JPMorgan Chase, Bank of America and Wells Fargo sued for failing to prevent fraud on Zelle

By Jeanne Sahadi, CNN

(CNN) — The Consumer Financial Protection Bureau said Friday it filed a complaint against three of the country’s largest banks and the operator of Zelle, the most widely available peer-to-peer payment system, “for allowing fraud to fester” on that network.

CFPB alleges that, as a result, hundreds of thousands of customers of 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 co-own Zelle, along with four other big 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 put out Zelle,” said CFPB Director Rohit Chopra in a statement. “By their failing to put in place proper safeguards, Zelle became a gold mine for fraudsters, while often leaving victims to fend for themselves.”

CFPB notes that customers who filed fraud complaints “were largely denied assistance, with some being told to contact the fraudsters directly to recover their money.”

What’s more, CFPB says, the entities being sued did not properly investigate complaints or give consumers “legally required reimbursement for fraud and errors.”

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 owners from using Zelle to perpetrate fraud.

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

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.”

Zelle calls suit ‘meritless,’ challenges loss claim

In response to CFPB’s complaint, Early Warning Services slammed the move, calling the suit “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 scams and fraud and has industry-leading reimbursement policies that go above and beyond the law. The CFPB’s misguided attacks will embolden criminals, cost consumers more in fees, stifle small businesses and make it harder for thousands of community banks and credit unions to compete,” Khodos added.

The company in a later email to CNN contested CFPB’s claim that customers of Chase, Bank of America and Wells Fargo who complained of fraudulent transfers had lost more than $870 million. The number is misleading because “not every reported fraud claim is actual payments fraud. Every reported fraud claim is investigated and often it is determined that fraud was not committed,” the company said. And, it noted, Zelle “goes above and beyond what is required by law and reimburses customers for certain types of scams where the customer authorized the transaction.”

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

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

For its part, Bank of America asserted that incidents 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 an issue, we work directly with them,” said spokesperson Bill Halldin. “We strongly disagree with the CFPB’s effort to impose huge new costs on the 2,200 banks and credit unions that offer the free Zelle service to clients.”

Wells Fargo declined to comment.

Chance of the case surviving a change in administrations

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

“We normally would dismiss a lawsuit filed in the final weeks before an inauguration, but this could have legs given the populist leanings of Trump’s coalition. Much will depend upon whom Trump picks as CFPB director,” said Jaret Seiberg, financial services policy analyst at TD Cowen Washington Research Group, in an email.

That said, Seiberg noted, banks may have a strong defense “as much of the fight is over authorized transactions that prove fraudulent. It is hard for us to see a court demanding banks stop transactions that consumers want to make.”

This story has been updated with additional details and context.

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CNN’s Matt Egan contributed to this article.