In a rare judicial rebuke of the Consumer Financial Protection Bureau’s (CFPB’s) oft-criticized efforts to seek penalties despite no damages for allegedly “unfair, deceptive, or abusive acts or practices” (UDAAP) conduct, the US District Court for the District of North Dakota in CFPB v. Intercept Corporation has dismissed without prejudice a complaint (Complaint) filed by the CFPB against Intercept (a third-party payment processor for payday and title lenders and debt collectors) and two of its officers for failure to state a plausible claim under Fed. R. Civ. P. 12(b)(6).

District Court Decision

The district court held that the CFPB failed to allege any facts suggesting that consumers were injured or likely to be injured by Intercept, or that any potential injury was not counterbalanced by benefits to the consumers in the matter. Accordingly, there was a failure of the most basic form of notice pleading, and the Complaint was dismissed. While the CFPB may refile its Complaint, one may presume that a sophisticated federal agency like the CFPB is aware of its Rule 12 notice obligations and did what it could to file an actionable complaint in the first place.

The Complaint

The facts as alleged in the Complaint fit a recurring pattern in CFPB enforcement actions. By creating a “choke point” in accessing the payment systems, the CFPB effectively can conscript a payment processor in the consumer protection enforcement business.

As a third-party payment processor, Intercept provides a necessary payments “bridge” between small lenders in the high-interest, short-term space on the one hand and the Automated Clearing House (ACH) and Federal Reserve System (FRB) payment systems on the other hand. The CFPB asserts, however, that payment processors have a duty to their customers’ customers—i.e., consumers—to be diligent in monitoring their small lender and debt collector customers for compliance with the law, and to take action against (and presumably not process payments for) those businesses that are noncompliant.

Thus, the CFPB alleged in its Complaint that there were numerous “red flags” that ought to have alerted Intercept to the shortcomings of some of its customers, and that its failure to act—a form of either negligence or willful blindness—amounted to assisting and facilitating the UDAAP violations of Intercept’s small lender and debt collector customers.

Even taking these allegations as true, which a court is required to do in deciding a Rule 12 motion, the CFPB made no allegations about how Intercept’s negligence or willful blindness was unfair and thereby caused injury to a consumer that was not outweighed by a benefit.

Takeaways

The takeaways of the district court’s decision are two-fold:

First, the court’s ruling has implications beyond the CFPB. Other federal agencies such as the Federal Trade Commission (FTC) have similar core unfair practices enforcement authority, and all 56 state and territorial attorneys general have independent authority to bring UDAAP actions under the CFPB’s federal provision or under their own state law provisions that generally are similar to the CFPB UDAAP provision.

Second, while the CFPB, FTC, and state attorneys general correctly assert that they need not prove monetary damages, monetary damage does not equate to harm, and even if there is harm, there may be counterbalancing consumer benefits. Legal conclusions alone do not suffice for purposes of a complaint, and practitioners should weigh these issues when considering their options in defending agency allegations of UDAAP violations.