On September 1, 2015, the Consumer Financial Protection Bureau (“CFPB”) won an important decision in which a federal court, for the first time, interpreted the meaning of “recklessly provid[ing] substantial assistance” under the Consumer Financial Protection Act (“CFPA”).² Perhaps since it was an order denying the defendants’ motions to dismiss released just before the Labor Day weekend, it has not received much attention. But it has wide-ranging implications for those business-to-business (“B2B”) companies that may have previously thought they could fly below the CFPB’s radar.

The case, CFPB v. Universal Debt & Payment Solutions, LLC, et al., arose from a scheme by some allegedly fly-by-night companies that were collecting “phantom” debt – that is, debt that consumers did not owe.³ In March 2015, the CFPB filed a complaint in the Northern District of Georgia against not only the alleged phantom debt collectors and their owners, but also against the much larger payment processors that enabled them to take debit and credit card payments.⁴ Since the payment processors did not provide services directly to consumers, the CFPB alleged that they were “service providers” to the debt collectors, and that they had engaged in unfair practices in connection with debt collection. In denying the defendants’ motions to dismiss, the court held the CFPB had alleged facts sufficient to support this count.⁵

In addition – for the first time in a litigated case – the CFPB included a count alleging that the payment processors also violated section 1036(a)(3) of the CFPA⁶ by recklessly providing substantial assistance to companies. Following a thorough discussion of what it means to “recklessly provide substantial assistance,” the court found that the CFPB had alleged facts sufficient to support this count. This client alert summarizes the key points of the court’s order.

CFPB Must Allege Facts Sufficient to Establish Same Level of Recklessness as Required in Similar SEC Enforcement Action To determine the extent of the CFPB’s enforcement authority under the CFPA, courts have often looked to precedent involving the Federal Trade Commission or the Securities and Exchange Commission (“SEC”). This is appropriate because the procedural aspects of the CFPB’s enforcement authorities are modeled in large part on the procedures of those two agencies. In determining what the CFPA means by “recklessly provide substantial assistance,” the Universal Debt court therefore looked to case law interpreting a similar provision in section 20(e) of the Securities and Exchange Act of 1934.⁷ The court wrote that to survive dismissal of this claim, the CFPB had to allege acts that establish what the 11th Circuit calls “severe recklessness,” and what other circuits call simply “reckless”:

Severe recklessness is limited to those highly unreasonable omissions or misrepresentations that involve not merely simple or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and that present a danger of misleading buyers or sellers which is either known to the defendant or is so obvious that the defendant must have been aware of it.⁸

CFPB Alleged Sufficient Facts to Survive Motions to Dismiss by All Three Payment Processors The court held that the CFPB had alleged sufficient facts to survive a motion to dismiss under the “severe recklessness” standard with respect to all three payment processors.⁹ In doing so, the court pointed to the following allegations, for example:

• Pathfinder considered any chargeback rate greater than zero to be suspicious. But Pathfinder took no action even when it learned that the debt collectors’ chargeback rates were 28.5 percent and 31 percent.¹⁰
• Pathfinder had difficulty contacting the debt collectors because mail was often returned and voicemail boxes were full.¹¹
• Frontline coded one of the debt collectors under the merchant category “Family Clothing Stores.” However, “On its underwriting summary, Frontline noted that UDPS [Universal Debt & Payment Solutions, LLC] was a prohibited business [a debt collector] under Global Payments’ credit guidelines. [] But both Frontline and Global approved the application.”¹²
• Global Payments received numerous consumer complaints that contained significant red flags. For example:
  • “Although the consumer did not provide her debit card information or authorize a charge, Credit Power withdrew $500 from her account.”¹³
  • A consumer received a threatening call wherein the caller referenced a “restraining order” against the consumer and threatened to contact the police over a debt. “The consumer gave over his bank card information because he was scared,” but then his wife told him they had never done business with the bank mentioned by the collector.¹⁴
  • A consumer disputed a $600 payment to UDPS, concluding, “They lied about who they were, they lied about what they were doing, and they lied about providing documentation.”¹⁵

Court Looked to SEC Precedent for the Meaning of ‘Substantial Assistance’ The court adopted the “substantial assistance” standard from a Second Circuit case, SEC v. Apuzzo, which is the same standard used in criminal aider and abettor actions.¹⁶ This standard does not require a showing that the aider and abettor “proximately caused” the violation. As stated by the Universal Debt court:

The [Apuzzo] court explained that § 20(e) was passed “precisely to allow the SEC to pursue aiders and abettors who . . . were not . . . themselves involved in the making of the false statements that proximately caused the plaintiffs’ injuries.” [Citation omitted]
. . .
Thus, to plead substantial assistance against a defendant, the SEC must allege “that he in some sort associated himself with the venture, that the defendant participated in it as something that he wished to bring about, and that he sought by his action to make it succeed.” ¹⁷

The Universal Debt court also explained that there is a sliding scale as to the level of “substantial assistance” and level of recklessness that must be proved for conduct to constitute reckless substantial assistance. A higher degree of recklessness lessens the SEC or CFPB’s burden of showing substantial assistance, and vice versa.¹⁸ The court did not indicate where on the sliding scale the allegations in this case fell, however.

