New CFPB Lawsuit Reminds PFs: Use Frictionless Underwriting for High-Risk Merchants at Your Peril

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Last week (Sept.23), the Consumer Financial Protection Bureau filed a lawsuit against a credit repair company called Prime Marketing Holdings.

In a press release announcing the complaint, CFPB Director Richard Cordray said, “We are taking action against Prime Marketing Holdings for luring consumers with misleading claims about its ability to repair credit files and then charging illegal fees.”

This case is a reminder to PFs that, when you’re dealing with merchants in high-risk categories, frictionless onboarding is not the way to go.

While no payment companies were named in the Prime Marketing complaint, that has not always been the case. If the agency believes payment companies have enabled transactions while disregarding warning signs about the nature of the company’s business, it will take action against them as well.

In June, the CFPB brought a suit against Intercept Corp., a payment processor based in North Dakota. In a press release announcing the complaint, the agency accused the company of violating the Dodd-Frank Wall Street Reform and Consumer Protection Act by turning “a blind eye to blatant warning signs of potential fraud or lawbreaking by its clients.”

Last year, payment processors were also included in a CFPB suit against Universal Debt & Payment Solutions, LLC, for what the regulator alleged was an unlawful debt collection scheme.

In that press release, the agency wrote, “Without payment processing capability, the collectors could not accept debit and credit card payments. The payment processors are alleged to have ignored numerous red flags of the debt collectors’ illegal conduct, including consumer disputes that described the scheme and communication problems with the debt collectors.”

These lawsuits make clear that payment companies have an obligation to exercise due diligence on the businesses they are enabling, and not to look the other way when there are signs the company may be defrauding consumers.

Paying attention to any reports of complaints from consumers or banks is important when you’re working with merchants in high-risk categories. But PFs can also reduce their risk on the front end.

Getting merchants on board and able to process transactions quickly is a benefit of the payment facilitator model. And for low-risk businesses, this can be done effectively. But knowing your portfolio and applying appropriate underwriting best practices is key to keeping your organization out of trouble and meeting your responsibility to the system, said Deana Rich. president of Rich Consulting and publisher of PaymentFacilitator.com.

“If you’re underwriting these types of merchants, you have to look past chargebacks and refunds, and find out what the chatter on the web looks like. Look on the CFPB web site to see if there are lots of complaints,” Rich said.

“When you’re underwriting businesses in high-risk categories, you can’t do frictionless underwriting. You need to do full underwriting. For example, pay close attention to who truly owns the business. Make sure the owner is the beneficial owner and not a nominee owner.”

Following these and other full underwriting best practices should uncover information that would raise a red flag, helping PFs to separate legitimate businesses from fraudulent ones.

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