The Consumer Financial Protection Bureau filed a lawsuit on June 6, 2016, against Intercept Corp., based in Fargo, N.D., accusing the company of enabling clients to withdraw millions of dollars from consumer bank accounts for fraudulent transactions.
The lawsuit, which also names two top executives of the firm, alleges Intercept ignored blatant warning signs of potential fraud or lawbreaking by its clients. The complaint seeks monetary and injunctive relief, as well as monetary penalties.
The CFPB's authority to initiate legal proceedings against payment processors comes from the 2010 Dodd-Frank financial reform legislation, which empowered the CFPB to pursue investigations against companies and individuals engaging in unfair, deceptive or abusive acts and practices, or activities that otherwise violate federal consumer protection laws. The allegations against Intercept and its principal officers were contained in a lawsuit filed in U.S. District Court for the District of North Dakota.
"Intercept and its executives Bryan Smith and Craig Dresser ignored clear signs of brazen fraud, including illegal withdrawals from consumer accounts, and need to clean up their act," said CFPB Director Richard Cordray. "Companies cannot turn a blind eye to wrongdoing when they process payments from consumer banking accounts on behalf of clients who are breaking the law," Cordray added.
According to the complaint, Intercept "performed only perfunctory due diligence regarding the legitimacy and legality of their clients' underlying transactions and have ignored indicia of fraud or illegality revealed through even their minimal due diligence."
Intercept was accessing the automated clearing house (ACH) system through several banking relationships to clear payments for assorted clients, including payday lenders, auto-title lenders, debt collectors and consumer finance companies. Over the years, some of these banks had expressed concerns to Intercept – as well as Smith, founder and President of the company, and Dresser, who is Intercept's Chief Executive Officer. Many of these complaints were clear indicators of fraud, the CFPB said. They included discrepancies between dates and amounts debited from consumer accounts vis-à-vis what consumers said they authorized, changes in lender names, and missing scripts for transactions authorized by telephone.
Intercept clients were also running up high return rates – many as high as 20 to 40 percent, or about 20 times the industry average, according to the CFPB complaint. If a bank complained too much, or terminated its relationship with Intercept, the company allegedly would find another bank to process the transactions.
The CFPB also alleges that Intercept ignored consumer complaints about unauthorized transactions. One bank used by Intercept to originate ACH items claimed that between June and August 2012, it received over 600 calls from consumers complaining about withdrawals Intercept initiated from their personal accounts. Another bank said it logged consumer disputes involving 1,800 ACH transactions initiated by Intercept for its clients between 2011 and 2014.
The company even failed to take action in response to state and federal law enforcement actions against its clients, the CFPB asserted. In 2012, for example, the Federal Trade Commission filed a lawsuit against one of Intercept's clients for illegal collection practices related to payday loans – practices that generated more than 7,500 complaints to law enforcement authorities over the previous five years, according to the CFPB.
In 2015, the bureau filed suit against several payment processors working with a telemarketing firm (Global Connect), alleging that they knew or should have known Global was running a robo-call phantom debt collection operation. Phantom debt is debt consumers do not owe, or debt that is not legally payable to those collecting the monies. Global allegedly harassed a significant number of consumers into paying bogus debts with threats of legal action.
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