On March 17, 2017, the U.S. District Court for the Eastern District of North Dakota dismissed without prejudice the CFPB’s complaint against third-party payment processor Intercept Corporation and two of its executives for failure to state a claim.
The CFPB’s June 2016 complaint alleged that defendants had violated the Consumer Financial Protection Act (the “CFPA”) by engaging in “unfair acts and practices,” including the processing of transactions for clients, including consumer lenders, when defendants knew or should have known that those transactions were fraudulent and illegal. Specifically, the CFPB alleged that defendants: (i) failed to heed warnings from banks and consumers that their clients’ activities were likely illegal or that debits were not authorized by consumers; (ii) failed adequately to monitor and respond to high rates at which consumers and consumers’ banks refused Intercept clients’ attempts to withdraw payments; (iii) ignored law enforcement activity relating to Intercept clients and continued processing for the clients despite knowledge of these red flags; and (iv) failed to investigate red flags in the client application process, basing Intercept’s acceptance of a client solely on a “risk assessment” aimed at determining a client’s ability to pay in the event of loss.
The court concluded that the complaint did not “contain sufficient factual allegations to back up its conclusory statements regarding Intercept’s allegedly unlawful acts or omissions.” To survive defendants’ motion to dismiss, the court noted that the CFPB’s complaint must allege facts demonstrating that defendants’ actions amounted to an “unfair” act or practice. The court found that the CFPB’s complaint neither alleged facts demonstrating that consumers were injured or likely to be injured, nor contained facts to enable the defendants or the court to ascertain whether any potential injury was outweighed by countervailing benefits to consumers, both elements of an unfairness claim. The court further noted that the complaint failed to identify how Intercept’s response to alleged “red flags” caused harm or was likely to cause harm to consumers.
Based on the foregoing analysis, the court held that the CFPB’s complaint failed to state a claim for “unfair” acts or practices and granted defendants’ motion to dismiss, without reaching any decision relating to the Bureau’s constitutionality. However, because the case was dismissed without prejudice, the defendants’ victory may be short-lived, as the CFPB has the opportunity to renew the action and allege additional facts supporting its claims; there is no substantive holding in the court’s opinion that a payment processor cannot be held liable for unfair acts and practices under the CFPA.