Zelle Fraud Claims on Banks and Credit Unions | Kaufman & Canoles

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

There is a wave of litigation over the lack of a fraud warning or bank refund protection for customers using the Zelle network to transfer funds to a party that scammed the consumer. Zelle was established in 2017 by seven of the country’s largest banks. Many other banks and credit unions are part of the Zelle network.

So far, at least three class action lawsuits have been filed against financial institutions for Zelle’s fraud losses. On April 20, 2022, Bank of America was sued in Orange County, California in a putative nationwide class action under the UCL CA. This matter has been referred to the CDCA and is pending. Tristan v. BOA.

Also in April 2022, Navy Federal CU was sued in Union County, New Jersey under the NJ CFA. This case has also been withdrawn and is pending in federal court in NJ. Wilkins vs. Navy FCU (Case 2:22-cv-02916 filed May 18, 2022). These claims fall under the New Jersey CFA for breach of contract.

In May 2022, Capital One was sued in Florida state court over similar claim theories for fraudulent activity using the Zelle network. This case has been remanded to federal court in Miami.

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

EFTA’s claim for these types of transactions is bolstered by rulings by federal banking regulators – the CFPB and FDIC – that banks and providers of monetary payment platforms – like Zelle, Cash App or Venmo – have duties under EFTA to investigate disputes relating to electronic funds and to limit consumer liability even where the consumer was negligent in authorizing the transfer. Regulators also argue that it is inappropriate for a financial institution to attempt to limit its EFTA or Regulation E obligations to consumers through the wording of account agreements and related disclosures.

Expect to see more activity from regulators reviewing reported money transfer fraud. Training staff on the requirements of Regulation E and assisting consumers alleging unauthorized transactions will be very important.

Zelle is a person-to-person (P2P) payment transfer service fully owned and operated by seven of the largest banks in the United States. Person-to-person payments allow a consumer to send money to another person without having to write a check, swipe a physical card, or exchange money.

About 1,500 member banks and credit unions participate in the Zelle service. These members engage in their own extensive marketing efforts to encourage their account holders 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 introduces Zelle to its account holders as a safe, free, and convenient way to transfer money. However, it misrepresents and omits a key fact about the service that is unknown to account holders: that there is virtually no recourse for consumers to recover losses due to fraud.

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

BOA does not and will not reimburse its account holders for losses through Zelle due to fraud, even when such losses are reported in a timely manner by account holders.

Users would probably never have signed up for Zelle had they known about the extreme risks of signing up and using the service.

Created in 2017 by the largest banks in the United States to enable instant digital money transfers, Zelle is by far the most widely used money transfer service in the country. 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 Bank of America, Capital One, JPMorgan Chase, PNC, Truist, US Bank and Wells Fargo.

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

The BOA is required to comply with EFTA requirements and does not

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

An unauthorized electronic funds transfer (EFT) is an EFT from a consumer’s account initiated by someone other than the consumer without actual authority to initiate the transfer and from which the consumer derives no benefit. 12 CFR § 1005.2(m).

According to the Consumer Financial Protection Bureau (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 Section E 1005.6 would apply.

The CFPB’s recent guidance on unauthorized EFTs indicates that P2P payments such as EFTs, such as transactions made with Zelle, trigger “error resolution obligations” for consumers to protect them from situations where they are fraudulently tricked into initiating an unauthorized EFT by a third party.

The CFPB had clarified that a transaction fraudulently induced by a third party is an unauthorized electronic funds transfer subject to the limitations of liability of 12 CFR § 1005.6.

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