The Consumer Financial Protection Bureau filed a lawsuit Monday against the payment processer Intercept Corp. and its two top executives for allegedly enabling clients to withdraw millions of dollars' worth of illegal charges from consumer bank accounts.
The lawsuit, filed in the U.S. District Court for the District of North Dakota, alleges that Intercept's top two executives "knew or consciously avoided knowing" that many client transactions "were fraudulent or illegal."
The CFPB said the Fargo, N.D., third-party payment firm processed electronic funds transfers on behalf of payday lenders in states where payday loans are illegal. Payment processors are required to monitor merchant return rates and other suspicious activity, the CFPB said.
Craig Dresser, the CEO and co-owner of Intercept, and Bryan Smith, the president and co-owner, did not immediately return calls seeking comment.
"Intercept and its executives Bryan Smith and Craig Dresser ignored clear signs of brazen fraud, including illegal withdrawals from consumer accounts, and need to clean up their act," CFPB Director Richard Cordray said in a statement. "Companies cannot turn a blind eye to wrongdoing when they process payments from consumer banking accounts on behalf of clients that are breaking the law."
The CFPB alleges that Dresser and Smith ignored blatant warning signs of potential fraud including repeated consumer complaints and unusually high rates of returned payments for insufficient funds or unauthorized debits. High return rates may indicate that consumers did not consent to the payments or terms, the CFPB said.
The lawsuit alleges that Intercept performed "only perfunctory due diligence regarding the legitimacy and legality of their clients' underlying transactions."
Many of Intercept's clients have run up annual return rates of 20% to 40% for network transactions, far above the industry average of 1.5%, the bureau said. The company and its owners also ignored other warning signs such as state and federal enforcement actions against its clients.
Intercept and its owners also ignored warnings from banks. One bank received 600 complaints from consumers during a three-month period after Intercept "ran millions of dollars of [automated clearing house] transactions through the bank, generating high volumes of returns in disputed transactions," the lawsuit stated.
The bureau said Intercept's actions violated the Dodd-Frank Act's prohibition against unfair acts and practices.