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  • District Judge Issues Order Against Bi-Weekly Payment Company, Denies Restitution Sought by CFPB

    Courts

    On September 8, a federal judge in the U.S. District Court for the Northern District of California issued an opinion and order against a company after a seven-day bench trial, finding that the company misrepresented its bi-weekly payment program in violation of the Consumer Financial Protection Act (CFPA). As previously covered in InfoBytes, the CFPB filed a complaint in 2015 against the company, its wholly owned subsidiary, and the company’s founder, alleging that the company’s false and misleading marketing practices were abusive and deceptive when it minimized the existence or amount of the program’s setup fee, misled borrowers on the amount of actual savings, and created the impression that the company was affiliated with the lender. The payment program allowed the defendants to contract with borrowers to make their mortgage, credit card, or other loan payments for them. The program automatically debited their accounts every two weeks in an amount equal to one-half of the monthly payment on the loan. This resulted in 26 payments per year, with the extra payments going towards paying down the principal on the loan. The judge granted the $7.9 million civil penalty proposed by the CFPB but denied the restitution of almost $74 million that the CFPB had sought—a full refund of all setup fees—because it found that “the CFPB has not proved that defendants engaged in the type of fraud commonly connoted by the well-worn phrase ‘snake oil salesmen,’” and specifically had “not shown, and could not show, that the [payment] program never provid[ed] a benefit to consumers, or that no fully-informed consumer would ever elect to pay to participate in the program.” The court found that further injunctive relief is warranted but directed the parties to meet and confer to determine the specific terms of the relief. The court noted that the CFPB had only sought civil penalties under the “basic tier” of the CFPA’s civil penalties provision and speculated that the CFPB did not propose higher penalties because it also expected to obtain a large amount of restitution. Nevertheless, the court found that higher penalties for reckless or knowing violations were not warranted because the defendants had taken “affirmative steps such as training, quality control, and seeking legal counsel, in an effort to stay on the right side of the line.”

    Courts CFPB Payment Processors UDAAP Settlement

  • District Court Dismisses CFPB Lawsuit Against Payment Processors, Cites “Blatant Disregard” for Discovery Order

    Courts

    On August 25, a federal judge in the U.S. District Court for the Northern District of Georgia filed an order dismissing claims brought by the CFPB against four payment processors for allegedly engaging in an illegal robocall phantom debt collection operation involving certain payment processors and a telephone broadcast service provider (defendants). (See previous InfoBytes coverage here.) According to a complaint filed in 2015, the defendants “knew, or should have known” that the debt collectors were contacting millions of consumers in an attempt to collect debt that consumers did not owe or that the collectors were not authorized to collect by using threats, intimidation, and deceptive techniques in violation of the Consumer Financial Protection Act and the Fair Debt Collection Practices Act.

    According to the order, however, the CFPB displayed a “blatant disregard” for the court’s instructions when asked repeatedly to identify the factual bases for its claims, and willfully failed to present a knowledgeable 30(b)(6) witness during depositions. As examples of “willful disregard,” the court noted that the CFPB’s approach was to first “bury the Defendants in so much information that [they] cannot possibly identify, with any reasonable particularity, what supports the CFPB’s claims,” and second, to “assert privilege objections to questions that the Court … repeatedly ordered to be answered.” The court also indicated that Bureau witnesses relied on “memory aids”—which the court characterized as “scripts”—to provide answers to the defendants’ questions and were unable to testify beyond what was stated on the memory aids. This behavior made the court “not optimistic that reopening the depositions would be fruitful.” As a result, the court dismissed the defendants from the action, granting sanctions under Rule 37, which permits “a district court [to] impose sanctions upon a party for failure to comply with a discovery order,” which may include striking pleadings in whole or in part.

