Law professor: Consumer board justified in suit against payment processor

By Robert Lawson | Oct 13, 2016

BISMARCK, N.D. — A pending District Court lawsuit may have broad implications for the entire payment processing industry, a third party and go-between for merchants and consumers. 

The Consumer Financial Protection Bureau (CFPB) launched an investigation and subsequent lawsuit against Intercept Corporation, based principally in North Dakota, alleging unfair acts and practices in it business. The CFPB alleges the company violated the Consumer Financial Protection Act but Intercept moved to dismiss the complaint against its company. The Third Party Payment Processors Association (TPPPA) filed an amicus curiae brief in support of Intercept.

Experts such as Kurt Lentz say the case could have great consequences and balances the question of whether the CFPA applies to payment processors and other types of businesses with the issue of the authority of the CFPB. 

Payment processors do not interact directly with consumers. The TPPPA pointed this out in the brief. They say payment processors are not "covered persons" under the CFPA. 

The CFPB argues a company does not necessarily need to interact or engage directly with consumers to be "covered persons" under this law. They acknowledge that the statute refers to "use by consumers" but also does not differentiate between direct and indirect relationships with consumers as a requirement. 

Intercept, meanwhile, says the consequences could be disastrous for the industry as a whole. Their lawyers argue that holding payment processors to this standard could result in liability for conduct that was not forbidden by current rules. However, the CFPB chalked that up to a defense of "everybody's doing it" and said this would allow widespread abuse. 

Bob Fellmeth, a Price professor of public interest law at the University of San Diego School of Law, offered his opinion on this matter. 

"I have taught consumer law for many years and am a former WCC prosecutor and author," Fellmeth told Legal Newsline in an email interview. "The CFPB is clearly correct in its legal position."

Fellmeth does not believe the indirect consumer engagement argument will fly. 

"Indirect is exempt? Really?," Fellmeth said. "Then manufacturers can do what they will even though it binds retailers and affects consumers? Where is that the law? That is not how Unfair Competition Law works anywhere. 

"If you are in competition, you are subject to its standards. I realize there is a consumer impact element to this statute, but do not believe it requires mano a mano imposition."

The TPPPA also pointed out that CFPB did not allege Intercept violated a National Automated Clearing House Association (NACHA) rule. NACHA is an industry group. Fellmeth said this did not amount to much either. 

"They must show a violation of the NACHA rule? Really?," Fellmeth said. "So a public agency must respect a combination of competitors [as in combination in restraint of trade]? A group of competitors who formulate an agreement that restrains trade or spreads unfair competition practices enhances the violation, it hardly excuses it. It creates an overlay of antitrust implications. Competitors cannot 'product fix.'  By the way, I spent nine years as a state and federal antitrust prosecutor."

Fellmeth also indicated how violations will apply and what the response might be.

"The SOL does not apply to a continuing violation," Fellmeth said. "It will apply at the point the violation stops and is not concealed or is discoverable through due diligence. And the industry can argue that notice to the FTC is notice to it for that purpose. Fine… So when did the violation cease?"

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