Zelle Fraud Reimbursement Demands on Banks and Credit Unions

    By Frank A. Hirsch, Jr., Consumer Finance

    Tristan v. Bank of America, N.A., Case No. 8:22-cv-1183-CDCA (June 8, 2022).

    There is a groundswell of litigation arising over the lack of fraud warning or bank reimbursement protection for customers utilizing the Zelle network to transfer funds to a party who has scammed the consumer. Zelle was formed in 2017 by seven of the nation’s largest banks. Many other banks and credit unions are in the Zelle network.

    So far, at least three class action lawsuits have been filed against financial institutions for Zelle fraud losses. On April 20, 2022, Bank of America was sued in Orange County, California in a putative nationwide class action under the California Unfair Competition Law (“UCL”). That case was removed to the Consumer Discount Company Act (“CDCA”) and is pending. Tristan v. Bank of America.

    Also in April 2022, Navy Federal CU was sued in Union County, New Jersey under the NJ Consumer Fraud Act (“CFA”). That case was also removed and is pending in the NJ federal court. Wilkins v. Navy FCU (Case 2:22-cv-02916 filed May 18, 2022). These claims are under the New Jersey CFA for breach of contract.

    In May 2022, Capital One was sued in Florida state court on similar claim theories for fraudster activities utilizing the Zelle network. That case was removed to federal court in Miami.

    None of these cases have proceeded past the initial stages although motions to dismiss have been filed. Similar lawsuits are likely to follow.

    The Economic Funds Transfer Act (“EFTA”) claim for these types of transactions is being bolstered by determinations by the federal banking regulators – the CFPB and the FDIC – that both banks and the money payment platform providers – like Zelle, Cash App, or Venmo – have duties under EFTA to investigate electronic fund disputes and to limit consumer liability even when the consumer was negligent in allowing the transfer. The regulators also maintain that it is improper for a financial institution to try to limit its EFTA or Regulation E duties to consumers via language in account agreements and related disclosures.

    Expect to see more activity by regulators examining reported fraud in the money transfer space. Training staff on Regulation E’s requirements and assisting consumers alleging unauthorized transactions will be very important.

    Zelle is a person-to-person (“P2P”) payment transfer service wholly owned and operated by seven of the largest banks in the U.S. Person-to-person payments allows a consumer to send money to another person without needing to write a check, swipe a physical card, or exchange cash.

    There are approximately 1,500 member banks and credit unions who participate in the Zelle service. Those members engage in their own significant marketing efforts to encourage their accountholders to sign up for the Zelle service by marketing Zelle as a fast, safe, and secure way for consumers to send money.

    Bank of America prominently touts Zelle to its accountholders as a secure, free, and convenient way to make money transfers. However, it misrepresents and omits a key fact about the service that is unknown to accountholders: that there is virtually no recourse for consumers to recoup losses due to fraud.

    The unique, misrepresented, and undisclosed architecture of the Zelle payment system means – again, unlike other payment options commonly used by American consumers – that virtually any money transferred for any reason via Zelle is gone forever, without recourse, reimbursement, or protection.

    Bank of America does not and will not reimburse its accountholders for losses via Zelle due to fraud, even where those losses are timely reported by accountholders.

    Users most likely never would have signed up for Zelle in the first place if they had known the extreme risks of signing up for and using the service.

    Created in 2017 by the largest banks in the U.S. to enable instant digital money transfers, Zelle is by far the country’s most widely used money transfer service. Last year, people sent $490 billion in immediate payment transfers through Zelle.

    The Zelle network is operated by Early Warning Services, a company created and owned by seven banks, including: including Bank of America, Capital One, JPMorgan Chase, PNC, Truist, U.S. Bank and Wells Fargo.

    Nearly 18 million Americas were defrauded through scams involving person-to-person payment apps like Zelle in 2020 alone, according to Javelin Strategy & Research, an industry consultant.

    Bank of America Is Required to Follow EFTA Requirements and It Fails to Do So

    The Electronic Fund Transfer Act requires banks to reimburse customers for losses on transfers that were “initiated by a person other than the consumer without actual authority to initiate the transfer.” (Electronic Fund Transfer FAQ, Consumer Financial Protection Bureau)

    An unauthorized Electronic Fund Transfer (“EFT”) is an EFT from a consumer’s account initiated by a person other than the consumer without actual authority to initiate the transfer and from which the consumer receives no benefit. 12 C.F.R. § 1005.2(m).

    According to the CFPB, “If a consumer has provided timely notice of an error under 12 CFR 1005.11(b)(1) and the financial institution determines that the error was an unauthorized EFT, the liability protections in Regulation E section 1005.6 would apply.”

    Recent CFPB guidance on unauthorized EFTs indicates P2P payments like EFTs, such as transactions made with Zelle, trigger “error resolution obligations” to consumers to protect them from situations where they are fraudulently induced to initiate an unauthorized EFT from a third-party.

    The CFPB had made it clear that a transaction that is fraudulently induced by a third party is an unauthorized electronic funds transfer subject to the limitations of liability in 12 C.F.R. § 1005.6.

    The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2024.