A payment processor and two executives were the subject of a new Consumer Financial Protection Bureau (CFPB) action, with the Bureau charging that the defendants enabled their clients to make unauthorized withdrawals from consumer accounts.
Intercept Corporation, president Bryan Smith, and chief executive officer Craig Dresser "turned a blind eye" to red flags of potential fraud or law-breaking by clients, the CFPB alleged, such as enforcement actions by federal and state authorities, high rates of returned payments because of unauthorized withdrawals, insufficient funds, or invalid or closed accounts.
On behalf of its clients—which include payday lenders, auto title lenders, debt collectors, and sales financing companies, among others—Intercept transmits electronic funds transfers through the Automated Clearing House (ACH). But the defendants processed payments for their clients "without adequately investigating, monitoring, or responding to red flags" indicating that some clients were deceiving consumers or breaking the law, the Bureau alleged in its North Dakota federal court complaint.
Many of Intercept's clients ran up annual return rates of 20 to 40 percent for network transactions (well above the 1.5 percent industry average) and the defendants made "little effort" to determine why the rates were so high, the CFPB said. Instead, the defendants continued to process transactions, helping process what the Bureau estimated at "millions of dollars" of unauthorized and illegal charges from consumer accounts.
Enforcement actions against some of their clients did not motivate the defendants to investigate, the CFPB noted, even when the Federal Trade Commission sued a customer in 2012 for illegal withdrawals from consumer accounts. Another client received a cease and desist order from the Georgia Attorney General but Intercept responded with an internal e-mail that it "seems as though the more information we ask for, the more information we receive that I would prefer not knowing!!!" the Bureau said.
The defendants also ignored repeated complaints from consumers as well as warnings from banks. In some instances, the defendants switched banks to help process payments for clients when the initial bank expressed concern in lieu of addressing the red flags, the CFPB said. Over a six-year period from 2008 to 2014, the defendants switched between eight different banks to keep client transactions moving, sometimes processing through three different banks at the same time, the Bureau alleged.
Intercept's application process was "perfunctory," the CFPB added, and although the defendants' stated procedure was to review Better Business Bureau (BBB) ratings and complaints, the "standard practice was not to investigate or follow up with clients" over poor BBB ratings to determine whether or not clients were engaged in illegal behavior. In one e-mail, an Intercept executive responded to an "F" rating of a payday lending client by writing, "My first thought about the BBB is that isn't every payday lender rated an F? I don't think this is unusual."
"Defendants have performed only perfunctory due diligence regarding the legitimacy and legality of their clients' underlying transactions and have ignored indicia of fraud or illegality revealed through even their minimal due diligence," according to the CFPB's complaint. "By providing these clients with access to the banking system and the means to extract money from consumers' bank accounts, Defendants have played a critical role in this unlawful conduct."
Alleging violations of Dodd-Frank Wall Street Reform and the Consumer Protection Act's prohibition on unfair, deceptive, or abusive acts or practices, the Bureau seeks monetary and injunctive relief as well as penalties.
To read the complaint in CFPB v. Intercept Corporation, click here.
Why it matters
"Companies cannot turn a blind eye to wrongdoing when they process payments from consumer banking accounts on behalf of clients that are breaking the law," CFPB director Richard Cordray said in a statement about the action.