Zelle fraud case: JPMorgan Chase, Bank of America and Wells Fargo sued

CNN
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The Consumer Financial Protection Bureau announced on Friday filed a complaint against three of the country’s largest banks and the operator of Zelle, the most widely used peer-to-peer payment system, “for allowing fraud to run rampant” on that network.

The CFPB alleges that as a result, hundreds of thousands of customers at JPMorgan Chase, Bank of America and Wells Fargo have lost more than $870 million since Zelle launched seven years ago. Zelle disputes that estimate.

The three banks named as defendants in the suit own Zelle along with four other major US banks: Capital One, PNC Bank, Truist and US Bank.

“The nation’s largest banks felt threatened by competing payment apps, so they rushed to shelve Zelle,” CFPB Director Rohit Chopra said in a statement. “By their failure to put proper security measures in place, Zelle became a gold mine for scammers, often leaving victims to fend for themselves.”

The CFPB notes that customers who filed scam complaints “were largely denied assistance, and some were told to contact the scammers directly to get their money back.”

What’s more, the CFPB says, the entities being sued did not properly investigate complaints or provide consumers with “legally required redress for fraud and error.”

The CFPB’s suit, filed in the US District Court for the District of Arizona, where Zelle operator Early Warning Services is based, specifically alleges, among other things, that the banks failed to stop transfers when there were indications of fraud and failed to protect its own account holders from using Zelle to commit fraud.

“Defendants’ errors resulted in millions of Zelle fraud complaints at (JP Morgan Chase, Bank of America and Wells Fargo) alone, including complaints of over $290 million in fraud losses from 210,000 Bank of America customers, over $360 million in fraud losses per 420,000 Chase customers and over $220 million in fraud losses with 280,000 Wells Fargo customers,” it claims in the complaint.

In a press call Friday morning, an agency official said that while more than 2,200 financial institutions use Zelle, the three banks it names in the suit control the overwhelming majority of activity on Zelle.

In response to the CFPB’s complaint, Early Warning Services struck back against the move, calling the case “meritless.”

“The CFPB’s attacks on Zelle are legally and factually flawed, and the timing of this lawsuit appears to be driven by political factors unrelated to Zelle,” Jane Khodos, a Zelle spokesperson at EWS, said in a statement.

“Zelle leads the fight against fraud and fraud and has industry-leading refund policies that go beyond the law. The CFPB’s misguided crackdown will embolden criminals, cost consumers more in fees, stifle small businesses, and make it harder for thousands of local banks and credit unions to compete,” Khodos added.

The company, in a later email to CNN, disputed the CFPB’s claim that customers of Chase, Bank of America and Wells Fargo who complained about fraudulent transfers had lost more than $870 million. The number is misleading because “not all reported fraudulent claims are actually payment fraud. Every reported fraudulent claim is investigated, and often it is determined that no fraud was committed,” the company said. And, it noted, Zelle “goes beyond what required by law and reimburses customers for certain types of fraud where the customer has authorized the transaction.”

But the CFPB countered that its complaint alleges that “the defendants did not actually investigate consumer complaints when they were victims of fraud. The CFPB further alleges that the banks erroneously denied tens of thousands of fraud claims using flawed logic.”

JPMorgan Chase spokeswoman Patricia Wexler, meanwhile, criticized the case as a case of overreach. “As a last ditch effort in pursuit of their political agenda, the CFPB is now overstepping its authority by holding banks accountable for criminals, even including romance scammers,” Wexler said in an email. “It is a stunning demonstration of regulation by enforcement that circumvents the required rulemaking process.”

Bank of America, for its part, claimed that cases of fraud are rare and that 23 million of the bank’s customers use Zelle. “More than 99.95 percent of transactions across the Zelle network go through without incident. When a client has a problem, we work directly with them,” said spokesman Bill Halldin. “We strongly disagree with the CFPB’s efforts to impose the 2,200 banks and credit unions huge new costs that offer the free Zelle service to customers.”

Wells Fargo declined to comment.

The CFPB lawsuit was filed in one of the last remaining weeks of the Biden administration. And President-elect Donald Trump is widely expected to name a new person to lead the agency during his tenure. What that will mean for the Zelle suit is unclear. (Chopra said in testimony before the House Financial Services Committee earlier this month that even though he was confirmed for a five-year term, he respects that “the president can remove us any time, any day.”)

“We would normally dismiss a lawsuit filed in the final weeks before an inauguration, but this could have legs given the populist stances of Trump’s coalition. A lot will depend on who Trump chooses as CFPB director,” said Jaret Seiberg, fiscal analyst at TD Cowen Washington Research Group, in an email.

That said, Seiberg noted, banks can have a strong defense, “since much of the fight is over authorized transactions that turn out to be fraudulent. It’s hard for us to see a court requiring banks to stop transactions, that consumers want to make.”

This story has been updated with additional details and context.