January 5, 2015 | Due to a CFPB lawsuit, Global Payments announced last month that it would no longer permit payments associated with collections to be processed through its network. Though the company had not underwritten collections accounts itself, it had allowed banks to process collections payments over its network, provided that those banks assumed the associated financial risk. In light of the lawsuit, however, Global Payments informed banks that they would face fines of $250,000 per month if they continued processing collections payments over its network.
The CFPB’s case against Global Payments made two primary arguments. First, it claimed that a business service provider can be liable for a client’s use of its services. Second, it argued that failure to enforce the terms of a private-party contract made the service provider complicit in the client’s illegal activity. The Global Payments contract contains 40 pages of stipulations protecting it from financial liability. This, hypothetically, would give the payment processor an out—they could claim that the merchant was in violation of their contract and Global would likely be absolved. The issue here is that the Global contract was too broad—businesses such as collection agencies were outright forbidden and, in fact, most Global merchants are likely in breach in some way, shape or form.
Prior case law would suggest that this is not a problem—a contract is an agreement between two parties and typically no third party is involved. In this case, because the contract was so strict and, relative to the contract, enforcement of the contract provisions was so lax, the CFPB saw fit to treat the contract as if it was an internal policy document. This let them make their case: “Although the Payment Processors classified the Debt Collectors and other persons who collect debt as high risk—indeed, prohibited—merchants, the Payment Processors approved the Debt Collectors’ numerous applications for payment processing accounts and failed to reasonably monitor those accounts for signs of unlawful conduct.”
Guidance For Payment Management Firms:
- Perform reasonable validation of your customers
- Audit your customers regularly
- Ensure that you do not enable any bad behavior or lend an air of legitimacy to any illegitimate businesses
- Terminate customers immediately if the CFPB shows up to investigate the case
- Put any clause in your contracts that could cause a third party significant harm if:
- Your customer breaks the law; AND
- You may not enforce the clause.
- Establish policies that you are not capable of enforcing
- Provide services to an industry without understanding the particular regulations in that industry
While it remains legal to process credit cards under FDCPA rules, the impact of Global Payments’ decision to forbid all collections business has had a chilling effect on the credit card processing industry.
For questions or feedback, email me at email@example.com.