JPMorgan Chase is prepared to sue the US government over the Zelle scam

Buried in a quarterly magazine of about 200 pages submit by JPMorgan Chase Last month there were eight words that underlined how controversial the bank’s relationship with the government has become.

The lender announced that the Consumer Financial Protection Bureau JPMorgan could punish JPMorgan for its role in Zelle, the giant peer-to-peer digital payments network. The bank is accused of failing to remove criminal accounts from its platform and compensating some scam victims, according to people who declined to be identified and spoke of an ongoing investigation.

In response, JPMorgan issued a thinly veiled threat: “The company is evaluating next steps, including litigation.”

The prospect of a bank taking its regulator to court would have been unheard of in an earlier era, according to policy experts, especially as companies feared provoking their regulators. That 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 activities caused the 2008 financial crisis, these experts say.

But a combination of factors has created an environment in the intervening years where banks and their regulators have never been further apart.

Trade groups say banks became easy targets for populist attacks from Democratic-led regulators in the wake of the financial crisis. Those on the regulators’ side point out that banks and their lobbyists are increasingly relying on them courts in Republican-dominated districts to fend off reforms and protect billions of dollars in fees at the expense of consumers.

“If you go back 15 or 20 years, the view was that it’s not particularly smart to antagonize your regulator, that litigating all these issues is just going against the hornet’s nest,” he said. Tobin Marcushead of US policy at Wolfe Research.

“The difference between how ambitious [President Joe] Biden’s regulators have been and how conservative the courts are, at least some of the courts, is historically broad,” Marcus said. “That has created so many opportunities for successful industry lawsuits against regulatory proposals.”

These forces collided this year, in what began as one of the most consequential for banking regulation since the post-2008 reforms that curbed risk-taking on Wall Street, introduced annual stress tests and became the industry’s main antagonist created, the CFPB.

In the final months of the Biden administration, efforts by a half-dozen government agencies aimed to reduce late fees on credit cards, debit transactions and overdrafts, among other things. The biggest threat to the sector was the Basel Endgame, a sweeping plan to force major banks to hold tens of billions of dollars more in capital for activities such as trading and lending.

“The industry is facing an onslaught of regulatory changes and potential legislative changes,” Marianne Lakehead of JPMorgan’s consumer bank, warned investors in May.

JPMorgan’s revelation about the CFPB investigation into Zelle comes after years of grilling by Democratic lawmakers about financial crimes on the platform. Zelle was launched in 2017 by a banking company called Early warning services in response to the threat of peer-to-peer networks, including PayPal.

The vast majority of activity in Zelle is quiet; Of the $806 billion that flowed through the network last year, only $166 million in transactions were disputed as fraud by JPMorgan customers, Bank of America And Wells Fargothe three largest players on the platform.

But the three banks collectively reimbursed only 38% of those claims, according to a July Senate report report which looked at disputed unauthorized transactions.

Banks are typically on the hook to refund fraudulent Zelle payments for which the customer did not authorize, but typically do not reimburse losses if the customer is tricked by a scammer into authorizing the payment. according to to the Electronic Funds Transfer Act.

A JPMorgan payment manager told lawmakers in July that the bank actually reimburses 100% of unauthorized transactions; the discrepancy in the Senate report’s findings comes because bank employees often determine that customers authorized the transactions.

Amid the investigation, the bank began warning Zelle users in the Chase app to “stay safe from scams” and added that customers likely won’t get refunds for fake transactions.

JPMorgan declined to comment for this article.

The company, which has grown into the largest and most profitable U.S. bank in history under CEO Jamie Dimon, is on the verge of several other skirmishes with regulators.

Thanks to his reputation for steering JPMorgan through the 2008 crisis and last year’s regional banking turmoil, Dimon could be one of the few CEOs with the status to openly criticize regulators. That was emphasized this year when Dimon led a campaign, both publicly and behind the scenes closed doorsto weaken the Basel proposal.

In May, at JPMorgan’s investor day, Dimon delegates argued that Basel and other regulations would ultimately harm rather than protect consumers.

The cumulative effect of the coming regulations would increase mortgage costs by at least $500 per year and credit card rates by 2%; According to JPMorgan, it would also force banks to charge two-thirds of consumers for checking accounts.

The message: banks will not just absorb the additional costs of regulation, but will instead pass them on to consumers.

While all these battles continue, the financial industry has seen several victories so far.

Some say the threat of a lawsuit has convinced the Federal Reserve to submit a new Basel Endgame proposal this month that would cut roughly in half the additional capital the largest institutions would be forced to hold, among other industry-friendly changes .

It is not even clear whether the watered-down version of the proposal, a long-in-the-making response to the 2008 crisis, will ever be implemented, as it will not be finalized until well after the US elections.

If Republican candidate Donald Trump wins, the rules could be further weakened or completely eliminated, and even under a Kamala Harris administration the industry could challenge the regulations in court.

That’s the banks’ approach to the CFPB credit card rule, which aimed to cap late fees at $8 per incident and was set to take effect in May.

A last ditch effort by the American Chamber of Commerce and banking trade groups have successfully delayed its implementation Judge Mark Pittman of the Northern District of Texas sided with the industry and allowed a freeze on the rule.

A key playbook for banks is to file cases in conservative jurisdictions where they are likely to prevail Lori Yuean associate professor at Columbia Business School who has studied the interplay between corporations and the legal system.

The Northern District of Texas flows into the 5th Circuit Court of Appeals, which is “known for its friendliness to industry lawsuits against regulators,” Yue said.

“This type of on-site shopping has become an established business strategy,” Yue said. “The financial sector has been particularly active this year in suing regulators.”

Almost since 2017 two-thirds of the lawsuits filed by the U.S. Chamber of Commerce challenging federal regulations have been brought in courts under the 5th Circuitaccording to an analysis of Responsible USA.

Industries dominated by a few big players — from banks to airlines, pharmaceutical companies and energy companies — tend to have well-funded trade organizations that are more likely to resist regulators, Yue added.

The polarized environment, true weakened Federal agencies are undermined by conservative courts, ultimately preserving the benefits of the largest corporations Brian Grahamco-founder of banking consultancy Klaros.

“It’s really bad in the long run because it’s sticking with whatever the regulations have been, when the reality is the world is changing,” Graham said. “This is what happens when you can’t adopt new regulations because you’re afraid you’ll be taken to court.”

— Featuring data visualizations by CNBC’s Gabriel Cortes.