On Friday, March 17, 2017, the U.S. District Court for the District of North Dakota dismissed the Consumer Financial Protection Bureau's lawsuit against Intercept Corporation and its two owners, Bryan Smith (also the company's president) and Craig Dresser (also the company's CEO). Intercept is a third-party payment processor that processes electronic payments on behalf of payday lenders, sales finance companies, title lenders, and debt collectors. The court held that the CFPB failed to show that consumers were likely to suffer substantial injury as a result of the payment processor's alleged failure to identify the fraudulent activity of its consumer finance company clients.
The CFPB filed its complaint against Intercept, Smith, and Dresser in June of 2016, alleging that the three engaged in unfair practices in violation of the Consumer Financial Protection Act. Specifically, the CFPB claimed that Intercept continued to process payments for its clients even "in the face of numerous indicators that those clients were engaged in fraudulent or illegal transactions," and that Smith and Dresser substantially assisted the company's allegedly unlawful conduct. The CFPB charged Intercept with knowledge of the illegal conduct of its clients, arguing that consumer complaints, high returned payment rates, warnings from its own bank, and enforcement actions against its clients put Intercept on notice of its clients' allegedly illegal activity and suspicious activity.
The defendants moved to dismiss. The court granted their motion. The court explained that the CFPB's complaint failed to show why the defendants' alleged omissions would injure or be likely to cause substantial injury to consumers. Specifically, the complaint did not sufficiently identify which of Intercept's clients presented "red flags" to Intercept, either during the client application process or during course of the client relationship, or how Intercept's failure to address those "red flags" caused or was likely to cause harm to any identified consumers. The court also considered whether the CFPB had established a claim for abusive acts or practices (despite that the CFPB did not allege that the defendants' actions were abusive), and found that it did not.
In the absence of sufficient evidence to state a claim for relief, the court dismissed the CFPB's case. The court's decision represents continued efforts by the judicial branch to reign in the CFPB's overreach. When it brings an unfair practices claim, the CFPB is constrained by its legislative mandate to prevent practices that cause or are likely to cause substantial injury to consumers. Without at least some likeliness of substantial consumer injury, and a specific identification of the source of that injury (i.e., the names of Intercept's clients who presented "red flags," and an explanation of how Intercept's inaction caused or was likely to cause harm), an unfair practices claim cannot stand.