A federal judge in Atlanta soon will rule on a question that could have a profound impact on one of Georgia’s most wide-reaching industries — the companies that process trillions of dollars of credit and debit card payments.
The question: Is Sandy Springs-based Global Payments liable if its automated payments processing system, used by millions of merchants, is also repeatedly tapped into by alleged crooks to steal millions of dollars from their victims?
The Consumer Financial Protection Bureau says it is. And that has industry players and some politicians seeing red over what they view as a federal agency overstepping its limits.
The CFPB, created four years ago in the aftermath of the financial crisis, is acting as “judge, jury and executioner in administering laws it has invented,” former Republican House Speaker Newt Gingrich groused recently in online comments on the issue.
The federal watchdog agency, in a civil lawsuit filed four months ago in the U.S. District Court in Atlanta, went after the ringleaders of an allegedly fraudulent debt collection scheme in metro Atlanta and Buffalo, N.Y. But the CFPB also said Global Payments and four other payments and telemarketing firms that did business with the debt collectors were culpable.
The CFPB lawsuit said the alleged fraud wouldn’t have succeeded if Global Payments and the other companies had properly screened and monitored the debt collectors, and hadn’t given them unfettered access to victims’ bank accounts despite signs of criminal activity.
High levels of customer complaints and reversed charges showed that the debt collectors deserved “a heightened level of scrutiny,” CFPB attorney Jonathan Engel said in a recent hearing in Atlanta. “And yet they were allowed to stick their fingers in people’s checking accounts.”
The lawsuit alleges that Mohan Bagga, of Duluth, and Marcus Brown, of Buffalo, N.Y., ran a boiler room operation in which they threatened, harassed and lied to thousands of consumers in order to collect millions of dollars on so-called “phantom” debt. Such debt includes money people never owed or that they no longer legally owe because it was canceled in a bankruptcy or otherwise became outdated.
U.S. District Judge Richard Story ordered an injunction freezing Bagga’s and Brown’s assets while the case is pending. The CFPB complaint also names more than a dozen other individuals and companies.
“The ringleaders of the scheme, the telemarketing firm that broadcast millions of robo-calls, and the companies that processed the payments should all be held accountable for taking advantage of vulnerable consumers,” CFPB Director Richard Cordray said at the time the lawsuit was announced.
The case has the payments industry and critics such as Gingrich up in arms. They view the CFPB’s action as an unprecedented and ill-considered effort to strongarm financial firms into acting as pseudo regulators guarding against consumer fraud.
“The CFPB has discovered that the mere threat of its regulatory authority allows it to pronounce and enforce new rules it has no legal right to create,” Gingrich said late last month in his blog for the Washington Times.
By going after payment processors to cut off financial services to debt collectors and other businesses they don’t like,the CFPB has joined a “chilling” federal enforcement effort called Operation Choke Point, Gingrich said.
“In short, it involves the CFPB conspiring with officials at the Justice Department and FDIC to put law-abiding American companies out of business,” he said.
Global Payments and other firms in the payments industry are trying to get the CFPB’s complaint against them dismissed.
In the recent hearing in Atlanta, lawyers for Global Payments and two other firms argued that the laws the agency is enforcing don’t apply to them because they don’t deal directly with consumers.
The CFBP’s complaint is based on the Consumer Financial Protection Act and the Fair Debt Collection Practices Act.
Global Payments is “four times removed from consumers,” said Doug Baldridge, a Washington, D.C. lawyer representing the company. Global Payments processes 6.5 billion credit and debit card payments a year, he said, but it only deals with merchants.
He told Judge Story that CFPB’s complaint goes too far by arguing that Global Payments is legally liable if criminals use the same services that the company offers to all its clients.
He said it would be hugely costly for Global Payments, which processes transactions for 1.5 million merchants, to ferret out fraud.
“You’re talking about two very small clients … in a sea of other merchants,” said Baldridge. “If you accept that standard, it’s going to add enormous costs to an essentially automated process.”
But Engel, with the CFPB, said Global Payments and the other companies were reckless and harmed consumers by failing to follow their own rules and procedures for vetting new clients and investigating consumer complaints and problem transactions.
“We don’t allege that a big company like Global Payments wanted to harm consumers. But they wanted these merchants to succeed and ignored (problems) to allow them to succeed,” he said. While consumers were losing their money to the debt collectors, Global Payments and the other companies “sent them gift baskets,” he said.
The story and its players
The Consumer Financial Protection Bureau alleges in a federal lawsuit that debt collectors in metro Atlanta and Buffalo, N.Y., reaped millions of dollars in payments on “phantom” debt from victims with a companies they created. But the alleged fraud couldn’t have succeeded without the help of a big Atlanta payments processor, a telemarketer and other firms, the agency said. These are the people and companies named in the civil complaint in federal district court:
Debt collectors and their firms
Marcus and Sarita Brown, Buffalo
Mohan and Varinderjit Bragga, Duluth
Tasha Pratcher, Buffalo
Sumant Khan, Atlanta
Universal Debt and Payment Solutions, Tucker
Universal Debt Solutions, Buffalo
WNY Account Solutions, Buffalo
WNY Solutions Group, Buffalo
Credit & Check Recovery, Atlanta
Credit Power, Johns Creek
S Payment Processing and Solutions, Atlanta
Payments processing and other companies
Global Payments, a large Atlanta-based payments processor
Pathfinder Payment Solutions, Columbia, M.D., independent sales company that markets Global Payments’ services
Frontline Processing Corp., Bozeman, Mont., independent sales company that markets Global Payments’ services
Electronic Merchant Services, Cleveland, Ohio, independent sales company
Global Connect, “robo-call” telemarketing firm in Mays Landing, N.J.
Source: Court filings by Consumer Financial Protection Bureau
The Consumer Financial Protection Bureau
— Created under the Dodd-Frank Financial Reform Act of 2010, passed after the financial industry meltdown of 2008-09.
— Led by Richard Cordray, a former Ohio attorney general and Democratic politician.
— Aims to stop unfair, deceptive and abusive practices among a wide range of financial businesses, while also ensuring consumers have access to beneficial financial services.
— Critics say agency is overreaching and making it harder for small-dollar lenders to provide services. Republican presidential candidate Sen. Ted Cruz of Texas has introduced a bill to close the agency.
— Cordray recently told Congress that CFPB enforcement actions have resulted in $10.1 billion in relief for more than 17 million consumers.
— In one case, Atlanta-based mortgage servicer Ocwen agreed to provide more than $2 billion in loan relief and cash payments to affected borrowers to settle complaints about its practices brought by the CFPB and states.