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Tuesday, August 29, 2017

Court strikes down CFPB action against payment processors

A federal district court judge in Georgia dismissed a two-year-old enforcement action brought by the Consumer Financial Protection Bureau against several payment processing companies, ruling that the consumer watchdog agency effectively stonewalled the pretrial discovery process.

An attorney who follows the CFPB suggested the court's ruling calls into question the CFPB's understanding of its enforcement powers. "The CFPB has been successful in extracting millions of dollars in consent orders without ever stepping foot in a court room, and certainly without ever engaging in formal discovery subject to the federal rules," Joann Needleman, a practice group leader at the law firm Clark Hill PLC, wrote in a recent blog post at InsideARM.com. "This case may have pulled back the curtain and exposed the bureau's inexperience when it comes to actually litigating a case."

Red flags ignored

The CFPB filed a civil enforcement action in 2015 against a group that included four payment processing companies over an alleged debt collection scheme that got unwitting consumers to pay off bogus debts (see "CFPB sues ISOs, acquirer over client scams," The Green Sheet, April 27, 2015, issue 15:04:02). The consumer watchdog agency asserted that the payment processing companies – leading acquirer Global Payments Inc., Frontline Processing Corp., an ISO headquartered in Bozeman, MT, Pathfinder Payment Solutions Inc., based in Columbia, MD, and Cleveland-based Electronic Merchant Systems – facilitated the scam by accepting transactions despite red flags suggesting something was amiss.

By accepting these credit and debit card transactions for processing, the four "helped legitimize the [debt] collectors' business and facilitated millions of dollars in ill-gotten profits," the CFPB wrote in a filing with the U.S. District Court for the Northern District of Georgia. That put the companies in violation of the Consumer Financial Protection Act's prohibitions against unfair, deceptive or abusive acts and practices, the bureau said. It requested the court levy civil penalties and awards on all alleged offenders, and shut down the errant debt collection agencies.

In preparing for their day in court, lawyers for the four payment processing companies and a telemarketing firm that was named in the CFPB's suit, sought depositions from CFPB lawyers regarding facts supporting the case. Depositions are typically used in pretrial discoveries so lawyers can ascertain what facts will be presented in a case, what witnesses know and other pertinent evidence. The CFPB objected to giving depositions, arguing that its testimony amounted to privileged law enforcement information, and that the depositions were improper because they sought the mental impressions and analysis of CFPB lawyers. The court disagreed and ordered the CFPB to submit to the requested depositions.

Discovery stonewalled

The deposition process didn't go well, however. Lawyers for the defendants complained to the court that the CFPB's witness responded to questions from a prepared script, which the CFPB defined as a "memory aid," and which the defendants' lawyers complained did not properly respond to the questions posed. The court intervened, telling the CFPB the information requested was not protected from inquiry and that it needed to provide a knowledgeable witness who could answer questions about the case off script.

Apparently, the CFPB did not heed the court's order, and its witness continued to respond from prepared statements. The witness also refused to answer some questions outright, insisting the answers would disclose privileged information. So the payment processing companies went back to court and requested sanctions against the CFPB for failing to heed the court's instructions.

The court sided with defendants. In an opinion handed down on Aug. 25, 2017, U.S. District Court Judge Richard W. Story wrote that "the CFPB's pattern of conduct warrants substantial sanctions." Story dismissed the enforcement actions filed against the four payment processing companies and the telemarketing firm.

Story noted the court had made it "quite clear" that more was expected of the CFPB's witness than rote answers similar to what was already available to defendants. "By relying almost exclusively on memory aids, the CFPB's witness failed to abide by the Court's instructions," Story wrote, adding that the CFPB appeared to be trying to "bury" the defendants with so much information and so many claims of privilege that the companies would be unable to defend themselves in court.

"The Court has consistently held that the CFPB was obligated to sit for those depositions, and that it needed to produce a witness prepared to apprise the Defendants of the facts they would face at trial," Story wrote. "But the CFPB has put up as much opposition as possible at every turn."

Neddleman praised the district court decision. "It is clear that in this instance the Bureau disregarded the scope and intent of the federal rules surrounding discovery, which first and foremost is cooperation," she wrote. "Under the circumstances, striking the claims against the Payment Processors was the only appropriate remedy." end of article

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