Groups Laud FDIC Move Against Republic Bancorp Tax-Refund Loans

Consumer groups Friday welcomed news that the Federal Deposit Insurance Corp. has notified Kentucky-based Republic Bank & Trust that tax-refund anticipation loans are "unsafe and unsound" now that the government is no longer providing a key underwriting tool.

The FDIC move is the latest example of U.S. federal regulators cracking down on the high-cost loans, which are offered by tax preparers and secured by a taxpayer's expected refund.

While the loans allow taxpayers to avoid waiting for their refund check to arrive in the mail, consumer advocates have long fought the short-term loans because they can come with triple-digit interest rates and excessive fees, which they say can ensnare unsuspecting consumers into damaging debt traps.

This tax-filing season, the refund loans will be harder to find and probably more expensive largely due to several steps initiated by federal officials.

Consumer advocates Friday said the FDIC's latest correspondence with the Republic Bancorp Inc. (RBCAA) unit is a key victory in the fight against these loans.

"With the FDIC's decision, RAL (refund anticipation loan) lending may be effectively over," National Consumer Law Center Staff Attorney Chi Chi Wu said in a statement. "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.

Republic Bancorp President and Chief Executive Steve Trager said the FDIC notice has no immediate impact on the company's ability to facilitate refund loans in the current 2011 tax season and it doesn't anticipate making any changes.

"The FDIC in Washington speculates that making RALs without this debt indicator is unsafe and unsound, and we again, respectfully disagree with their decision and so do many others," he said. "We've been offering this product to millions of taxpayers over the last 15 years and the primary constant is that taxpayers want this product and the fee that we charge--$61.22--seems to be a very reasonable fee and very attractive to taxpayers.

Republic, which provides refund loans for Jackson Hewitt Tax Service Inc. (JTX), noted in a Securities and Exchange Commission filing that it received a notice from the FDIC on Feb. 10 about its refund anticipation loan program.

The FDIC raised concern about the company issuing refund loans without a key debt indicator tool from the Internal Revenue Service, according to the filing. Last year, the IRS said it would stop offering the underwriting tool, a policy shift that seems to be aiding efforts to combat the use of the refund loans.

"Contrary to an evaluation by the Kentucky Department of Financial Institutions, the FDIC's notice contends that the bank's practice of originating RALs without the benefit of the DI (debt indicator) from the IRS is unsafe and unsound," the company wrote in the filing.

Still, Republic noted that it is entitled to a hearing before an administrative law judge.

It also would have the right to appeal a final order in the U.S. Court of Appeals for the Sixth Circuit, it said.

"The board and management believe the charges from the FDIC to be without merit and intend to vigorously defend the Bank's right to offer a legal product to those who wish to purchase the product," the company said in the filing.

Meanwhile, several banks have exited the business amid heightened regulatory scrutiny.

J.P. Morgan Chase & Co. (JPM) last year backed out of offering tax preparers financing for the loans.

Pacific Capital Bancorp (PCBC) sold its refund anticipation loan business last year, blaming changes in the regulatory and legislative environments. The company in 2009 said the Office of the Comptroller of the Currency did not give its banking unit approval to originate and offer the loans.

In October 2010, Meta Financial Group Inc. (CASH) said regulators blocked its MetaBank unit from making short-term payday and tax refund loans.

Also, H&R Block Inc. (HRB), the nation's biggest tax preparer, disclosed in December that in the wake of a directive from the Office of Comptroller of Currency, HSBC Holdings PLC (HBC, HSBA.LN) ended its long-term contract for refund anticipation loans.

"We are pleased that the bank regulators may have effectively put an end to loans that siphon off hundreds of millions in taxpayers' hard-earned money and federal benefits meant to lift hard-working Americans out of poverty," said Jean Ann Fox, director of financial services for the Consumer Federation of America.

-By Maya Jackson Randall, Dow Jones Newswires; 202-862-6687, maya.jackson-randall@dowjones.com

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