CFPB Sues Major Banks Over Alleged Zelle Fraud Failures

The U.S. Consumer Financial Protection Bureau (CFPB) has filed a lawsuit against JPMorgan Chase, Bank of America, and Wells Fargo, accusing them of failing to protect consumers from what it describes as “widespread fraud” on the Zelle payments platform. This legal action is part of an aggressive push by the agency to enforce consumer protections in the final weeks of President Joe Biden’s administration. Sources familiar with the CFPB’s strategy said the move is aimed at advancing its agenda before President-elect Donald Trump, who is expected to overhaul the agency, takes office. Congressional Republicans have criticized the timing, calling for agencies to halt rulemaking during the transition.

The CFPB is seeking to stop what it alleges are unlawful practices, secure restitution and penalties for affected consumers, and obtain further relief. “What they built became a goldmine for criminals,” CFPB Director Rohit Chopra said in a briefing, referring to Zelle. “These banks broke the law by running a payments system that made fraud easy, while refusing to help the victims.” According to the CFPB, customers of the three banks named in the lawsuit have lost over $870 million since Zelle’s launch in 2017.

The proliferation of fraud and scams on Zelle has drawn scrutiny from lawmakers, including Democratic Senator Elizabeth Warren, and from regulators focused on consumer protection. Federal regulations require banks to reimburse customers for unauthorized payments, such as those resulting from hacked accounts. However, the CFPB alleges that banks have often resisted compensating customers who were deceived into sending payments themselves. Many consumers were reportedly told to contact the fraudsters directly to recover their money. The regulator’s lawsuit describes how hundreds of thousands of consumers filed fraud complaints but were largely denied assistance.

Early Warning Services, the company that operates Zelle and is jointly owned by the banks, rejected the CFPB’s allegations, calling them “legally and factually flawed.” The company suggested the lawsuit’s timing was politically motivated. In a statement, it noted that fraud reports on Zelle decreased by nearly 50% in 2023, despite a 27% increase in transaction volume.

The CFPB’s action highlights a broader concern over consumer protections in digital payments. A U.S. Senate committee report found that the percentage of customers reimbursed for disputed fraudulent transactions fell from 62% in 2019 to 38% in 2023 across JPMorgan Chase, Bank of America, and Wells Fargo. While the banks began refunding victims of imposter scams in late 2023, the CFPB argues these measures fall short. The regulator claims the banks have consistently failed to address systemic vulnerabilities in the Zelle platform, leaving users exposed to fraud.

CFPB officials stated they would press forward with the lawsuit regardless of the impending leadership changes at the agency, including the likely departure of Director Rohit Chopra. Enforcement Director Eric Halperin emphasized that the decision to act was based on years of investigation and assessments of the facts. “This is an issue that the CFPB has been looking into for a number of years, and we make decisions on when to bring an enforcement action based on case-specific assessments of the facts and legal violations,” Halperin said.

The banks named in the lawsuit declined to comment. JPMorgan Chase and Bank of America had previously signaled their intention to sue the CFPB over its handling of Zelle, while Wells Fargo disclosed ongoing regulatory investigations into its management of customer disputes on the platform. Billionaire Elon Musk, a Trump ally and outspoken critic of federal bureaucracy, has also called for the abolition of the CFPB, amplifying political tensions surrounding the agency’s future.

Zelle, which is used by over 143 million American consumers and small businesses, is jointly owned by seven major banks, including JPMorgan Chase and Bank of America. Despite the platform’s growth, the CFPB contends that insufficient safeguards have made it a target for fraudsters, resulting in significant financial harm to consumers. The outcome of the lawsuit could have far-reaching implications for the future of digital payment systems and consumer protection standards in the financial industry.

By fLEXI tEAM