A payment processor scored a victory against the Consumer Financial Protection Bureau (CFPB) when a North Dakota federal court dismissed the Bureau's lawsuit for failing to plead facts sufficient to support the conclusion that the processor engaged in unfair practices resulting in harm to consumers.
What happened
Last June, the CFPB filed suit against the payment processor and its two co-owners, alleging that in violation of the Consumer Financial Protection Act (CFPA) the defendants engaged in unfair acts and practices by turning a "blind eye to blatant warning signs of potential fraud or law breaking" by its clients, including illegal withdrawals from consumer bank accounts. The CFPB also alleged that owners provided substantial assistance to the company's alleged violations. The company is a third party payment processor that processes electronic fund transfers through the Automated Clearing House (ACH).
Not only did the company ignore concerns from the originating depository financial institutions questioning the lawfulness of the transactions the company was processing, the company allegedly disregarded complaints from customers, high return rates, and law enforcement actions against its clients, the CFPB said.
The complaint stated two counts: first, that the defendants engaged in unfair acts and practices in violation of the Act, and second, that the two individuals provided substantial assistance to the company's alleged violations of the CFPA.
The company moved to dismiss, arguing that the complaint failed to state a plausible claim.
U.S. District Court Judge Ralph R. Erickson granted the motion, hinging his analysis on whether the complaint adequately stated causes for "unfair, deceptive, or abusive acts or practices."
"A close review of the complaint yields a conclusion that the complaint does not contain sufficient factual allegations to back up its conclusory statements regarding [the company's] allegedly unlawful acts or omissions," the court wrote. "While the complaint indicates that [defendant] was required to follow certain industry standards, it fails to sufficiently allege facts tending to show that those standards were violated. Although the complaint contains several allegations that [the Company] 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. Nothing in the complaint allows the defendants or the court to ascertain whether any potential injury was or was not counterbalanced by benefits to the consumers at issue."
An act or practice cannot be considered "abusive" under the CFPA unless it "materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or … takes unreasonable advantage" of consumers, the court explained. But the CFPB failed to provide factual allegations to support a finding that the company interfered with consumers' ability to understand the terms of their dealings with the company's clients or that would support a finding that defendant took unlawful advantage of consumers, Judge Erickson said.
"The complaint simply does not sufficiently identify particular clients whose actions provided 'red flags' to [the Company] or how [the Company's] failure to act upon those 'red flags' caused harm or was likely to cause harm to any identified consumer or group of consumers," the court wrote. "Although the CFPB strongly urges this court to find that the complaint's factual detail is sufficient to allow defendants to recognize the specific clients, the complaint does not provide the court with sufficient information or factual detail to analyze whether it is sufficient to state a claim for relief."
The court dismissed the suit without prejudice, enabling the CFPB to amend its complaint to remedy the defects noted by the court.
To access the order, click here.
Why it matters
The decision is a victory for the defendants and a rebuke to the CFPB in its efforts to reign in alleged unfair acts and practices of various third party processors, particularly when their clients operate in problematic industries such as payday lending or debt collection. The victory may be short-lived, however, as the CFPB may in fact have sufficient facts to refile a complaint that can withstand a motion to dismiss.