FILE PHOTO: Signage is seen outside a Capital One Bank in Manhattan, New York, U.S., November 12, 2021. REUTERS/Andrew Kelly/File Photo

By Jonathan Stempel

(Reuters) -A bipartisan group of 18 U.S. states told a federal judge that Capital One's $425 million settlement with depositors who felt cheated out of high interest rates should be rejected, because it lets the bank continue short-changing customers.

Led by New York Attorney General Letitia James, the states objected in a filing made public on Wednesday in federal court in Alexandria, Virginia, where U.S. District Judge David Novak granted preliminary settlement approval in June.

The May 16 settlement addressed claims that Capital One froze rates at 0.3% on its "high interest" 360 Savings accounts, while quietly offering rates above 4% to new customers on similarly named 360 Performance Savings accounts.

Capital One, based in McLean, Virginia, agreed to pay 360 Savings depositors $300 million to cover interest they missed out on, plus another $125 million in interest if the depositors still held their accounts. It denied wrongdoing.

STATES SAY SETTLEMENT WOULD SAVE BANK MORE THAN $2.5 BILLION

The states, however, said 360 Savings depositors would earn just 0.78% under their class-action settlement, below the 3.5% that Capital One now offers 360 Performance Savings depositors.

According to the states, this would save the sixth-largest U.S. commercial bank more than $2.5 billion without requiring it to change its behavior, while providing typical depositors just $54 of the $717 in interest lost.

The states also said Novak should reject Capital One's claim that the settlement preempted James' own lawsuit on behalf of New Yorkers with 360 Savings accounts.

In a statement, Capital One said it "strongly denies" the depositors' allegations, but called the $425 million accord "reasonable" given the risks of more litigation.

Philip Black, a lawyer for the depositors, called the accord a "good deal" for them in light of the same risks, and said delaying approval because of James' lawsuit did not make sense.

Black also said a website for the settlement provides a toll-free phone number for switching accounts.

CFPB DROPPED ITS OWN CASE

The settlement covers depositors with 360 Savings accounts at any time since September 18, 2019. A hearing to consider final settlement approval is scheduled for November 6.

Other states objecting to the settlement include Arizona, California, Colorado, Connecticut, Hawaii, Illinois, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, Ohio, Oregon, Rhode Island and Washington.

The U.S. Consumer Financial Protection Bureau filed a similar lawsuit against Capital One in January.

It dropped that case in February, after President Donald Trump took office and the White House largely ended the CFPB's enforcement activity.

The case is In re Capital One 360 Savings Account Interest Rate Litigation, U.S. District Court, Eastern District of Virginia, No. 24-md-03111.

(Reporting by Jonathan Stempel in New York; Editing by Leslie Adler and Diane Craft)