    Courts Payment Processors CFPB CFPA FDCPA UDAAP

  • Supreme Court Remands Texas Credit Card Surcharge Case

    Courts

    On April 3, the U.S. Supreme Court granted certiorari in a case challenging a Texas law that bars retailers from imposing credit card surcharges, and remanded the case to the Fifth Circuit in light of its ruling last week in Expressions Hair Design, that a similar statute in New York regulated merchants’ First Amendment rights. In Rowell, a landscaping business, a computer networking company, a self-storage facility, and an event design and production company sought to challenge a Texas law allowing merchants to charge different prices to customers who pay with cash and customers who pay with a credit card, but barring merchants from describing the price difference as a surcharge for credit cards, leaving them to describe it instead as a discount for using cash. The Fifth Circuit held that the Texas law did not violate the retailers’ free speech rights, aligning it with the Second Circuit in its September 2015 ruling in the Expressions Hair Design litigation against New York State.

    As previously reported on InfoBytes, the Supreme Court last week in the Expressions case unanimously rejected the Second Circuit’s conclusion that the New York credit card law regulates conduct alone, rather than speech. As explained in the Supreme Court’s opinion, the law at issue “is not like a typical price regulation,” which regulates a seller’s conduct by dictating how much to charge for an item. Rather, the Court explained, the law regulates “how sellers may communicate their prices.” (emphasis added). The Supreme Court, however, did not address the question of whether the law unconstitutionally restricts speech.

    Courts U.S. Supreme Court State Issues Consumer Finance Payment Processors Credit Cards

  • Supreme Court Questions State Law Restricting Consumer Price Displays

    State Issues

    On March 29, the U.S. Supreme Court vacated and remanded a lawsuit challenging a New York law—N.Y. Gen. Bus. Law § 518—which provides that no seller “may impose a surcharge on a holder who elects to use a credit card” instead of a cash payments. (See Expressions Hair Design, et al. v Schneiderman.) Plaintiffs, a group of New York merchants, argued that the law violates the First Amendment by regulating how they communicate their prices. Plaintiffs further alleged that the law is unconstitutionally vague. In its defense, the State of New York asserted that the law merely prevents unfair profiteering, consumer anger, and deceptive sales tactics. After the district court ruled in favor of the Plaintiffs, the Court of Appeals for the Second Circuit vacated the judgment with instructions to dismiss. The Second Circuit appellate panel reasoned that the law is a “price regulation” that regulates conduct rather than speech and, as such, is immune from scrutiny under the First Amendment.

    Writing for the Supreme Court—which was unanimous in the judgment—Chief Justice John G. Roberts disagreed with the Second Circuit panel’s conclusion that the law regulates conduct alone. Specifically, Justice Roberts notes in his opinion that Section 518 “is not like a typical price regulation,” which regulates a seller’s conduct by dictating how much to charge for an item. Rather, the Chief Justice explained, the law regulates “how sellers may communicate their prices.” Notably, the majority opinion declined to delve into the First Amendment issues raised by the parties, including whether the law is a valid commercial speech regulation, citing its status as “a court of review, not of first view.”

    Justice Stephen G. Breyer filed a concurring opinion in which he noted that because the law’s interpretation is unclear, on remand, the Second Circuit should ask New York's highest court to clarify it, as this “is a matter of state law.” Justice Sonia M. Sotomayor, joined by Justice Samuel A. Alito, Jr., also filed a concurring opinion in which she called the majority's ruling a “quarter-loaf outcome,” because the holding failed to address whether the law unconstitutionally restricts speech. The Second Circuit erred by not certifying the question of the statute's interpretation to the N.Y. Court of Appeals “and this Court errs by not correcting it,” Sotomayor reasoned. The Justice indicated that she would have “vacate[d] the judgment below and remand with instructions to” certify the question for a definitive interpretation.

