Bank executives aired their concerns about expanding a provision of the Electronic Funds Transfer Act in a Senate hearing earlier this week.

Those executives said a proposal by Sen. Richard Blumenthal of Connecticut to expand Regulation E of the 2016 law wouldn’t address the source of scams and would encourage customers to take advantage of the rules.

Regulation E requires banks to reimburse customers for fraudulent or unauthorized transactions, such as when a crook hacks into your bank account and transfers money out of it. Blumenthal wants the provision to include authorized transactions made after a consumer is duped into sending money to a scammer.

Blumenthal, a Democrat, called for the change during a hearing of the Senate Committee on Homeland Security and Governmental Affairs Tuesday evening.

Lawmakers and consumer advocates have for years called on Zelle, a peer-to-peer payments service, to improve fraud protection and do more to fight scams and make consumers whole. A report released by Senator Elizabeth Warren’s office in 2022 found rampant fraud on Zelle’s network. Tuesday’s hearing was the second Senate hearing this year involving fraud or scams on Zelle’s network.

If a bad actor convinces someone to send them money under false pretenses — say a scammer poses as a police officer and tells a consumer to send money to post bail for a relative — the consumer should get the money back, Blumenthal said.

Scammers are also known to build relationships — romantic or professional — with unsuspecting consumers before asking for money through payment networks like Zelle, a peer-to-peer payment channel operated by the bank-owned company Early Warning Services.

Executives from JP Morgan Chase, Bank of America, Wells Fargo and Early Warnings Services testified Tuesday. Adam Vancini, executive vice president and head of payments for consumer, small and business banking for Wells Fargo, said expanding Regulation E to include authorized transfers would encourage customers to game the system by falsely claiming they were scammed.

"I think we need to be thoughtful and think about unintended consequences," he said at the hearing.

Customers of those three banks who are victimized by scammers are rarely reimbursed, a report released by the Homeland Security Committee on Tuesday said. In 2020, the most recent year for which statistics were available, JPMorgan Chase received consumer reports of more than 41,000 scams, but only reimbursed three transactions, and Wells Fargo did not issue any reimbursements after receiving more than 21,000 scam reports that year, according to the report.

JPMorgan Chase and Wells Fargo executives told Blumenthal that each claim is investigated individually.

Working with law enforcement to head off scams before consumers send money is a better solution, said Melissa Feldsher, head of payments and lending innovation and loyalty at JPMorgan Chase.

"The best way to protect customers from fraud and scams is to prevent criminals from carrying out their schemes in the first place," she said.

Undeterred, Blumenthal continued to argue for an expansion of regulation E.

"This issue of reimbursement is fundamental," Blumenthal said. When banks are required to reimburse scam victims, "you have a financial incentive to impose stronger measures” to fight scams.

Blumenthal noted that the report released by his office Tuesday included proposals encouraging banks and payment networks to share information with law enforcement in real-time to better combat fraud and scams.

For their part, Early Warning Services CEO Cameron Fowler and bank executives who testified Tuesday said they already warn customers about potential scams, flag suspicious transactions and push customers to verify that they’re sending money to a trusted recipient.

Blumenthal, however, noted that those safeguards don’t do much good if a consumer is tricked into thinking a relative is in danger, or if a scammer convinces a victim they are trustworthy.

In June, Zelle changed its rules to reimburse scam victims in some circumstances, Early Warning Services CEO Cameron Fowler noted, and he said the network issues reimbursements in 90% of those cases. However, Blumenthal said Zelle only considers scams that meet a narrow set or requirements, such as scams that involve a criminal posing as a government official or a police officer.

Fowler also underscored the overall integrity of the system, maintaining that sending money through Zelle is safer than paying in cash.

"99.9 percent of Zelle transactions are completed without any report of fraud or scam," he said, repeating past statements made by company spokespeople in response to critics like Sen. Warren