Bank of America has agreed to settle a lawsuit filed by three New Jersey residents who claimed the bank froze their prepaid debit cards during the COVID-19 pandemic, blocking them from accessing unemployment benefits.
The plaintiffs alleged that the $3.5 trillion-asset bank did not have adequate systems to combat fraud and illegally used a fraud filter that blocked customers from accessing their money.
On Friday, lawyers for Bank of America wrote in a letter to U.S. District Judge Brian Martinotti that the two sides have reached a "settlement in principle." The letter, which did not disclose how much money BofA has agreed to pay, came nine days after a scheduled mediation session in the case.
In June, Martinotti partially granted BofA's motion to dismiss the case, but he allowed certain alleged violations of federal due process to move forward.
Martinotti wrote at the time that the plaintiffs' claim for deprivation of due process was "plausible on its face," pointing partly to allegations that Bank of America denied the plaintiffs access to their accounts even after they re-verified their identities.
The plaintiffs had alleged that BofA was acting in a public function in its role administering the distribution of unemployment benefits for New Jersey's Department of Labor & Workforce Development. They claimed that the Charlotte, North Carolina-based bank did not adequately investigate allegations of fraud, blocked cardholders from accessing their accounts and failed to provide provisional credit.
The lawsuit was filed in 2021 in the U.S. District Court for the District of New Jersey.
BofA, which had denied the plaintiffs' allegations, declined to comment Monday on the settlement agreement.
In July 2022, BofA was fined $225 million by federal regulators for botching the disbursement of state unemployment benefits and unlawfully freezing consumer accounts, particularly in California. The Office of the Comptroller of the Currency and the Consumer Financial Protection Bureau found that BofA had not implemented any system of oversight to monitor compliance with applicable laws and regulations.
Bill Halldin, a BofA spokesman, said at the time of the regulatory action that the bank had partnered with its state clients to identify and fight fraud during the pandemic. "This action arose despite the government's own acknowledgment that the unemployment program expansion during the pandemic created unprecedented criminal activity where illegal applicants were able to get states to approve tens of billions of dollars in payments," Halldin said.
BofA still faces lawsuits in Arizona, California, Maryland and Nevada related to prepaid debit card pandemic fraud. New Jersey and Arizona issued a small number of prepaid debit cards compared with California, which had rampant fraud on cards that were sent through the mail and stolen. Many other states were not targeted for fraud because they offered direct deposit to beneficiaries,
The pending cases fault BofA for using cheaper, less secure magnetic stripes that were prone to fraud, rather than adopting EMV chip technology that is the industry standard.
Back in 2020, BofA held contracts with 12 states to provide government benefits on prepaid debit cards. But the massive pandemic-era fraud quickly overwhelmed state agencies and the bank. Regulators said BofA failed to respond to tens of thousands of cardholders who reported unauthorized transactions that drained their accounts. In an effort to combat the fraud, BofA froze the accounts of thousands of legitimate beneficiaries, who were blocked from accessing their money.
Earlier this year, BofA ended its involvement in distributing government unemployment benefits.