Under the Apuzzo standard, the court found that the CFPB had sufficiently alleged “that Global did in some sort associate itself with the venture, participate in it as something it wished to bring about, and seek to make it succeed by approving the Debt Collectors’ applications and processing payments.”¹⁹ The court rejected arguments from the payment processors that their activities were merely routine, arguing that just because payment processing was a common business practice did not excuse the processors for “failing to investigate obvious red flags.”²⁰

Order Has Potential to Upend the World of Payment Processing, B2B Services When the CFPB released its complaint in April 2015, some lawyers objected, saying the CFPB had overstepped its authority. Others argued that CFPB was right to intervene because the kinds of practices that the CFPB was targeting were prohibited by the rules of the processors and the large payment networks, and that the processors had missed obvious red flags. Regardless, the judge’s ruling means that other payment processors and B2B companies need to examine their own practices to make sure they are not vulnerable to CFPB scrutiny.

How Payment Processors and B2B Companies Can Avoid CFPB Investigations Payment processors and other service providers to consumer-facing businesses can take several steps to prepare for and protect against CFPB investigations. First, companies should carefully screen merchants on the front end. If a merchant cannot answer questions in a satisfactory manner, it should reject the application. Second, companies should devote resources to reviewing potential red flags such as consumer complaints, which are always the first place that the CFPB looks. As the court’s order shows, judges weigh complaints heavily as well. Third, companies must carefully monitor chargebacks. Chargebacks are an obvious and easy method of ferretting out potential unfair, deceptive, or abusive practices – and they are easy for the CFPB to analyze too. Finally, companies should seek advice from counsel. Companies that lack in-house legal resources should talk to outside counsel to make sure their compliance systems are in order. Getting the right advice early can save millions of dollars in potential fines and restitution ordered by the CFPB.

The CFPB Will Continue to Pursue Large Service Providers to Leverage Its Resources More broadly, the Universal Debt case represents another advance in the CFPB’s efforts to put pressure on what the agency has called “centralized chokepoints” that enable other entities to commit alleged violations of law.²¹ For example, the CFPB settled with a debt settlement payment processor, Meracord, in 2013, and described it as an efficient and effective way to “help consumers who were charged millions of dollars in illegal fees by many of the debt-settlement companies using Meracord’s services.”²² That was followed by a similar settlement with Global Client Solutions in August 2014.

Like debt settlement scams, phantom debt collection schemes are, on their own, difficult for any federal agency to address effectively because they are small, spread all over the country, and easy to start, shut down, and restart somewhere else. By investigating companies like Global Payments, Frontline, and Pathfinder, the CFPB is leveraging its resources by putting the burden on service providers to police the companies with which they do business. The CFPB knows that these larger companies will be more cooperative in investigations and ultimately able to pay more money to compensate consumers. Going forward, payment processors and other B2B companies should expect further scrutiny from the CFPB.

1. The author wishes to recognize the helpful input of Reed Smith Partner Robert M. Jaworski.
2. Order denying Defendant Pathfinder Payment Solutions, Inc.’s Motion to Dismiss; denying Defendant Global Payment, Inc.’s Motion to Dismiss; denying Defendant Frontline Processing Corp.’s Motion to Dismiss (“Order”), Case No. 1:15-cv-00859 (N.D. Ga. September 1, 2015). http://www.reedsmith.com/files/uploads/alert-attachments/2015/149__ORDER.pdf
3. Complaint, CFPB v. Universal Debt & Payment Solutions, LLC, et al., March 26, 2015, available at http://files.consumerfinance.gov/f/201504_cfpb_complaint-universal-debt.pdf.
4. The payment processors are Global Payments, Inc. (“Global”) and two of its service providers, Pathfinder Payment Solutions, Inc. (“Pathfinder”) and Frontline Processing Corp. (“Frontline”), which were responsible for screening merchants for Global.
5. Order at 55-57.
6. 12 U.S.C. § 5536(a)(3).
7. 15 U.S.C. § 78t(e). Like section 1036, section 20(e) establishes liability for “any person that knowingly or recklessly provides substantial assistance to another person in violation of [securities laws].”
8. Order at 22.
9. Order at 26, 34, 35.
10. Order at 9.
11. Order at 8.
12. Order at 10.
13. Order at 12.
14. Order at 12-13.
15. Order at 13-14.
16. 689 F.3d 204 (2d Cir. 2012).
17. Order at 37 (quoting Apuzzo quoting United States v. Peoni, 100 F.2d 401, 402 (2d. Cir. 1938)).
18. Id. at 39.
19. Id., citing Apuzzo.
20. Order at 44.
21. The CFPB’s cases against what it calls chokepoints should not be confused with “Operation Choke Point,” an effort by the U.S. Department of Justice and the prudential bank regulators to prevent banks from doing business with certain lenders that allegedly pose a high risk to consumers. The CFPB maintains that it is not involved in Operation Choke Point. See, e.g., http://www.law360.com/articles/546440/cfpb-isn-t-advising-doj-on-choke-point-cordray-says.
22. CFPB Press Release, “CFPB Takes Action Against Meracord for Processing Illegal Debt-Settlement Fees,” October 3, 2013, available at http://www.consumerfinance.gov/newsroom/cfpb-takes-action-against-meracord-for-processing-illegal-debt-settlement-fees/.

Client Alert 2015-291