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Three of the largest banks in the US, which collectively account for 73 percent of Zelle transactions, have disclosed that they are gearing up for a potential legal battle with the country’s consumer financial regulator.

At the end of last month,��,�� ���Ի��� each submitted their Q3 financial statements to the Securities and Exchange Commission (SEC).

In the legal matters and contingencies sections of the reports, the three firms included a near-identical disclosure related to possible litigation with the Consumer Financial Protection Bureau (CFPB).

“The firm is responding to inquiries from the CFPB regarding the transfers of funds through the Zelle Network,” wrote J.P. Morgan Chase.

“In connection with this, the CFPB staff has informed the firm that it is authorized to pursue a resolution of the inquiries or file an enforcement action. The firm is evaluating next steps, including litigation.”

Bank of America’s disclosure used almost the exact same wording, while Wells Fargo’s disclosure added another key detail as to the nature of the inquiry.

“The CFPB has been conducting an investigation regarding the handling of customer disputes related to fund transfers made through the Zelle Network,” the bank wrote.

No other information about the CFPB’s inquiries were provided by the three banks, except for generalised warnings to investors that potential legal action could lead to “accrued liability” and “possible loss”.

Senator Blumenthal’s call heeded?

The three disclosures suggest that the CFPB has responded affirmatively to a call from Senator Richard Blumenthal (D-CT) to investigate the three banks’ “mishandling” of Zelle fraud complaints.

In August, as covered by 91����ԭ��, Blumenthal  to CFPB director Rohit Chopra, urging him to take “appropriate action to ensure that these institutions fully and promptly address consumer reports of fraud, as required by law”.

The senator added that if the CFPB finds evidence that any of the three firms has violated the Electronic Fund Transfer Act knowingly and willingly, the “strongest appropriate action” should be taken.

Blumenthal contacted Chopra following the publication of a  from the Senate’s Permanent Subcommittee on Investigations (PSI), looking into the handling of fraud complaints on Zelle, the largest peer-to-peer (P2P) payment network in the US.

The report focused on the role of Early Warning Services (EWS), the operator of Zelle, and the three banks named above, which are the largest of the seven that collectively own EWS.

As noted by Blumenthal, the committee was “particularly alarmed” to discover that, between 2019 and 2023, the total percentage of transactions disputed by Zelle users as unauthorised that were ultimately reimbursed by the three banks fell from 62 percent to 38 percent.

Seeking to understand why so few fraud complaints are resolved through reimbursement, the committee held a hearing at which the CEO of EWS and executives from the three banks were invited to give evidence.

In Blumenthal's words, the witnesses provided “deflections and excuses, but few answers”.

“PSI’s investigation of the three banks indicates that they provide their respective employees with broad discretion to determine whether a disputed transaction is unauthorized, and, in turn, whether a consumer is entitled to reimbursement.

“Unfortunately, last week’s testimony provided little insight into the processes these institutions use to investigate transaction disputes.

“Beyond vague anecdotes, none of the witnesses offered details about why so many consumers who complained to their bank of fraud were turned away empty handed.”

���Ի�����, banks and credit unions are required to reimburse customers for unauthorised electronic funds transfers.

The regulation stipulates that financial institutions must investigate reports of unauthorised transfers and decide within ten days whether they qualify for reimbursement.

If the transaction is ruled to be an authorised transaction, the customer is not entitled to reimbursement.

Adam Vancini, EVP for consumer and small business banking at Wells Fargo,�� during the hearing of when a transaction that is initially disputed as “unauthorised” may be ruled “authorised”.

“We start with the benefit of the doubt that it is a fraud claim, so that's how it originally gets classified,” he said.

“In some instances, the customer might have made the transaction and forgotten they've made it.

“In other instances, it might be a joint account, and you might see your wife has made a transaction on that account you don't recognise — those are some of the some of the things that can occur.”

In the coming weeks and months, we are likely to learn of the findings of the CFPB’s investigation and whether enforcement action will follow. 

If it does, it will significantly change the conversation around how firms are expected to handle fraud disputes in the US.