In a major development in financial litigation, a federal judge has rejected Capital One Financial Corp’s proposed $425 million settlement with depositors, stating that the payout was far too small and would leave millions of account holders at a continued disadvantage. The ruling highlights ongoing concerns about fair banking practices and the responsibility of financial institutions to deliver promised returns to their customers.

Background: Capital One High-Interest Account Controversy

Capital One, headquartered in McLean, Virginia, had reached a settlement to resolve claims from account holders who alleged that they were short-changed on interest rates. The plaintiffs argued that the bank froze rates at 0.3% on its “high interest” 360 Savings accounts,” while simultaneously offering rates exceeding 4% to new customers opening similarly named 360 Performance Savings accounts.

The class-action lawsuit claimed that these practices misled depositors and caused significant financial harm by denying them fair returns on their savings.

Details of the Proposed Settlement

Under the rejected settlement, Capital One had agreed to pay:

• $300 million to cover unpaid interest owed to 360 Savings account holders.
• An additional $125 million contingent on account holders maintaining their accounts.

Despite the sizable nominal payout, U.S. District Judge David Novak of Alexandria, Virginia, ruled that the settlement was insufficient, saying it failed to provide adequate relief to depositors and would perpetuate ongoing financial harm.

Judge Novak: Depositors Deserve “Significantly Greater Relief”

Judge Novak emphasized that the settlement would only compensate depositors for a fraction of their losses—less than 10% of actual damages. In his decision, he wrote:

“These millions of class members would continue to experience the same financial harm that they have already experienced for years.”

The judge ordered both Capital One and the plaintiffs to resume settlement negotiations to develop a more equitable resolution that fully addresses the harm caused by the bank’s practices.

Opposition from States and Regulatory Concerns

The settlement faced opposition from 18 U.S. states, including New York, which is pursuing its own legal action against Capital One for the same issues. The states argued that the effective interest rate for 360 Savings depositors would be only 0.78%, compared to 3.4% earned by 360 Performance Savings account holders—effectively saving Capital One more than $2.5 billion at the expense of customers.

In addition, the U.S. Consumer Financial Protection Bureau (CFPB) had previously sued Capital One over the 360 Savings accounts. However, the CFPB later dropped the case as the agency largely ended its enforcement activities on this matter.

What This Means for Depositors and Capital One

The ruling signals that courts may require financial institutions to provide more substantial remedies when their practices result in widespread customer harm. For Capital One depositors, this could mean significantly higher payouts if a revised settlement is agreed upon.

For the bank, it underscores the legal and reputational risks associated with misleading interest rate practices, especially as regulators and state authorities continue to scrutinize its actions.

Next Steps

Both parties have been ordered to return to the negotiating table to resolve the judge’s concerns. Until a new agreement is reached, millions of 360 Savings account holders remain undercompensated relative to their peers with 360 Performance Savings accounts.