Flipping the Bird at the CFPB!

Jonathan Foxx
Managing Director
Lenders Compliance Group

Do you really want to tell the Consumer Financial Protection Bureau (CFPB) that it doesn’t regulate you?

Before flipping the bird at the CFPB, a company had better do some deep and serious deliberations!

Take the case of Intercept Corp., a company that the CFPB asserted allegedly took money from consumers’ bank accounts without authorization to do so. It was claimed that the company willfully ignored red flags and thereby allowed its client companies to take consumers’ funds.

Here’s what happened, as described in the complaint,[i] and argued in federal court a few days ago.

Intercept does business as InterceptEFT. The CFPB claimed that InterceptEFT, and its President, Bryan Smith, and also its CEO, Craig Dresser, knew about the alleged illegal withdrawals but they did nothing to protect consumers.

Intercept tried a gambit that, in this instance, seems to have been destined to failure: when in doubt, remove the opposing litigant for lack of standing. So, let’s do it, let’s try to remove the CFPB! Let’s contend - or maybe “pretend” should be the best word here - that we’re not governed by the Consumer Financial Protection Act (CFPA). Sure, that will work!

The CFPB, it seems, successfully argued otherwise.

What does InterceptEFT do? The CFPB describes this company as a financial service that is mainly used for consumer purposes – meaning personal, family, or household needs. It is a third party vendor. The CFPB took the position that although consumers don’t directly work with this third party vendor doesn’t alter the service, and the company's classification doesn't change just because the complaint doesn’t explicitly state that its products are offered for those consumer purposes.

Specifically, the CFPB alleges that Intercept and its executives processed transactions for clients they knew, or should have known, were making fraudulent or other illegal transactions, even after being warned several times of the wrongdoing. The injury to consumers reached into the many millions lifted from consumers’ bank accounts.

Now the gambit: Intercept claimed that it met exceptions for the law, including one that would allow it to escape the suit because not all of its clients are covered by the CFPA.

The CFPB descanted critically:

“That reading would produce the absurd result that an entity could not be a service provider if it provided support services to even a single non-covered-person client - regardless of the entity’s conduct with respect to covered persons.” … “Intercept provides no justification for such an arbitrary result, and indeed there is none.”

As to attempts to remove the President and the CEO from the litigation, the CFPB said that they should be held accountable as individuals because they’re involved in the company’s day-to-day operations and not just “uninvolved company figureheads or passive shareholders.” These company officers had said that they worked with the banks on due diligence checks, so their work was not recklessness.

But, that position came under this withering fire from the CFPB:

“[That argument] contradicts the factual allegations in the complaint, which describe how numerous banks warned Smith and Dresser about apparent fraud and illegality and how the two men responded, not by acting on those concerns, but by seeking to minimize and work around them.” ... “Smith and Dresser cannot now hope to hide behind the very warnings they previously chose to ignore.”

The injury was substantive, claimed the CFPB. The Bureau said that it had proved substantial injury was caused as direct monetary losses, as described by category in the suit. Indeed, consumers couldn’t have avoided the harm because they didn’t even know about the unauthorized withdrawals in the first place.

So, first gambit: fail.

Second gambit: obfuscate, complicate, baffle and befuddle.

InterceptEFT launched a second line of counter-attack. As the CFPB stated in its suit, “…rather than confronting these allegations head-on, defendants claim not to understand them, asserting that the complaint is too vague or ambiguous for defendants even to present a defense on this element of unfairness.”

If adumbration is the tactic, better be prepared with a phalanx of facts! Unfortunately, Intercept had few facts to support their endeavor to becloud the issues. Although the Bureau did not name the clients, the complaint points to specific communications that Intercept had concerning access as well as its more common practices – such as allegedly ignoring specific warnings.

Second gambit: arrested development.

Third gambit: invoke statute of limitations.

Worth mentioning is that the motion to dismiss had also claimed the suit was barred under the statute of limitations. This really could not go anywhere, since the CFPB said the dates Intercept proffered regarding the government's discovery of the alleged violations were irrelevant because they were determined by when the Federal Trade Commission did a separate investigation, not the one conducted by the Bureau itself.

Third gambit: boomerang.

Now comes the last and fourth gambit, one that is like a last gasp of air in a hot air tunnel: challenge the constitutionality of the Consumer Financial Protection Bureau.

Intercept raised a motion challenging the constitutionality of the CFPB as an agency. The Bureau squelched that line of reasoning by stating every court that has considered the Bureau’s constitutionality has ruled in the government’s favor and that Intercept didn’t provide any new, substantial arguments that would justify a ruling otherwise.

