own bank, which is known as the “Originating Depository Financial Institution” or “ODFI”. The ODFI then forwards the debit or credit request to an ACH operator, who transmits the request to the recipient’s bank, known as the “Receiving Depository Financial Institution” or “RDFI”. The RDFI then credits or debits the recipient’s account and sends the money back to Intercept through the ODFI. Intercept remits the debit amount back to its client and charges the client fees for its services.

The CFPB alleged in the complaint that Intercept ignored warnings from ODFIs of possible illegal activity by its clients, of debits unauthorized by consumers, of potential indicia of fraud by its clients, of discrepancies in dates and amounts debited, and of other possibly suspicious activity. 

The complaint also alleged that if an ODFI raised concerns or terminated its relationship with Intercept, Intercept would find another ODFI to process transactions for the same clients who were the subject of the concerns. 

The CFPB also claimed that Intercept did not properly investigate when ODFIs expressed concerns about high return rates for some of its clients. 

Finally, the CFPB alleged that Numerous consumers had complained about Defendants’ processing activities and that “Despite all of these warning signs from ODFIs and consumers, Defendants continued payment processing for these clients without investigation or consequence.” 

The Court’s Discussion and Holding

The court’s decision was rendered by the Honorable Ralph R. Erickson, District Judge United States District Court. Judge Erickson determined that the Motion to Dismiss the Complaint should be GRANTED and the case DISMISSED WITHOUT PREJUDICE.

A copy of the order granting summary judgment can be found here. 

Judge Erickson wrote: 

“To survive a motion to dismiss, “a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face. Factual allegations must be enough to raise a right to relief above the speculative level[.]” In other words, the facts alleged in the complaint must be plausible, not merely conceivable.

A close review of the complaint yields a conclusion that the complaint does not contain sufficient factual allegations to back up its conclusory statements regarding Intercept’s allegedly unlawful acts or omissions. While the complaint indicates that Intercept was required to follow certain industry standards, it fails to sufficiently allege facts tending to show that those standards were violated. Although the complaint contains several allegations that Intercept engaged in or assisted in unfair acts or practices, it never pleads facts sufficient to support the legal conclusion that consumers were injured or likely to be injured. Nothing in the complaint allows the defendants or the court to ascertain whether any potential injury was or was not counterbalanced by benefits to the consumers at issue. 

The complaint lacks factual allegations that would support a finding that Intercept interfered with consumers’ ability to understand the terms of their dealings with Intercept’s clients or that would support a finding that Intercept took unlawful advantage of consumers. 

A complaint containing mere conclusory statements without sufficient factual allegations to support the conclusory statements cannot survive a motion to dismiss. The defendants’ motion to dismiss, under Rule 12(b)(6) of the Federal Rules of Civil Procedure, for failure to state a claim is granted.” 

insideARM Perspective

If the case seems somewhat familiar, it is because the CFPB has previously filed an action against a third party payment processor.  

On April 8, 2015 insideARM wrote about a CFPB enforcement action involving “shady debt collectors” in Buffalo. But, in that proceeding the CFPB also named a number of payment processors and a voice broadcasting service as defendants for “enabling” the debt collectors in their scheme. Those defendants were charged with “providing substantial assistance to the Debt Collectors’ unfair or deceptive conduct.” 

Earlier this year, on January 17, 2017, insideARM wrote about one of the defendants in that earlier case “punching back” against the CFPB. The company, Pathfinder Payment Solutions, Inc. (Pathfinder) filed a motion for Rule 11 Sanctions against the Bureau for including them in that action. That case is still pending. 

There are two other interesting items from the Intercept case. First, the court dismissed the case without prejudice.  The CFPB could simply file an amended complaint. On the other hand, the CFPB could file an appeal of Judge Erickson’s decision. 

Second, in their motion to dismiss, Intercept also argued the case should be dismissed because of the “unconstitutional structure” of the CFPB. However, Judge Erickson wrote: 

“The court deems it unnecessary to decide the issue of the constitutionality of the CFPB at this time. Should the CFPB decide to renew this action in this court or another court, the issue may be addressed appropriately at that time.”