US consumer watchdog sues big banks over ‘widespread’ fraud on Zelle payment app

By Manya Saini and Pete Schroeder

(Reuters) -The U.S. Consumer Financial Protection Bureau said on Friday it filed a lawsuit against JPMorgan Chase (NYSE:), Bank of America and Wells Fargo (NYSE:) for failing to protect consumers from alleged “widespread fraud” on payments platform Zelle.

The lawsuit was initiated as the watchdog moves ahead with an aggressive agenda in the final weeks of Joe Biden’s Democratic administration in a bid to advance consumer protections before President-elect Donald Trump overhauls the agency, said three people familiar with the agency’s thinking. The moves defy congressional Republicans, who have called for agencies to cease rulemaking.

The CFPB seeks to stop the alleged unlawful practices, secure redress and penalties, and obtain other relief for consumers, it said in a statement.

“What they built became a goldmine for criminals,” making it easy for fraudsters to drain accounts, while providing insufficient protections for consumers or making them whole for losses, CFPB Director Rohit Chopra told journalists in a briefing. “These banks broke the law by running a payments system that made fraud easy, while refusing to help the victims.”

The proliferation of fraud and scams on Zelle has attracted attention from U.S. lawmakers, including Democratic Senator Elizabeth Warren and regulators concerned about consumer protection.

“The CFPB’s attacks on Zelle are legally and factually flawed, and the timing of this lawsuit appears to be driven by political factors,” said Early Warning Services, the company that operates Zelle and is jointly owned by banks.

Customers of the three banks named in Friday’s lawsuit have lost more than $870 million over the seven years since Zelle was introduced, the CFPB said.

Federal rules require banks to reimburse customers for unauthorized payments, for instance if their accounts were hacked. But in some cases, banks have resisted paying back customers who were tricked into making the payments themselves.

The consumer regulator describes how hundreds of thousands of consumers filed fraud complaints and were largely denied assistance, with some being told to contact the fraudsters directly to recover their money.

CFPB officials said it would press on with the Zelle enforcement action regardless of the new presidential administration and likely leadership changes at the agency, including the probable departure of director Rohit Chopra. Billionaire Elon Musk, a close Trump adviser who is leading an effort to curb bureaucracy, has also called for abolishing the agency.

“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,” the CFPB’s enforcement director Eric Halperin told journalists in response to a question about leadership changes in the incoming administration.

Zelle is a payments network owned by seven banks, including JPMorgan and BofA. It has over 143 million American consumers and small businesses as customers.

In 2023, despite a 27% increase in transaction volume, reports of scams and fraud decreased by nearly 50%, Early Warning said in a statement.

In November 2023, banks on the payment app begun refunding victims of imposter scams to address consumer protection concerns.

The percentage of combined consumers who were reimbursed for transactions that were disputed as fraud fell to 38% in 2023 across JPMorgan, Bank of America and Wells Fargo, according to a U.S. Senate committee report. That fell from 62% in 2019.

The banks declined to comment.

JPMorgan and BofA both signaled in filings earlier this year that they could sue the CFPB over Zelle. Wells Fargo disclosed that regulators have been probing its handling of customer disputes on Zelle.