CFPB Launches Its Own Choke Point-Style Operation

WASHINGTON — The Consumer Financial Protection Bureau has filed a massive lawsuit against more than a dozen debt collectors, payment processors and related entities that the agency said failed to stop fraudulent collection tactics.

The complaint, filed under a seal on March 26, accuses a handful of connected debt collectors based in Georgia and New York of harassing consumers about "phantom" debts.

But the potentially groundbreaking part of the case is that the CFPB also sued several payment processors, including worldwide processor Global Payments and its contracted parties, because the agency said they "should have known" about the alleged violations.

The case is one of the CFPB's largest to date that pursues multiple different entities, some of which were not directly involved in the harassment of consumers. In that way, it resembles the Justice Department's controversial "Operation Choke Point," observers said.

"This is exactly the same as Choke Point but in the credit card processing space because it is predicated on the idea that the payment processors should have known that these debt collectors were doing something illegal," said Chris Willis, a partner at the Ballard Spahr office in Atlanta. "And because they proceeded to do business with the debt collectors, they made themselves liable for illegal conduct."

To be sure, Operation Choke Point is different in that the Justice Department has targeted banks for not stopping third-party payment processors from making unauthorized ACH withdrawals. And the CFPB has included payment processors in enforcement actions in the past but not to the degree of the larger network named in the new case.

In the case filed by the CFPB, the agency instead faults several payment processors for not stopping the fraudulent activities of a handful of debt collectors, even though the processors had monitoring systems in place that the agency claims should have unearthed such illegal activity. Because of that, the CFPB said the "debt collection scheme depended upon the participation of" the payment processors and a telemarketing company.

"Our lawsuit asserts that consumers were harassed, threatened, and deceived as part of a reprehensible scheme to collect debt that was not even owed," said CFPB Director Richard Cordray, in a press release. "We are taking action against the many parties that allegedly contributed to this phantom debt collection operation. The ringleaders of the scheme, the telemarketing company that broadcast millions of robo-calls, and the companies that processed the payments should all be held accountable for taking advantage of vulnerable consumers."

The payment processors named in the case include Global Payments and a subsidiary that had a contract with Pathfinder Payment Solutions to market the firm's processing services to merchants as well as monitor and alert of any fraud or risk. Frontline Processing Corp. was also named for having a similar contract with Global Payments in which it was prescreening merchants for compliance with the credit criteria at Global.

Through these agreements, the CFPB said both Pathfinder and Frontline provided payment processing services to the debt collectors named in the suit. The CFPB said that Global Payments, Pathfinder and Frontline "failed to appropriately monitor" the accounts with the named debt collectors.

Electronic Merchant Services was also named as a payment processor to the debt collectors.

"The Payment Processors facilitated the Debt Collectors' largescale fraud by enabling the Debt Collectors to accept payment by consumers' bank cards when the Payment Processors knew, or should have known, that the Debt Collectors were engaged in unlawful conduct," the CFPB said in its complaint.

The CFPB added that the service the payment processors provided gave the debt collectors an "air of legitimacy" that allowed them to bring in a high volume of collections. And in certain instances, some of the processors had flagged the debt collectors as prohibited merchants but the CFPB said they continued to do business with them anyway.

Pathfinder's counsel, who was the first among the defendants to respond to American Banker's requests for comment, denied the CFPB's allegation that it gave "substantial assistance" to the named debt collectors.

"According to the complaint, payment processors maintain self-imposed policies designed to minimize their credit exposure. The CFPB now argues that those internal policies — implemented to protect the payment processors' own credit risks — impose a pseudo regulatory obligation for them to investigate potential violations of the Consumer Financial Protection Act. The CFPB effectively seeks to 'deputize' small businesses without notice or lawful authority," John Da Grosa Smith of Smith LCC, who represents Pathfinder in the case, said in an emailed response.

"Pathfinder denies that it associated itself with the venture alleged in the Complaint, that it participated in it as something it wished to bring about, and that it sought by its own actions to make any such venture succeed."

Like Operation Choke Point, the CFPB's moves could have a chilling effect on businesses if payment processors begin having second thoughts about working with debt collectors or others that are targets of the agency, observers said.

"What this case is about is if you are clearing payments for someone doing something illegal and you have some way of knowing it, then you continue to work with them at your own peril," Willis said. "That is the message intended for payment processors."

The complaint said that "consumers paid millions of dollars" because of the threats made by the debt collectors, including Universal Debt & Payment Solutions, WNY Solutions Group, and Check & Credit Recovery. The debt collectors involved were considered "common enterprises" since some of the entities were registered under the same individuals or their relatives (who are individually being sued in the case). And the entities commingled funds, the CFPB said. The agency specifically cited Marcus Brown and Mohan Bagga in a press release Wednesday for leading the group of people named in the case for running the entities.

"The debt collectors used collectors and automated telephone broadcasting services to contact consumers and their family members to threaten consumers with false allegations of check fraud and false claims of debt owed, which would result, according to the debt collectors, in service of a 'financial restraining order,' notification to the consumer's employer of the alleged fraud or debt, garnishment of wages, and arrest, unless the consumers paid the alleged debt," the CFPB said in the complaint.

In addition to making the payment processors part of the suit, the CFPB also named a communications platform, Global Connect LLC, for "broadcasting millions of threatening and false statements to consumers" by telephone on behalf of the debt collectors.

The parties have been cited for violating the Fair Debt Collection Practices Act and the CFPB is seeking the courts to determine the penalties and restitution. A public hearing was held April 7 in which a preliminary injunction was issued that stopped the named misconduct and froze the assets of the individual defendants and their businesses.

The case has been filed in the U.S. District Court for the Northern District of Georgia.

Though the case was filed March 26, the CFPB was granted a request to seal the documents, so it was not made public until this week.