A Payments Association Mounts a Defense for an ISO Targeted by the CFPB

By Kevin Woodward
@DTPaymentNews

The Third Party Payment Processors Association is stepping in to lend support to Intercept Corp.

The independent sales organization, which specializes in automated clearing house payments, is being sued by the Consumer Financial Protection Bureau for allegedly enabling unauthorized ACH withdrawals from consumer accounts and ignoring warnings about potential fraud by merchant clients, some of which reportedly racked up return rates of 20% to 40% of transactions.

The CFPB complaint claims that Intercept, which does business as InterceptEFT, “processed transactions for many clients when they knew or consciously avoided knowing that many of the transactions initiated by those companies were fraudulent or illegal.”

Specifically, the CFPB alleges that Intercept instituted a program to help hide a merchant’s actual return rate for ACH transactions, and that the owners, Bryan Smith, president, and Craig Dresser, chief executive, who were also named in the suit, failed to heed the warning signs. In the suit, the CFPB claims Intercept failed to follow rules set by NACHA, the ACH governing body. Intercept did not respond to a Digital Transactions News inquiry.

The Washington, D.C.-based TPPPA filed a “friend of the court” brief this week supporting a motion from Intercept to dismiss the CFPB complaint.

In its filing, the association said “the Bureau acknowledges that the NACHA rules govern the transactions at issue. Nonetheless, the Bureau fails to plausibly allege that the Defendants violated the NACHA rules.”

The filing also states that the CFPB advises “a risk-based approach” when conducting due diligence, especially with regard to high-risk industries. However, the CFPB provides no “prescriptive guidance on such expectations,” the filing said. “Instead, the industry and most regulatory bodies continue to use the NACHA rules to guide an analysis of the appropriate conduct in this area.”

The TPPPA brief was filed out of concern “this case would set a dangerous precedent that would impact payment processors generally,” says Marsha Jones, president of the association, via an email to Digital Transactions News. Intercept is a member of the association, but Jones says the group would have taken the same action even if it were not.

One of “two primary concerns” the TPPPA has about the CFPB action against Intercept is that “third-party payment processors do not have relationships with consumers (only merchants), and therefore are not ‘covered persons’ under the Consumer Financial Protection Act,” Jones says.

The other concern is that payment processors that followed the NACHA rules as they existed at the time “should not be considered to be violating the unfairness standard of the CFPA,” she says.

The association’s brief has a three-fold goal. One part is to educate the court about how third-party payment processing works, and a second is to show how NACHA rules evolve, Jones says. The third part is to educate the court about consumer protection already built into the NACHA rules.

The Third Party Payment Processors Association is not the first trade group to advocate on behalf of its industry in legal matters. The ATM Industry Association—representing independent ATM deployers—in June issued a report blasting Operation Choke Point, a federal government initiative targeting high-risk merchants via their payments providers.

The Electronic Transactions Association, which represents the acquiring industry, has backed legislation that would effectively end Operation Choke Point.

The CFPB has served notice that it has put payments companies in its crosshairs. In March, it announced an enforcement action against Dwolla Inc., a 6-year-old Des Moines, Iowa-based processing startup, for, among other things, failing to encrypt user data in its system and misrepresenting its security policies. The action was the CFPB’s first involving data-security practices.