Fourth gambit: crash and burn.

In sum, the Bureau pled that Intercept and its officers failed to meet the standard of proof needed to dismiss a case at this stage. The court will determine if the foregoing gambits will put this case down or keep it going forward on some subtle and abstruse vapors. 

But why prolong the agony?

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[i] Consumer Financial Protection Bureau v. Intercept Corp. et al., case number 3:16-cv-00144, in the U.S. District Court for the District of North Dakota. 

Going Rogue

Jonathan Foxx

Managing Director
Lenders Compliance Group

There has been a lot of media attention recently about the political class endeavoring to trim the CFPB’s sails. It seems like many of these politicians have taken the view that the CFPB is an out-of-control agency which should be tamped down. A few of them seem to suffer from such flagitious aggravations that I fear they may die of apoplexy.

Like state banking departments, the CFPB views itself as a consumer advocacy agency. Given that proposition, it will always potentially bear the brunt of corporate concerns not only for the corporations themselves but also for what is best for consumers. This balancing of interests is the way that federal and state agencies work with the financial institutions they supervise.

There are some politicians who believe that there are too many restrictions on financial activities and the CFPB is the cause of a financial system weighed down by so many rules and regulations. But is the Bureau really the cause of too much rulemaking or a symptom of too few boundaries?  

It takes no courage for a politician to try to make a lot of noise about undoing the undoable. Dodd-Frank, the foundation on which the Consumer Financial Protection Bureau is codified, is simply not going anywhere. We can expect the Bureau and its Director to push and test the limits of the authorities vested in the CFPB. It is unrealistic to expect less!

The CFPB is a new federal agency and precedent may lead to fiat, unless corporate stakeholders litigate and push back on its plans. And that struggle is not only an opportunity to improve the supervision of institutions but also an obligation to ensure that the consumer is receiving financial protection.

There are claims and counterclaims, disputes and counter-disputes. The 19^th century philosopher Georg Hegel described history as a triad process consisting of thesis, antithesis, and synthesis. Applied to an interpretative method, the process sets forth an assertable proposition (thesis), which is necessarily opposed by its apparent contradiction (antithesis), and both thesis and antithesis are reconciled on a higher level of truth by a third proposition (synthesis). In context, the thesis is the rulemaking, the antithesis is the apparent contradiction and concerns, and the synthesis is a reconciliation of both projects.

Here’s the problem, though: the CFPB seems to be setting rules outside of the judicial and rulemaking process, thereby removing the force of the triad, the means by which precedent and rulemaking are built. It has adopted a pattern of promulgating rules by means of administrative action. Put otherwise, we are getting the thesis, by-passing the antithesis, and never getting to synthesis. This means that the so-called “grey area” expands into a treacherous badland where a chain reaction of results cannot be predicted. To put a finer point on this outcome, it makes companies into vagabonds, unwittingly going rogue in the midst of an already highly regulated legal and regulatory environment.

As Thomas Harman wrote in the 16^th century in his book on vagabonds and rogues – indeed, he was one of the first writers to use the word “rogue” -  there is a taxonomy of rogues in a vagabond society. He categorized these rascals as Abram Men, Autem Morts, Bawdy Baskets, Counterfeit Cranks, Demanders for Glimmer, Dells, Doxies, Dummerers, Fraters, Hookers or Anglers, Jarkmen or Patricos, Kinchin Coves, Kinchin Morts, Palliards, Priggers of Prancers, Rufflers, Swadders or Pedlars, Tinkers or Priggs, Upright Men, Walking Morts, Whipjacks or Freshwater Mariners, Wild Rogues, and, of course, just plain Rogues. Given the way that the Bureau leaves this terra incognita so unattended by judicial process, but seemingly made less unruly by administrative process, perhaps it views the interstitial inhabitants residing there as boonies in the boondocks, Swadders or Pedlars, as Harman states, who "not all be evil, but of an indifferent behaviour". Since Harman’s day, some well-known thinkers have noted that the vagabond barrens are “fruitful sources of fertile error.” To the financial institutions supervised by the Bureau, it surely seems to be the case!

So, next time politicians get all uppity and glowing in effervescent contemptuousness about restraining the Bureau from its overreaching tactics, maybe it would be a better use of their zeal to insist on a way to require the Bureau to implement its rulemaking along mostly already existing means. Maybe that will sufficiently excite these politicians to climb down from their inveterately pusillanimous posturing and actually do something for the boonies who are just trying to comply with the law.