The U.S. District Judge in Miami has given the preliminary approval for the payment of a total of $199.5 million by The Toronto-Dominion Bank (TD) and Citizens Bank – a unit of The Royal Bank of Scotland Group plc (RBS). The payment relates to the settlement of class lawsuits filed by the customers of these companies for charging disproportionate overdraft fees.
As a part of the settlement deal, TD Bank will pay $62 million to its customers in 15 states and the District of Columbia. Likewise, Citizens will have to pay $137.5 million to customers across the nation.
The case related to TD Bank was settled in May, while Citizens agreed to settle the lawsuit in April. However, both awaited court approvals.
The customers had accused TD Bank and Citizens of regularly dealing with transactions pertaining to debit cards in the order of the magnitude of the transaction rather than following the chronological order. The intentional malpractices resulted in faster negative balances in customers’ accounts, leading to a larger number of overdrawn transactions, each of which then became chargeable. Hence, overdraft fees piled up in excess.
Moreover, TD Bank was accused of violating the U.S. Federal Reserve’s regulation of obtaining customer approval before charging any overdraft fees. Earlier, in 2010, the Fed made it mandatory for the banks to timely reveal the charging of overdraft fees to the customers and to get their approval before initiating the overdraft facility on the debit cards.
TD Bank and Citizens are not the only institutions to settle lawsuits related to overdraft fees. Over a dozen banks have already settled or are in the process of settling similar charges.
The major banks who have already resolved the issue include JPMorgan Chase & Co. (JPM), U.S. Bancorp (USB), Bank of America Corporation (BAC), Commerce Bancshares Inc. (CBSH), Wells Fargo & Co. (WFC) and PNC Financial Services Group Inc. (PNC). Other large financial institutions under the purview of such charges that have not yet come up with the settlement include Citigroup Inc. (C) and Capital One Financial Corp. (COF).
The settlements of such claims are bound to affect the company’s financials, but at the same time it will restore customers’ confidence in the federal laws to some extent.
Though the number of banks involved in charging unfair overdraft fees has been increasing, the steps taken by the regulators are expected to curb such unfair practices going forward. Moreover, the banks will be dissuaded from such misconduct as a result of rising litigation costs as more customers are now opposing such unjust ways of the banks.
Currently, TD Bank retains its Zacks #2 Rank, which translates into a short-term Buy rating, while The Royal Bank of Scotland retains a Zacks #3 Rank, which translates into a short-term Hold rating.
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