Monday, December 23, 2024
The three banks cited in the lawsuit are among the nation's largest: Bank of America, JPMorgan Chase and Wells Fargo. The CFPB is asserting that Early Warning and its owner banks, in a rush to compete with nonbank payment apps like Venmo and CashApp, dropped the ball on consumer safeguards. As a result, customers of the three banks named in the lawsuit have lost in excess of $870 million over the network's seven-year existence.
"The nation's largest banks felt threatened by competing payment apps, so they rushed to put out Zelle," said CFPB Director Rohit Chopra. "By their failing to put in place proper safeguards, Zelle became a goldmine for fraudsters, while often leaving victims to fend for themselves."
The lawsuit describes how hundreds of thousands of consumers who filed complaints alleging fraud perpetrated through the network were denied assistance, with some being told to contact the fraudsters directly to recover their money.
The lawsuit cites several alleged violations of federal law by Zelle and the three banks. For example, it alleges Zelle left the door open to scammers by way of limited identity verification methods, thus allowing fraudsters to quickly create accounts and target Zelle users.
Early Warning and the banks also have been slow to restrict and track repeat offenders, the CFPB alleges—failing to share information about known fraudulent transactions between network member banks.
The banks also have violated the Electronic Funds Transfer Act and Regulation E by failing to properly investigate Zelle customer complaints and take appropriate action in the face of fraud and errors, the CFPB asserts.
The CFPB lawsuit seeks a halt to the banks' alleged unlawful conduct and obtain refunds to consumers who were scammed, as well as impose civil money penalties.
Zelle immediately pushed back on the allegations. "The CFPB's attacks on Zelle are largely and factually flawed, and the timing of this lawsuit appears to be driven by political factors unrelated to Zelle," the network said in a statement.
The CFPB has been controversial since its creation under the Dodd-Frank Act. It has been blasted by Republicans as government overreach, and mired in legal challenges, including challenges to its funding mechanism. The consumer watchdog agency is part of the Federal Reserve and as such receives funding from fees assessed financial institutions for payment and related services. But its director is appointed by the president.
During his first term in office, President-elect Trump effectively mothballed the agency. Mick Mulvaney, a vocal critic of the bureau was appointed acting director—a position he held in tandem with being director of the Office of Management and Budget. Plus, several Obama-era initiatives were diluted during Trump's four year term, such as a payday lending rule.
With Trump about to return to the White House, and Republicans in control of the House and Senate, it would seem a dearth of actions can be expected out of the CFPB at least for the next few years. The timing of this lawsuit may be an attempt to get a case on the books before the new Administration is in place.
"Zelle is relied upon by 144 million enrolled American consumers and small businesses, and we are fully prepared to defend this meritless lawsuit to ensure their service does not suffer," the network said in its statement. It added that Zelle "leads the fight against scams and fraud and has industry-leading reimbursement policies that go above and beyond the law."
The statement went on to say that Americans "value Zelle" as a reliable, convenient and free peer-to-peer money transfer service. In 2023, despite a 27 percent increase in transaction volume, reports of scams and fraud fell by nearly 50 percent, resulting in 99.95 percent of payments being sent without any reports of scams or fraud, Zelle asserted.
A spokesperson for JPMorgan Chase criticized the lawsuit in a statement to CNN characterizing it as "a last-ditch effort in pursuit of their political agenda." The spokesperson added that "the CFPB is now overreaching its authority by making banks accountable for criminals, even including romance scammers." 
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