JPMorgan Chase ready to sue US government over Zelle fraud

Buried in a quarterly report of about 200 pages JP Morgan Chase Last month’s eight words highlighted just how contentious the relationship between banks and government has become.

The lender revealed that the Consumer Financial Protection Bureau could punish JPMorgan for its role in Zelle, a giant peer-to-peer digital payments network. The bank is accused of failing to remove criminal accounts from its platform and failing to compensate some fraud victims, said the people, who spoke on condition of anonymity to discuss an ongoing investigation.

In response, JP Morgan issued a thinly veiled threat, saying, “The company is considering next steps, including litigation.”

Policy experts say it would have been unheard of in previous eras for banks to sue regulators, largely because companies used to fear provoking regulators. This was especially true for the U.S. banking industry, which needed hundreds of billions of dollars in taxpayer bailouts to survive after irresponsible lending and trading practices sparked the 2008 financial crisis, experts said.

However, a combination of factors during this period has created an environment in which banks and their regulators are farther apart than ever before.

Industry groups say banks have become easy targets for populist attacks by Democratic-led regulators in the aftermath of the financial crisis. Regulatory officials say banks and their lobbyists are increasingly relying on courts in Republican-dominated districts to fend off reform and protect billions of dollars in fees at the expense of consumers. He points out.

“If you go back 15 or 20 years, it’s not very wise to antagonize regulators, and litigating these things is just kicking a hornet’s nest,” said Tobin Marcus, head of U.S. policy at Wolfe Research. There was a view that it was.”

“The difference is how ambitious you are. [President Joe] “Biden’s regulators have historically been broadly conservative in how conservative the courts have been, at least in some parts of the court, and that makes it very likely that industry lawsuits against proposed regulations will be successful,” Marcus said. It has created many opportunities.”

It began as one of the most significant reforms to banking regulation since 2008, which curbed Wall Street risk-taking, introduced annual stress tests, and established the industry’s chief adversary, the CFPB. This year, these forces collided.

In the final months of the Biden administration, the effort by six government agencies aimed to reduce fees on late credit card payments, debit transactions and overdrafts. The industry’s biggest threat was the “Basel End Game,” a far-reaching proposal that would force major banks to hold tens of billions of dollars more in capital for activities such as trading and lending.

Marianne Lake, JPMorgan’s head of consumer banking, warned investors in May that “the industry faces an onslaught of regulation and potential legislative change.”

JPMorgan’s disclosure of the CFPB’s investigation into Zell comes after years of scrutiny by Democratic lawmakers over financial crimes on the platform. Zelle was launched in 2017 by a bank-owned company called Early Warning Services in response to threats from peer-to-peer networks such as: PayPal.

Most of Zelle’s activities are uneventful. Of the $806 billion that flowed through the network last year, JPMorgan customers disputed just $166 million of the transactions as fraudulent. bank of america and wells fargothe three biggest players on the platform.

But the three banks collectively repaid just 38% of those claims, according to a July Senate report examining the disputed fraudulent transactions.

According to the Electronic Funds Transfer Act, banks are typically busy refunding fraudulent Zelle payments that the customer did not authorize, but if a customer is tricked into authorizing a payment by a fraudster, they typically lose money. will not be refunded.

JPMorgan’s payments executive told lawmakers in July that the bank was actually repaying 100% of fraudulent transactions. The Senate report’s findings are inconsistent because bank officials often determine that customers have authorized the transaction.

Amid increased scrutiny, the bank began warning Zelle users of its Chase app to “protect themselves from scams” and added a disclosure that customers would likely not be refunded for bogus transactions.

JP Morgan declined to comment for this article.

The company has grown into the largest and most profitable U.S. bank in history under CEO Jamie Dimon, but it has also been at the forefront of several other skirmishes with regulators.

Thanks to his reputation for guiding JPMorgan through the 2008 financial crisis and last year’s regional bank turmoil, Mr. Dimon may be one of the few CEOs in a position to openly criticize regulators. This was highlighted this year when Mr. Dimon led a campaign to undermine the Basel proposal, both in public and behind closed doors.

At JPMorgan’s investor day in May, Mr. Dimon’s representatives argued that Basel and other regulations would ultimately harm consumers rather than protect them.

The cumulative effect of ongoing regulations will increase mortgage costs by at least $500 per year and credit card interest rates by 2%. JPMorgan says banks will charge two-thirds of consumers a fee to use their checking accounts.

The message is that banks will pass on the additional costs of regulation to consumers, rather than just eating them.

While all of these battles are ongoing, the financial industry has achieved some victories so far.

It took a lot of effort to convince the Fed to propose a new Basel final proposal this month that would cut the additional capital that the largest financial institutions would be forced to hold by roughly half, among other industry-friendly changes. Some argue that the threat of litigation was helpful.

It is not even clear whether a watered down version of the proposal, long considered as a response to the 2008 crisis, will actually be implemented, as it will not be finalized until well after the US election.

If Republican candidate Donald Trump wins, the regulations could be further weakened or completely repealed, and the industry could still fight them in court under Kamala Harris.

That’s the bank’s approach to the CFPB’s credit card rule, which aims to cap late fees at $8 per transaction and was scheduled to go into effect in May.

A last-ditch effort by the U.S. Chamber of Commerce and banking industry groups succeeded in delaying implementation, with Judge Mark Pittman of the Northern District of Texas siding with the industry and allowing the rule to be frozen.

Lori Yue, an associate professor at Columbia Business School who studies the interaction between corporations and the legal system, said a key strategy for banks is to sue in conservative jurisdictions where they are likely to prevail. It is said that

The Northern District of Texas falls under the jurisdiction of the Fifth Circuit Court of Appeals, which is “well known for being friendly to industry lawsuits against regulators,” Yue said.

“Shopping at venues like this has become an established corporate strategy,” Yue said. “The financial industry has been particularly active in litigation against regulators this year.”

Since 2017, nearly two-thirds of lawsuits filed by the U.S. Chamber of Commerce challenging federal regulations have been filed in the Fifth Circuit, according to an analysis by Accountable US.

Industries dominated by a few large companies, from banks to airlines to pharmaceuticals to energy companies, have well-funded trade associations and tend to be more resistant to regulators, Yue says. he added.

A polarized environment in which weakened federal institutions are undermined by conservative courts ultimately favors the largest corporations, said Brian Graham, co-founder of banking consulting firm Claros. It turns out.

“This is really bad in the long run because the reality is that the world is changing, but whatever regulations have been in place are becoming entrenched,” Graham said. “This is what happens when you can’t introduce new regulations for fear of being sued.”

— Data visualization by CNBC’s Gabriel Cortez.