    State Issues Credit Cards Payment Processors U.S. Supreme Court Consumer Education

  • Federal Court in North Dakota Dismisses CFPB Complaint Against Payment Processor for Insufficient Factual Allegations

    Courts

    In an Order issued on March 17, a U.S. District Court for the District of North Dakota dismissed an enforcement action filed by the CFPB against a payment processor and its two top executives.  The Bureau had filed the lawsuit last year against a Fargo-based third-party payment firm, and its co-owners, alleging that the firm had “ignored” warnings from financial institutions of possible unauthorized debits and other possibly suspicious activity, including the possibility that the firm was processing electronic funds transfers on behalf of payday lenders in states where payday loans are illegal. 

    In granting Defendants’ motion to dismiss without prejudice, the Court held, among other things, that the CFPB had failed to “plead[] facts sufficient to support the legal conclusion that consumers were injured or likely to be injured” by the actions attributed to the defendants in the complaint.  As explained by the Court, "[a]lthough the complaint need not contain detailed factual allegations, it must contain 'more than an unadorned, the-defendant-unlawfully-harmed-me accusation.”  The Court emphasized both that (i) “[f]ormulaic recitations of the elements of a claim or assertions lacking factual enhancement are not sufficient,” and (ii) that “[t]he facts alleged in the complaint must be plausible, not merely conceivable.”  Applying this standard, the Court ultimately held that the CFPB’s complaint “d[id] not contain sufficient factual allegations to back up its conclusory statements regarding Intercept’s allegedly unlawful acts or omissions.”

    Courts CFPB Payment Processors Payday Lending

  • CFPB Fines Prepaid Debit Card Company and Payment Processor $13 Million for Preventable Service Breakdown, Claims Consumers Denied Access to Their Own Money

    Courts

    On February 1, the CFPB announced that it had entered a consent order against two companies—a prepaid card company and its payment processor—for failing to conduct adequate testing and preparation before and during a switch to a new payment processing platform in 2015. In addition, the Bureau cited both companies for improper administration of accounts after the switch. The allegations arise out of an approximate three week breakdown in services in October 2015 which, among other things, denied cardholders access to their accounts, delayed the processing of deposits and payments, and also, in some instances, erroneously double posted deposits which falsely inflated account holders’ balances. The consent order also notes that the prepaid card company failed to provide adequate customer service to consumers impacted by the breakdown. The CFPB stated that it received roughly 830 consumer complaints in the weeks following the switch. Based on these and other allegations, the Bureau ordered the two companies to prepare a plan to prevent future service disruptions and pay an estimated $10 million in restitution to harmed consumers as well as a $3 million civil penalty.

    Courts Consumer Finance CFPB Prepaid Cards Payments Payment Processors

  • Multiple Federal Agencies Pursue International Payment Processor

    Fintech

    The DOJ, OFAC and the U.S. Postal Inspection Service (USPIS), as part of an effort to stop an international network of mass mailing fraud schemes that target elderly and vulnerable victims, conducted a joint enforcement action against an international payments processor and money services business based in Canada. The agencies alleged that the payment processor engaged in money laundering and mail fraud by knowingly processing payments on behalf of the perpetrators of more than 100 different mail fraud campaigns, collectively involving tens of millions of dollars. OFAC designated the payments processor as a significant transnational criminal organization (TCO) pursuant to Executive Order 13581. OFAC also designated as TCOs a global network of 12 individuals and 24 entities across 18 countries based on their association with the payment processor. As a result of today’s action, all property and interests in property of the designated persons subject to U.S. jurisdiction are blocked, and U.S. persons are prohibited from engaging in transactions with them. Additionally, USPIS obtained a warrant through the Eastern District of New York to seize the funds in a U.S. bank account that was allegedly used to process payments received through fraudulent mailings. According to OFAC, the payment processor “has a nearly 20-year history of knowingly processing payments relating to these fraudulent solicitation schemes, which result in the loss of millions of dollars to U.S. consumers.”

