CFPB Rebuffed in Unfair Practices Suit Against Payment Processor

By Chris Bruce

A federal judge dismissed the Consumer Financial Protection Bureau’s allegations of unfair practices against a Fargo, N.D.-based third-party payment processor and its top executives, saying the agency failed to state a plausible claim ( Cons. Fin. Protection Bureau v. Intercept Corp. , D.N.D., 16-cv-00144, 3/17/17 ).

The CFPB’s June 2016 suit in the U.S. District Court for the District of North Dakota said Intercept Corp. “systematically enabled” consumer lenders, debt collectors, and other clients to make unauthorized or illegal debits and charges from consumer bank accounts. Intercept and its two top officials also ignored warnings from banks it works with about unauthorized account debits, indications of fraud and other potential illegalities, the suit said.

Judge Ralph R. Erickson dismissed the complaint March 17, saying the CFPB failed to make its case. “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,” he said.

It’s unusual for a case brought by the government to be dismissed at such an early stage. However, the decision allows the CFPB to refile its claims. The agency also has the option to appeal. A CFPB spokesman did not immediately respond to a request for comment on the ruling.

Challenging Juncture

Among other points, although Intercept said the CFPB is an unconstitutional agency, Erickson said that question doesn’t need to be decided yet.

Erickson’s decision comes at a challenging juncture for the CFPB. Also on March 17, the Justice Department, in a separate case, filed a brief in the U.S. Court of Appeals for the District of Columbia Circuit that said the agency’s present leadership structure is unconstitutional.

Meanwhile, a House Financial Services subcommittee is scheduled to examine the agency at a March 21 hearing entitled “The Bureau of Consumer Financial Protection’s Unconstitutional Design.”

Automated Clearing House

The March 17 ruling involves the automated clearing house (ACH) network, which moves more than 23 billion payment transactions each year totaling more than $40 trillion. According to the CFPB, although third-party processors that use the ACH have a duty to monitor transactions for suspicious activity, Intercept failed to meet its responsibilities.

In an August brief, the agency said the company debited consumer bank accounts on behalf of its merchant clients “despite numerous red flags that the payment requests they were submitting were fraudulent or illegal.”

The other defendants are Intercept President Bryan Smith, who holds 50 percent of the company’s shares, and Craig Dresser, Intercept’s chief executive, who owns the other 50 percent.

Intercept is represented by Richard J. Zack, Jessica S. Russell, and Jay Dubow of Pepper Hamilton in Philadelphia, and David J. Hauff and Michael T. Andrews of Anderson & Bottrell Sanden & Thompson in Fargo. Zack, speaking for Intercept, said the company is pleased at the dismissal.

To contact the reporter on this story: Chris Bruce in Washington at cbruce@bna.com

To contact the editor responsible for this story: Michael Ferullo at MFerullo@bna.com

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.