Wells Fargo, Chase and Bank of America have sued over alleged fraud at Zelle

Wells Fargo, JP Morgan Chase and Bank of America are being sued by the embattled Consumer Financial Protection Bureau over alleged uncontrolled fraud on the payment app Zelle – setting off a legal showdown that the new Trump administration could scrap as soon as next month.

The three financial institutions that own the app along with four other major banks were accused in a lawsuit filed Friday of rushing to launch the service in 2017 without taking adequate consumer protections to compete with popular payment apps such as. E.g. to be able to compete with Venmo. The result, according to the lawsuit, was fraud-related losses of more than $870 million over the last seven years.

“Zelle became a goldmine for fraudsters while victims were often left to fend for themselves,” said CFPB Director Rohit Chopra.

The 91-page federal lawsuit alleged that hundreds of thousands of consumers at the three banks complained of fraud but were “largely denied compensation, and some were even told to try to get their money back by contacting the person.” The CFPB said the three banks accounted for 73% of Zelle activity last year.

The lawsuit was immediately attacked by Early Warning Services, which operates the app on behalf of the banks, as “legally and factually flawed,” claiming the lawsuit could be counterproductive by “creating incentives” for criminals to make false claims of fraud the institutions would have to pay – increasing the cost of the app and crowding out credit unions and community and minority-owned banks that offer Zelle. Around 2,200 financial institutions use the service.

“Zelle is used by 143 million registered American consumers and small businesses, and we are fully prepared to defend this baseless lawsuit to ensure that their service is not impacted,” said Jane Khodos, a spokeswoman for Early Warning, who The defendant was also referred to as a “cell”.

Bank of America said in its own statement that “more than 99.95 percent of transactions across the Zelle network occur without incident. If a customer has an issue, we work with them directly.”

JP Morgan Chase also denied the allegations, citing political undertones raised by Early Warning and saying the CFPB’s action was a “last-ditch effort to pursue its political agenda.” Wells Fargo did not respond to messages seeking comment.

The CFPB, created in 2011 after the financial crisis, has long been criticized by Republicans as an “out-of-control” agency whose actions are heavy-handed and slowing economic growth.

The first Trump administration sought to rein in the bureau and redrafted proposed rules aimed at tightening regulations on payday lenders. Consumer advocates considered the final regulations to be watering down. The new Trump administration could drop the lawsuit against Zelle when it takes power next month.

Some critics want to abolish the agency entirely. Billionaire Elon Musk, who is spearheading efforts to streamline the federal government through the so-called Department of Government Efficiency (DOGE), criticized the agency in a November post on X that said, “Delete the CFPB.” There are too many duplicate regulators.”

Earlier this year, the Supreme Court rejected a short-term lending trade group’s attempt to declare the bureau’s structure unconstitutional because it is funded by bank fees rather than congressional appropriations.

The bureau, which boasts of providing more than $21 billion in relief to consumers, recently stepped up its enforcement efforts ahead of the change in administration.

On Monday, the company filed separate lawsuits against Walmart and Rocket Mortgage alleging financial misconduct. And earlier this month, groundbreaking rules were passed that could cut the cost of bank overdrafts to just $5.

Separately, the Federal Trade Commission, led by outgoing Chairwoman Lina Khan, sued Los Angeles-based cash app Dave Inc. last month, accusing it of cheating its financially vulnerable customers about the fees it charges and the amount of money it spends to have been misled. The company denies the allegations.

The CFPB alleged in its lawsuit that Zelle, without adequate safeguards, allows fraudsters to create multiple email addresses and cell phone numbers when they sign up for the service, which they can associate with the same or different bank accounts, leaving consumers unaware of who you send your money to.

It was alleged that the banks allowed repeat offenders to move between banks because the banks did not share information about fraudsters and moved too slowly to restrict or track down criminals. It also claimed that it failed to respond to the hundreds of thousands of complaints it received to prevent further fraud.

In response, Early Warning claimed that it had “highly effective, multi-layered fraud and fraud prevention measures” in place, which resulted in reports of scams and scams falling by almost 50% in 2023, despite a 27% increase in transaction volume.

The company said it made “every effort to cooperate and cooperate” with the bureau before filing the lawsuit, which it said was part of the agency’s “pattern and practice of regulatory overreach.”

The bureau’s lawsuit was welcomed by the National Consumer Law Center, which said: “The CFPB stands up for people who have failed to get the big banks to take their fraud allegations seriously and return their hard-earned money.” The CFPB helps ordinary people who have been harmed by big banks.”

Senator Elizabeth Warren, who led the agency’s creation, defended it last week and called on Trump to work with the agency to help American families by temporarily capping credit card interest rates at 10% – a promise he made on the campaign trail Path.

“This would be a real boost for millions of families across the country,” said the Massachusetts Democrat. “If he stays true to his word here, and I think we should take them at their word, then the CFPB can help him do that.”