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Wednesday, April 15, 2015

CFPB sues ISOs, acquirer over client scams

The Consumer Financial Protection Bureau wants ISOs and acquirers to be more circumspect about their clients. To that end, the federal consumer watchdog agency revealed on April 8, 2015, it is taking down a bogus debt-collection operation. It also named four merchant services companies as co-defendants in a civil suit it filed in a federal court in Georgia.

This appears to be the first time the CFPB has come down directly on payment processing companies. And it doesn’t bode well, according to industry attorney Adam Atlas. “This case poses challenging questions for all processors and ISOs as well,” he said.

Global Payments Inc., Pathfinder Payment Solutions Inc., Frontline Processing Corp. and Electronic Merchant Systems are alleged to have facilitated a massive scheme to collect bogus debts from unwitting consumers by acquiring and processing the associated card payments. Frontline is an ISO headquartered in Bozeman, Mont. Pathfinder and EMS, which are also ISOs, are headquartered in Columbia, Md., and Cleveland, Ohio, respectively. Global is a top five acquirer and processor with headquarters in Atlanta.

“Our lawsuit asserts that consumers were harassed, threatened and deceived as part of a reprehensible scheme to collect debt that was not even owed,” said CFPB Director Richard Cordray in announcing the case. “We are taking action against the many parties that allegedly contributed to this phantom debt collection operation. The ringleaders of the scheme, the telemarketing company that broadcast millions of robo-calls, and the companies that processed the payments should all be held accountable for taking advantage of vulnerable consumers.”

The CFPB requested that the court impose civil penalties and awards; it also wants the debt collectors to be shut down permanently.

Missed or ignored red flags

The CFPB’s complaint was filed in U.S. District Court for the Northern District of Georgia, in Atlanta, in March and unsealed April 8. It alleges violations of the Fair Debt Collection Practices Act and the Consumer Financial Protection Act, by a group of individuals and businesses that threatened, harassed and deceived consumers into paying phantom debts. A preliminary injunction also was imposed to halt further activities by the lead defendants – Marcus Brown and Mohan Bagga – and various businesses they controlled, and to freeze their assets.

Brown and Bagga, using fictitious business names and the assistance of several associates, are said to have tricked consumers into believing the debts were legitimate because the collectors had their personal information (such as Social Security numbers and dates of birth). That information, it turns out, had been purchased from debt brokers and lead generators.

The two lead defendants are alleged to have hired a telemarketing firm, Global Connect, to broadcast robo-calls to millions of consumers alleging each had engaged in check fraud and threatening them unless their debt was settled, by credit or debit card. Threats used against the victims included arrest, wage garnishment and “financial restraining orders.”

The CFPB asserts the card transactions were submitted for processing and settled using the four named payments companies despite numerous red flags indicating illegal conduct, including consumer disputes describing the scheme and difficulties contacting the debt collectors.

“The Payment Processors facilitated the Debt Collectors large-scale fraud by enabling the Debt Collectors to accept payment by consumers’ bank cards when the Payment Processors knew, or should have known, that the Debt Collectors were engage in unlawful conduct,” the complaint stated.

It also cited specific instances in which underwriting and risk monitoring were lacking and/or disregarded at Global and the three ISOs. The complaint alleges, for example, that the debt collection companies were known to be factoring payments and had chargeback rates of 30 percent or higher, yet the firms continued to accept and process card payments from them.

A new standard of conduct?

Atlas said it appears the CFPB is taking a harder line on standards of conduct for ISOs and acquirers than did the Federal Trade Commission, which came down on ISOs several years ago regarding disclosures provided to merchants. (The CFPB assumed the FTC’s jurisdiction over the industry under the Dodd-Frank Act.)

“Here the CFPB is basically asking the processor to take responsibility for the acts of its merchants,” Atlas said. “This breaks with long-standing custom in the industry. Until now, absent complicity in wrongdoing, processors were not held responsible for the acts of their merchants.” He added that the CFPB’s action could “contribute to high risk processing going underground or off-shore where there are fewer remedies for all concerned.” end of article

Editor's Note:

The Green Sheet Inc. is now a proud affiliate of Bankcard Life, a premier community that provides industry-leading training and resources for payment professionals. Click here for more information.

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