March 06, 2023

Senators call on banking regulators to scrutinize Zelle fraud

digital dollarAs more consumers fall victim to fraud scams on peer-to-peer (P2P) payment apps, a group of Democrat senators sent a letter to federal banking regulators – including the NCUA – calling on the agencies to review customer reimbursement and anti-money laundering (AML) practices of financial institutions that participate in the Zelle network.

In the letter, Sens. Jack Reed, D-R.I., Bob Menendez, D-N.J., Elizabeth Warren, D-Mass., Mark Warner, D-Va., and Senate Banking Committee Chairman Sherrod Brown, D-Ohio, claimed, “When banks or credit unions participating in Zelle evade responsibility for reimbursing their customers if they are fraudulently induced to send money to scammers through the app, those customers may lose confidence in their depository institution for offering a product that places their money at risk.”

The senators argued there are compliance concerns – related to potential UDAAP, consumer protection, and AML violations – regulators should review at financial institutions and asked the Federal Reserve and OCC to regularly examine Early Warning Services, which operates Zelle and is owned by the nation’s largest banks. They also recommended the banking agencies coordinate oversight with the CFPB.

In response to reports that the CFPB was reviewing Regulation E liability requirements last summer, including potential guidance that would seek to ensure financial depository institutions cover losses from consumer authorized transactions that are the result of scams, NAFCU’s advocacy team shared concerns with lawmakers and regulators.

NAFCU President and CEO Dan Berger called this effort “deeply concerning,” arguing that an expansive interpretation of Regulation E could magnify credit unions’ exposure to fraud and curtail investments designed to help reach underserved communities, such as investments in brick-and-mortar branches. Rather than putting liability on credit unions, Berger recommended the bureau focus on ensuring fintechs have proper regulatory oversight and work to prevent fraud before it occurs.

NAFCU Senior Vice President of Government Affairs Greg Mesack also shared the repercussions of expanding Regulation E liability in a Wall Street Journal article; a post on NAFCU’s Compliance Network further details the issue. A Compliance Blog post also reviews the bureau’s updated FAQs and how its error resolution requirements apply to P2P payments and providers.

NAFCU will continue to monitor the CFPB’s efforts related to Regulation E and keep credit unions informed of compliance considerations.