What The Zelle Is Going On Here?

May 25, 2022 at 7:00 am Leave a comment

That is the question yours truly has been pondering since I read the complaint in a class action lawsuit recently filed against Navy Federal Credit Union. Those of you who promote the use of payment apps should watch this case closely because if it is successful, it will provide a roadmap to sue financial institutions for years to come. The case is Wilkins v. Navy Federal Credit Union, case number 2:22-cv-02916 which was recently highlighted by Law360.

Zelle is a payment app started in 2017 by a group of the nation’s largest banks. Like Venmo, it provides members a convenient way of electronically transferring funds to other network users. Typically, these transactions are facilitated with the use of a member’s debit card.

The plaintiff in this case received a voicemail from her utility company putatively informing her that her electric bill was overdue and that if it did not receive an immediate payment that her service could be cut off. The voicemail provided the plaintiff with a number to “Zelle transfer” her overdue balance. In fact, New Jersey had a moratorium on utility payments and PSE&G would not make such a request, but the panicked plaintiff sent fraudsters $998 using Zelle believing she was transferring the money to the utility. When she called up the phony utility number, she was told that they never received the initial transfer and that she should send an additional payment.

This is the part that has me bemused and bewildered: the plaintiff isn’t contending that the credit union is strictly liable for the transaction under Regulation E, which would most likely lead to a legal dead end; instead, they argue that the credit union deceptively marketed Zelle to its members by not adequately explaining the risks of using Zelle. She argues that, had she been aware of the risks inherent in using Zelle, she never would have signed up for the product in the first place.

This is a not-so-subtle attempt to evade Regulation E, which generally provides reimbursement for consumers whose debit cards are used without their permission [§ 1005.2(m)].  In this case, Navy can argue that the debit card transaction used to facilitate the fraudulent conduct was clearly authorized by the member who initiated it using Zelle.  While the CFPB has suggested that this type of transaction is in fact subject to Regulation E’s protections, the Bureau’s interpretation is open to dispute.  In contrast, if the plaintiffs successfully sue Navy Federal, the nettlesome issue of what the law and regulation actually requires becomes largely irrelevant.

In an ideal world, Congress would step in and update the Electronic Funds Transfer Act (EFTA) to reflect the radically different world we now bank in, as compared to when the law was passed in the late 70s.  Of course, the world is not ideal which means that it is time to start reviewing your account and marketing language to see if they are vulnerable to the same legal arguments being made against Navy FCU.

Entry filed under: Legal Watch, Regulatory, Technology. Tags: , , , , .

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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