The Federal Deposit Insurance Corporation has notified Republic Bank & Trust of Kentucky that its high-cost refund anticipation loans are "unsafe and unsound."
The FDIC's action against Republic Bank is based on the IRS's decision last year to no longer offer information on a taxpayer's debt indicator, the FDIC said in a statement.
The indicator was a number available from the IRS that helped tax preparers and banks make refund anticipation loans - short-term loans offered by tax preparers to clients that they later repay with their refunds - by letting them know the likelihood of whether a borrower's refund would be taken by the government for debts, such as federally-insured loans, delinquent child support and federal and state tax liens.The FDIC's notice of charges said Republic Bank made about 836,835 of the controversial loans in 2010, totaling more than $3 billion, roughly equal to the average assets of the bank.
Consumer groups applaud the FDIC's action.
"With the FDIC's decision, RAL lending may be effectively over," Chi Chi Wu, staff attorney for the National Consumer Law Center, said in a joint statement with the Community Reinvestment Association of North Carolina and Consumer Federation of America. "The FDIC-regulated banks were the 'last man standing' in making RALs. Now the FDIC has signaled that it too is forcing these last few banks out of the RAL business."
The FDIC's action follows a similar procedure by the Office of Comptroller of Currency, which issued a regulatory directive last year against HSBC – H&R Block's tax loan partner bank – prohibiting it from making the loans, Wu said.
Last year, JPMorgan Chase stopped issuing RALs, leaving only Republic and two other FDIC-regulated banks as the last RAL lenders. Republic is the RAL lender for Jackson Hewitt and Liberty Tax Service, the second and third largest tax-preparation chains in the country.
FDIC spokesman David Barr wouldn't comment on whether the agency is cracking down on loan issuers. Barr said the notice of charges that the FDIC issued against Republic Bank speaks for itself.
However, Barr told Consumer Ally the FDIC has been carefully scrutinizing whether RALs are a safe product, given the absence of an IRS debt indicator.
This year, Republic Bank is charging $61.22 for a RAL of $1,500, which translates into an APR of 149%, Wu said. RALs target low-income taxpayers. In 2009, RALs took more than $600 million from the refunds of 7.2 million American taxpayers, he said.
A hearing before an administrative law judge on the FDIC action against Republic Bank is set for mid-September, Barr told Consumer Ally.
Steve Trager, CEO of Republic Bank, said in a statement:
"Our success this tax season seems to be further evidence of the desirability of our products and the safety and soundness of our tax business. At this time, we just want a fair review of the safety and soundness of our tax business, which the administrative process is designed to provide, without fear of retaliation.
"We completely support the right of the FDIC and other bank regulators to thoroughly examine Republic Bank and other financial institutions in order to protect the safety and soundness of our industry and the consumers we serve. However, no regulator or branch of government should be immune from review and those that seek such review should have the opportunity to do so without fear of harassment and intimidation."
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