Last month, the Consumer Financial Protection Bureau prevailed in federal court on an important decision interpreting the Consumer Financial Protection Act. The court denied a motion to dismiss a CFPB complaint. The original lawsuit was filed by the CFPB against several small debt collection entities, but it also named three third-party payment processors. The CFPB cited Section 1036(a)(3) of the Act and alleged that the processors, although not involved directly in debt collection, “recklessly” provided “substantial assistance” to illicit collection actions.
The case, CFPB v. Universal Debt & Payment Solutions, LLC, et al., arose from a scheme by some allegedly fly-by-night companies to collect debt that consumers did not actually owe. Earlier this year, the CFPB filed a complaint in federal court against not only the alleged phantom debt collectors and their owners, but also against the much larger payment processors that enabled them to take debit and credit card payments.Since the payment processors did not provide services directly to consumers, they made a motion in court to dismiss the charges against them. In denying the defendants’ motions to dismiss, the court held the CFPB had alleged facts sufficient to support the accusation, without ruling on the merits of the case.
Those facts are significant. The original complaint alleged that the payment processors facilitated fraud by enabling the debt collectors to accept credit and debit card payments, thereby giving the debt collectors an “air of legitimacy,” which helped convince consumers that the debt collectors were credible merchants. The complaint also alleged that the payment processors were liable because they violated their own policies and procedures, which were designed to minimize their own credit exposure that results from chargebacks associated with disputed or fraudulent charges.
At the time the lawsuit was filed, CFPD Director Richard Cordray said, “The ringleaders of the scheme, the telemarketing company that broadcast millions of robo-calls, and the companies that processed the payments should all be held accountable for taking advantage of vulnerable consumers.” This decision agrees, holding that “the payment processors were in a position to know their contractors weren’t legitimate.”
This decision puts third-party processors on notice. By investigating large payment processors, the CFPB is leveraging its resources by putting the burden on service providers to police the companies with which they do business. The CFPB knows that these larger companies will be more cooperative in investigations and ultimately able to pay more money to compensate consumers. Going forward, payment processors should expect further scrutiny from the CFPB.