Processors Contest CFPB Charges That They Improperly Aided Debt Collectors

By Jim Daly

Processors accused by the Consumer Financial Protection Bureau last month of aiding allegedly fraudulent debt collectors by providing them with payments services are beginning to file their answers to the federal charges. At least one of them is accusing the CFPB of “regulatory overreach” in the style of Operation Choke Point, a much-criticized federal initiative aimed at cutting off payment services to suspect merchants.

The Operation Choke Point allusion comes in a motion filed Tuesday in U.S. District Court in Atlanta by Pathfinder Payment Solutions Inc. to dismiss the CFPB’s complaint against the company. Columbia, Md.-based Pathfinder is an independent sales organization that is one of four merchant acquirers or ISOs the CFPB sued at the same time it sued six people and their associated debt-collection companies for allegedly attempting to collect millions of dollars in so-called “phantom debts” from consumers that the consumers either did not owe or were not owed to the debt collectors themselves. The named collections companies are Universal Debt & Payment Solutions LLC, Credit Power LLC, WNY Account Solutions LLC, and S Payment Processing & Solutions LLC.

Pathfinder’s motion to dismiss challenges the CFPB’s accusations on several definitional and legal points. It then gives a brief history of Operation Choke Point, so named in 2013 by the U.S. Department of Justice. Together with the Federal Deposit Insurance Corp., the DoJ pursued cases against banks that worked with processors the government accused of improperly providing payment services to fraudulent merchants. Critics claimed the government was attempting to cut off financial services to legal but disfavored industries such as payday lenders or other allegedly high-risk merchants that had not violated any laws. The FDIC later issued guidance to banks that they should serve merchants based on individual circumstances.

“In suing Pathfinder, the Bureau [CFPB] has taken up the discredited reasoning behind Operation Choke Point,” Pathfinder’s filing says. “As the FDIC did with Operation Choke Point, the Bureau [CFPB] seeks to intimidate companies that provide general business services to a disfavored industry—here, debt collectors—by bringing regulatory actions against those companies. The Bureau is trying to impose on businesses an unbounded, pseudo-regulatory obligation to investigate not only their customers, but their customers’ customers. The Bureau should not be allowed to exert this type of powerful, chilling effect on Pathfinder or other payment processors—acts beyond its statutory authorization.”

Pathfinder routes its transactions to Atlanta-based Global Payments Inc., the biggest processor accused by the CFPB. Global has not yet filed its answer to the suit.

Another accused merchant processor, Cleveland-based Electronic Merchant Systems, on Monday asserted eight defenses in a filing that also asked for dismissal of the CFPB’s claims as well as recovery of EMS’s legal expenses. EMS said that in signing the collections companies as merchants, it “exercised reasonable due diligence that was consistent with or exceeded industry standards.” The underwriting process included credit-bureau checks of the companies and their principals, and checks of LexisNexis and MasterCard databases of fraudulent and high-risk merchants.

EMS also says it could not have known the collectors were pursuing allegedly phantom debts because of the federal Fair Debt Collections Practices Act’s ban on collectors communicating with third parties about the debts they’re trying to collect.

A CFPB spokesperson could not be reached late Tuesday for comment on the processors’ filings.