February 1, 2024 — Testimony

Carla Sanchez-Adams, NCLC Senior Staff Attorney, testified on February 1, 2024, before the U.S. Senate Committee on Banking, Housing, and Urban Affairs  on “Examining Scams and Fraud in the Banking System and Their Impact on Consumers.” 

Her testimony explained that payment fraud impacts all Americans across many communities. But the impacts of fraud are most keenly felt by certain vulnerable populations such as older Americans, low-income consumers, and minorities.

Consumers are plagued by problems with unauthorized transactions as well as fraudulently induced transactions over peer-to-peer payment applications, bank-to-bank wire transfers, check alterations and forgeries, and Electronic Benefits Transfer card skimming, The increased ease and use of mobile and online banking through technological advancement have also simultaneously provided opportunities for scammers to exploit newer payment technologies. However, obtaining a complete and holistic picture of the volume, loss, and threat of payment fraud is difficult because of the fragmented way we collect this data.

The financial institutions that design and run these payment systems, including the financial institutions that hold the accounts of scammers and money mules that receive fraudulent payments, need to take more responsibility for making these systems safe and protecting consumers. Given the increasing sophistication of fraud schemes, warnings to consumers are insufficient. If payment system participants take responsibility for protecting consumers, as they are doing in the United Kingdom, they will have the incentive to leverage the latest innovative technologies to prevent and detect fraud, making the entire system safe. At the same time, any attempts to combat fraud must also be tempered with policies and procedures that protect innocent consumers who do not engage in payment fraud but whose funds might be frozen for extended periods of time.

To combat payment fraud, we recommend addressing the current gaps and ambiguities in the Electronic Funds Transfer Act that leave consumers unprotected. These include:

  • Ensuring consumers are protected from liability when they are defrauded into initiating a transfer;
  • Allowing the consumer’s financial institution, after crediting the consumer for a fraudulent transfer, to be reimbursed by the financial institution that allowed the scammer to receive the fraudulent payment;
  • Eliminating the exemption for bank wire transfers and electronic transfers authorized by telephone call, bringing those transfers within the EFTA and its protections against unauthorized transfers and errors;
  • Eliminating the exclusion of Electronic Benefit Transfer cards from the EFTA, bringing those transfers within the EFTA and its protections against unauthorized transfers and errors;
  • Clarifying that the EFTA’s error resolution procedures apply when the consumer makes a mistake, such as in amount or recipient;
  • Clarifying that the error resolution duties under the EFTA apply if a consumer’s account is frozen or closed or the consumer is otherwise unable to access their funds, with an exception if the consumer was denied access due to a court order or law enforcement or the consumer obtained the funds through unlawful or fraudulent means; and
  • Considering whether consumer protections for checks should be included in the EFTA.

Federal regulators should also take additional steps to address fraud and protect innocent consumers who are harmed by aggressive fraud reporting. For example, federal regulators should:

  • Devote more attention to the responsibilities of institutions that receive fraudulent payments, including stepping up enforcement of Bank Secrecy Act /Anti-Money Laundering obligations;
  • Establish interagency collaboration to assist consumers with reporting fraud, collecting data on fraud, and establishing systems; and
  • Provide guidance to financial institutions about the timelines and procedures for consumers to regain access to improperly frozen funds and clarify what information can and should be given to accountholders regarding account closures and freezes.