CFPB Shows It’s a Tough New Cop on the Beat With Case Against Payment Processor

By: Michelle Cohen

On October 3, 2013, the Consumer Financial Protection Bureau announced it had filed a complaint in federal district court in Washington state against a leading debt-settlement payment processor, Meracord LLC, and its CEO.  The CFPB contends that Meracord helped third parties collect millions of dollars in illegal upfront fees from consumers.

The complaint alleged violations of the Federal Trade Commission’s Telemarketing Sales Rule (TSR) and the Consumer Financial Protection Act of 2010. The CFPB contended that Meracord maintained accounts and processed payments for consumers who had contracted with providers of debt-relief servicers and mortgage assistance relief services.  As is often the case, when consumers enroll in a debt-relief program, they also enter into a separate agreement with a payment processor, which establishes and maintains a “dedicated  account” for the consumer. At the time of enrollment, the debt-relief service provider instructs the consumer to stop paying his or her unsecured debts and, instead, to make monthly payments to the payment processor.  The processor can later pay renegotiated debts to the creditor and also pay the debt-relief servicers’ fees.

The CFPB alleged that, since October 27, 2010, Meracord processed payments for more than 250,000 consumers receiving debt-relief services from more than 250 debt-relief service servicers.  According to the agency, consumers paid debt-relief service providers before any debts were settled.  The Telemarketing Sales Rule has special requirements for debt reduction services. In particular, providers are not allowed to request or take fees for services before providing debt-relief services resulting in actual renegotiation or other settlement of a consumer’s debt and a payment by the consumer to a creditor.  The FTC asserted that Meracord processed payments for debt reduction services which routinely charged advanced fees to consumers in violation of the TSR.

The TSR also makes it unlawful for third parties to assist others in violating the TSR.  The CFPB used this section of the TSR against Meracord. Since Meracord collected the payments from consumers and would know whether or not they had been disbursed to creditors, and when they had been disbursed to the debt-relief servicers, Meracord would have knowledge that the debt-relief servicers were violating the TSR by collecting fees prior to delivering debt-relief services that resulted in payments to creditors.

Meracord and its CEO have agreed to settle the case.  In the Stipulated Final Judgment and Order, Meracord and its CEO, Linda Remsberg, agree that they will permanently enjoined from providing account-maintenance or payment-processing services to any provider of a debt-relief service or a mortgage assistance relief service.  The proposed settlement (which must be approved in court) also provides for a civil money penalty of $1.37 million and compliance reporting and monitoring, as well as ongoing recordkeeping requirements.

The CFPB’s action signals that it will use its authority to reach organizations that it believes provide substantial assistance to others allegedly violating consumer protection laws within its jurisdiction.  CFPB Director Richard Cordray said, “By taking a stand against those who facilitate illegal activity, we can root out harmful behavior across the debt-settlement industry and better protect consumers.”  Thus, it is not only those companies dealing directly with consumers who need to be cognizant of the CFPB’s reach.  In particular, organizations within the “chain” of industries such as debt-settlement and credit repair, should review their compliance with laws and rules the CFPB may enforce (usually shared with other agencies such as the FTC), and which include the Fair Debt Collections Practices Act, the Fair Credit Reporting Act, the Telemarketing Sales Rule, the Business Opportunities Rule, and other consumer financial-related statutes.