The CFPB Drops Its Zelle Lawsuit As the Senate Looks to Curb the Bureau’s Power

The Consumer Financial Protection Bureau late Tuesday dropped its lawsuit against Early Warning Services LLC, operator of the Zelle person-to-person payments network. The suit had also named Bank of America, JPMorgan Chase, and Wells Fargo as defendants. The financial institutions are three of the seven bank owners of Early Warning.

The reversal comes less than three months after the CFPB filed the lawsuit alleging the defendants failed to protect consumers against fraud on the Zelle network and little more than a month after President Trump fired former CFPB director Rohit Chopra, naming Scott Bessent as acting director of the agency.

The decision comes as the CFPB has backed off several lawsuits and regulatory actions in recent weeks, including a suit against Capital One.

The news was welcomed by Early Warning, which argued the suit lacked justification.

“We welcome the CFPB’s decision to drop its lawsuit against the Zelle network. As we’ve said before, this lawsuit was without merit, and legally and factually flawed,” a Zelle spokesperson says by email. “We look forward to continuing to provide Zelle, a trusted service, to 151 million enrolled American consumer and small-business accounts.”

Consumer advocates decry the CFPB’s decision, arguing it weakens the bureau as a consumer watchdog.

“For consumers and businesses to have confidence in the fast-emerging digital-payment space, consumers need strong safeguards against payment fraud and deceptive or abusive acts and practices,” Chuck Bell, advocacy program director for Consumer Reports, says by email.

“Based on the Senate report on CFPB’s complaint and the Senate report on problems with payment fraud and imposter scams at Zelle, these problems have been extremely widespread, and victims have not had the benefit of thorough investigations and adequate reimbursement for risks that could have been reasonably foreseen by banks and platform operator,” Bell adds. “Consumers need an active financial watchdog, not a lapdog that reflexively sides with the big-tech payment platforms and megabanks against customers.”

CFPB critics counter that the decision to drop the suit indicates the CFPB is taking a less aggressive approach to regulation, which is good for the payments industry.

“The CFPB dropping its lawsuit with prejudice against Early Warning Services, BofA, Chase, and Wells Fargo, is good for the industry and a relief to America’s three largest retail banks,” says Eric Grover, principal at the consultancy Intrepid Ventures, by email. “The notion that they weren’t adequately managing fraud on the platform and couldn’t be trusted to do so without prescriptive oversight from enlightened regulators at the CFPB was preposterous on its face.”

Dropping the action also reflects the Trump’s administration’s desire to “curb if not eliminate the CFPB”, which became “hyperpolitical and hostile to banks and the payments industry” under Chopra, Grover argues.

The CFPB is facing another potential blow to its regulatory authority as the Senate is planning to vote on repealing a rule that gives the bureau the authority to supervise digital-payment apps offered by Apple, Google, and other big tech companies. The CFPB has adopted a similar rule for financial institutions.

Overturning the rule would create a regulatory vacuum with respect to monitoring payment-app companies to ensure transactions are safe and consumers have remedies for errors and unauthorized charges, according to Bell.

“[This would create] a vast landscape of unregulated activity that will undermine consumer and business confidence in digital financial services that have inadequate oversight and virtually no protections against data harvesting and overcollection of customer data,” Bell says.

Grover counters that, while overturning the rule would further rein in the CFPB, doing so could give Big Tech firms an edge over banks when it comes to payments.

“Generally, economic activity migrates to the less-regulated domain. Big tech firms have enormous resources and customer engagement,” Grover says. “The more freedom they have to offer payments and financial services on and through their platforms, the greater the risk that traditional financial institutions are relegated to the backend, with commensurately thinner economics.”