    DOJ Enforcement OFAC Payment Processors Elder Financial Exploitation

  • CFPB Takes Action Against North Dakota Payment Processor for Alleged Unauthorized Withdrawal Practices

    Fintech

    On June 6, the CFPB filed a complaint against a North Dakota-based third-party payment processor and two of its senior executives for alleged violations of the Dodd-Frank Act’s prohibition against unfair acts and practices. Acting on behalf of its clients, the payment processor transferred funds electronically through a network called the Automated Clearing House, and in the process, according to the CFPB, the payment processor “ignored numerous red flags about the transactions they were processing, including repeated consumer complaints, warnings about potential fraud or illegality raised by banks involved in the transactions, unusually high return rates, and state and federal law enforcement actions against their clients.” The CFPB contends that the defendants failed to: (i) heed warnings, including federal and state enforcement actions taken against the defendants’ clients, from banks and consumers regarding potential fraud or unauthorized debits; (ii) adequately monitor and respond to “enormously” high return rates; and (iii) investigate “red flags” throughout its clients’ application processes that “should have caused it to… perform enhanced due diligence prior to accepting a client for processing.” Regarding the individuals’ involvement in the allegedly unlawful activity, the CFPB’s complaint alleges that both engaged in unfair acts and practices by “actively ignoring” a number of red flags associated with the payment processor’s business activities. The CFPB’s complaint seeks monetary relief, injunctive relief, and penalties.

    CFPB Enforcement Payment Processors Vendor Management UDAAP Third-Party

  • Washington Department of Financial Institutions Denies ETA's Petition for Declaratory Order on Technical Grounds

    Fintech

    On March 15, the Washington Department of Financial Institutions responded to the Electronic Transactions Association’s (ETA) December 2015 Petition for Declaratory Order, which sought clarification on the statutory definition of “money transmitter” under the Washington Uniform Money Services Act (WUMSA), RCW 19.230.020(9). Specifically, the ETA requested clarification that “money transmitter” excludes payment processors that do not have consumer-facing relationships or receive consumer payments for transmission to a third-party payee or other transferee. The ETA’s petition further requested that the Department issue a declaratory order that the payment processor exclusion in WUMSA “applies to payment processors that act on behalf of merchants, rather than consumers, to facilitate the merchant’s acceptance of credit and debit cards and that such payment processors are not subject to the Act.” The Department declined to issue such an order because the ETA’s petition failed to specifically identify any of its purported 500+ members “by name or as doing business in or having sufficient minimum contacts with Washington State to a degree that would presumptively make them subject to the Division’s authority under WUMSA.” The Department allowed that ETA could resubmit the petition, but also encouraged it to contact the Department’s staff and “have discussions about how best to resolve the alleged ‘uncertainty’ you have addressed.”

    Money Service / Money Transmitters Payment Processors

  • FTC Amends Telemarketing Sales Rule, Bans Payment Methods Used by Scammers

    Fintech

    On November 18, the FTC announced that it approved, by a 3-1 vote, final amendments to the Telemarketing Sales Rule (TSR) that ban telemarketers from using certain payment methods that are commonly used by scammers. Per the amendments, telemarketers are prohibited from (i) using specific types of checks and “payment orders” that are remotely created by the telemarketer or seller and which permit direct access to consumers’ bank accounts; (ii) receiving payments through traditional “cash-to-cash” money transfers, which allow scammers to easily obtain consumer funds anonymously and without the ability to reverse the transaction; and (iii) accepting as payment “cash reload” mechanisms. The FTC concluded that the aforementioned payment methods constituted abusive practices because they caused or were likely to cause “substantial injury to consumers that is neither reasonably avoidable by consumers nor outweighed by countervailing benefits to consumers or competition.” Finally, according to the FTC, “the amendments address changes in the financial marketplace to ensure consumers remain protected by the TSR’s antifraud provisions, but are narrowly tailored to allow for innovations with respect to other payment methods that are used by legitimate companies.”

    FTC Telemarketing Sales Rule Payment Processors

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