Banking and Finance Law Daily CFPB’s UDAAP claims against third-party payment processor dismissed
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Tuesday, March 21, 2017

CFPB’s UDAAP claims against third-party payment processor dismissed

By Thomas G. Wolfe, J.D.

Determining that the Consumer Financial Protection Bureau’s complaint against third-party payment processor Intercept Corporation and its owners failed to allege sufficient facts to support claims for "unfair, deceptive, or abusive acts or practices" (UDAAP) under the Consumer Financial Protection Act, the U.S. District Court for the District of North Dakota dismissed the CFPB’s complaint "without prejudice" (Consumer Financial Protection Bureau v. Intercept Corporation, March 17, 2017, Erickson, R.).

CFPB’s complaint. In June 2016, the CFPB filed a complaint against Intercept Corporation—doing business as InterceptEFT—and its owners, Bryan Smith and Craig Dresser, alleging that they ignored "blatant warning signs of potential fraud" by the companies using the payment processor’s services and allowed those companies to withdraw millions of dollars from consumers’ bank accounts unlawfully.

According to the CFPB, Intercept transmitted electronic funds transfers through the Automated Clearing House for its customers, which included payday lenders, title lenders, and debt collectors. This activity allowed the customers to obtain payments by drawing funds directly from consumers’ bank accounts. In its two-count complaint, the CFPB contended that the Intercept defendants violated the CFPA’s ban against UDAAP by not properly monitoring customer transactions, investigating red flags that indicated improper activity, or responding to concerns and complaints raised by originating depository financial institutions, consumers, and others. The CFPB sought restitution, damages, injunctive relief, and civil penalties from Intercept and its owners (see Banking and Finance Law Daily, June 6, 2016).

Court’s analysis. In addressing Intercept’s motion to dismiss the CFPB’s complaint for the alleged UDAAP violations under the CFPA, the court first noted that while some of the alleged practices by the Intercept defendants likely fell outside the applicable three-year statute of limitations, "the current record does not support a finding that [the CFPB’s] claims are time-barred as a matter of law."

Next, the court determined that the CFPB sufficiently alleged facts that, "if proven," would support a finding that the Intercept defendants are "covered persons," "service providers," or "related persons" under the CFPA. Consequently, the court stated that the Intercept defendants’ request for dismissal hinged on whether the complaint adequately stated causes of action for "unfair, deceptive, or abusive acts or practices." Ultimately, the court found that the CFPB’s two-count complaint did not do so.

In ruling that the CFPB’s complaint did not contain "sufficient factual allegations to back up its conclusory statements regarding Intercept’s allegedly unlawful acts or omissions," the court determined that the complaint failed to provide sufficient factual support to adequately plead that:

  • industry standards were violated by Intercept;
  • consumers were injured or likely to be injured;
  • Intercept took unlawful advantage of consumers;
  • specific, identifiable clients of Intercept presented "red flags" to the third-party payment processor; and
  • how the Intercept defendants failed to act upon these red flags.

Final disposition. In dismissing the CFPB’s complaint "without prejudice," the court commented that if the CFPB should decide to "renew this action in this court or another court," the separate issue about the constitutionality of the CFPB "may be addressed appropriately at that time."

The case is No. 3:16-cv-144.

Attorneys: David J. Hauff, Richard Zach, and Mike Andrews (Anderson, Bottrell, Sanden & Thompson) for Bryan Smith, Craig Dresser, and Intercept Corporation, doing business as InterceptEFT. Janelle Dennis, Kevin Friedl, and Richa Shyam Dasgupta for the Consumer Financial Protection Bureau. Keith Barnett for amicus curiae Third Party Payment Processors.

Companies: Intercept Corporation, doing business as InterceptEFT

MainStory: TopStory CFPB ChecksElectronicTransfers DoddFrankAct EnforcementActions FinancialIntermediaries UDAAP

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