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Capital One (COF) Accused of Charging Illegal Overdraft Fee

Zacks Equity Research

Capital One Financial Corporation COF has been accused of charging illegal overdraft fees from customers. Per a Reuters report, a federal appeals court recently revived the proposed class-action lawsuit, which had been filed against the company earlier for its wrongdoing.

According to the 2nd U.S. Circuit Court of Appeals in Manhattan, the rules for charging overdraft fee of Capital One were quite confusing and ambiguous. Thus, a lower court judge had wrongly dismissed a breach of contract claim.

Ideally, if a bank pays their merchant for purchases made by its customers, who do not have enough money in their accounts, it charges an overdraft fee of nearly $35.

There can be times when the transaction settlement does not take place immediately. Settlement happens after a merchant requests payment. The process might take a few days sometimes.

Thus, the overdraft fee to a large extent depends on how and when the transaction is settled. For example, a customer has only $100 in his account and makes five purchases of $10 each and then makes a purchase of $100. If the transactions are settled in the order they were placed, the customer would have to pay only one overdraft fee. However, if the $100 purchase was settled first, the customer would have to face five overdraft fees.

Tawanna Roberts, a Capital One customer in the New York City borough of the Bronx, who is among the plaintiff, accused Capital One, saying that the company wrongly imposed overdraft fees when it settled transactions i.e. at the time of making the payment to its merchants instead of when it authorized transactions at the cash register.

Notably, the Consumer Financial Protection Bureau said that the total overdraft and bounced check fees in the United States was about $15 billion in 2016.

Capital One said to its customers that they could “elect to pay checks and other items drawn on your deposit account or to permit automatic bill payments and withdrawals against your account for an amount in excess of your available balance (an ‘Overdraft’).”

However, the appeals court, comprising three judges, thought that it was “equally reasonable” to get an understanding of the term “overdraft” in connection with Capital One’s decision of making payments at the time of authorization, or the payment itself at the time of settlement.

Hence, it returned the case to U.S. District Judge Lorna Schofield in Manhattan for further proceedings. The appeals court has upheld Schofield’s dismissal of three other claims.

Capital One did not comment on the decision.

Shares of Capital One have gained 8.8% so far this year, outperforming 1.3% growth of the industry it belongs to.

Currently, Capital One carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the finance space are First Bancorp FBNC, Farmers Capital Bank Corporation FFKT and Capstar Financial Holdings, Inc. CSTR.

First Bancorp’s earnings estimate has been revised 9.7% upward for the current year over the last 60 days. In the past year, the company’s share price has been up 50.3%. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Farmers Capital Bank has a Zacks Rank #2 (Buy). Its earnings estimate for the current year has been revised 5.3% upward over the last 60 days. The stock has risen 14.5% in a year.

Capstar Financial also has a Zacks Rank of 2. Its earnings estimate has been revised 71.4% upward over the last 60 days. The company’s shares have increased nearly 7.1% in a year.

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