On April 8, 2015, insideARM published an article on a CFPB enforcement action regarding technology vendors to a collection operation. That article detailed a CFPB complaint that targeted an alleged debt collection scam in which multiple companies were named as defendant. The companies included, among others, Defendants Universal Debt and Payment Solutions, LLC (“UDPS”) and Credit Power, LLC (“CreditPower”), both organized by Defendant Mohan Bagga. The defendants are collectively referred to as “Debt Collectors.”
Three companies involved in providing payment processing services to the Debt Collectors were also named as defendants. One of those three companies processed payments for the debt collectors and the other two companies were independent sales organizations that marketed the processor’s services to merchants and were responsible for screening and underwriting merchants. The three companies are collectively referred to as “Processors.”
Recently another chapter was written in an opinion by United States District Court Judge Richard W. Story (Northern District of Georgia) in response to a motion to dismiss filed by the three Processors.
Editor’s Note: A voice broadcasting service was also named as a defendant in the original complaint, but was not part of this motion.
The CFPB brought the claim under a provision of the 2010 Dodd–Frank Wall Street Reform and Consumer Financial Protection Act., citing that “[I]t is unlawful for “any person to knowingly or recklessly provide substantial assistance to a covered person or service provider in violation of section 5531 of this title [prohibiting unfair, deceptive, or abusive acts or practices.]”
The Bureau pursued the technology providers as defendants for “providing substantial assistance to the Debt Collectors’ unfair or deceptive conduct.” The CFPB alleged that the technology vendors either knew, or should have known, that the conduct of the Debt Collectors was unfair or deceptive and thus materially contributed to the Debt Collectors’ scheme by providing them access to their products.
The Processors had brought the motion to dismiss on grounds that the CFPB did not adequately allege knowledge or recklessness, or that the Payment Processors provided substantial assistance to the Debt Collectors.
The 59-page Opinion is located here. The opinion goes into great detail discussing the allegations of the complaint, the law governing the case, and the legal standard for the court’s review of the motion.
The initial issue presented to the court was whether the Complaint adequately alleged knowledge or recklessness on the part of the Processors. The court noted that there was not yet any case law interpreting the substantial-assistance provision of the Dodd–Frank Act. After discussing alternatives the court decided that to survive the motion to dismiss, the CFPB must allege acts satisfying the Eleventh Circuit’s formulation of severe recklessness against each Defendant:
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.
The court then determined: “Taking all the above allegations together, the Complaint plausibly alleges severe recklessness on the processors’ part.”
The second issue presented to the court was whether the Processors had provided “substantial assistance” to the debt collectors. Again the court discussed alternative positions on defining “substantial assistance.”
After a discussion of the alternatives the court determined that the CFPB had alleged facts that plausibly support a finding that the Processors knowingly or recklessly provided substantial assistance to the Debt Collectors.
Finally the court discussed and determined that the Processors were “covered persons” within the meaning of the CFPA and thus subject to the CFPB jurisdiction. However, the court also noted that even if the Processors were not “covered persons” under the CFPA, they could still be subject to UDAAP liability as service providers. The court then determined that the Processors were “service providers” because they provided meaningful services to the Debt Collectors.
The court denied the motions to dismiss.
As noted in our initial coverage, there are potentially far-reaching ramifications for “service providers” as a result of this case. The ultimate issue may be the amount of due diligence” that will be required by a service provider before doing any work with a company subject to the CFPA.
The CFPB case survived the defendant’s motion to dismiss. insideARM will continue to monitor and report on the story as it develops further.