On October 19, 2021, the Consumer Financial Protection Bureau (CFPB or the “Bureau”) entered into its first consent order under new Director Rohit Chopra, finding that a service provider to state correctional departments violated the Electronic Funds Transfer Act (EFTA) and the Consumer Financial Protection Act (CFPA) in providing prepaid debit cards to released inmates on behalf of its state and local government clients. The order notably returns the Bureau to the business of indirectly policing parties over which it has no jurisdiction, in this case state and local governments. It also confirms the new Director’s strategy of attempting to deter financing of certain types of businesses by “naming and shaming” investors in companies found to have violated the law.
What Happened
When inmates are released from correctional facilities, they are entitled to the return of their commissary or other funds held by the facility, as well as “gate money” some jurisdictions provide to help inmates get home. Many state and local governments in recent years have elected for various policy reasons to provide these funds on prepaid debit cards rather than by cash or check. Respondent JPay, LLC (“JPay”) provides services to many of these correctional facilities pursuant to contracts with state and local governments, including offering prepaid debit cards through a program administrator and bank not identified in the consent order.
The consent order found that JPay violated the EFTA and the CFPA by (1) requiring consumers to establish an account with a particular bank in order to receive government benefits, (2) requiring use of an account for receipt of electronic funds transfers in order to receive government benefits, (3) unfairly forcing consumers to pay fees on the prepaid cards, (4) abusively taking advantage of consumers who had no other way to access their funds, and (5) charging fees not authorized by the card agreements and misrepresenting the circumstances under which fees would be charged.
JPay was ordered to make various practice changes, pay $4 million in consumer restitution and pay a civil money penalty of $6 million.
Why It Matters
While this consent order may seem focused on an isolated corner of the consumer financial services space, we believe it provides important intelligence regarding Bureau policy in three respects.
First, the Bureau plainly has returned to indirect enforcement against parties over which it has no jurisdiction. As in a prior order in which Director Cordray’s CFPB attacked bad-check diversion programs run by local prosecutors by suing their service provider, here the Bureau used its authority over a service provider to challenge policies of elected state and local governments. The indirect auto finance consent orders are another example, in that case involving the Bureau’s indirect policing of auto dealers that are exempt from its authority. The lesson for all service providers is that direction from a customer, even if it is a government, is not a defense to Bureau enforcement action.
Second, reputational risks for institutional investors will be elevated significantly under Director Chopra’s CFPB. In the press release announcing the consent order, the Director chose to name the private equity firm that owns JPay, effectively punishing that firm for portfolio company activity without any due process. Investors and lenders therefore should be redoubling their focus on due diligence and oversight of companies they buy or finance.
Finally, the press release and consent order both suggest a greater focus at the Bureau on competition issues. JPay allegedly “abused its market dominance” and “denied [consumers] a choice on how their own money would be given to them upon release” by proposing in RFPs to eliminate cash and check alternatives to the debit cards, for example. We see this focus on market power as something to watch, particularly given the recent Bureau orders to certain large technology companies.
If you have questions about this consent order or any other Bureau matters, please reach out to any of the authors or the Manatt professional with whom you work.