Republic Bank Fights To Keep Offering Loan FDIC Says Is 'Unsafe'

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LOUISVILLE, Ky.-Republic Bancorp Inc. is fighting to keep a right that most other banks have surrendered.

Republic is preparing to square off against the FDIC over refund-anticipation loans, a product that regulators have pressured several other lenders to stop making because it is viewed as predatory. Scrutiny of such loans is likely to increase with the creation of the Consumer Financial Protection Bureau.

It will be a tough battle, analysts said, but one worth waging. Given Republic's health-it has been profitable throughout the downturn and is exceedingly well capitalized-it has a better chance than most against the FDIC, which claims the product, often used by low-income individuals, is unsafe and unsound.

"Their condition should give them a lot of staying power," Jeffrey C. Gerrish, a partner at Gerrish McCreary Smith, told American Banker, an affiliate of CU Journal. "I think most banks would just say 'forget it' and move on. I am glad they are challenging it."

Regulatory Prodding Forces Pull-Out

Several large banks pulled out of the business after prodding from regulators. For these institutions, the sliver of business was not worth fighting over. Also, in early 2010 the $7.9-billion Pacific Capital Bancorp Inc. sold its refund-anticipation loan business after the Office of the Comptroller of the Currency would not give it permission to make such loans. RALs were Pacific Capital's most profitable business, but its bank's capital had dwindled to a level regulators deem merely adequate, so the company was not in a position to negotiate.

For Republic, the tax business contributes 40% to 65% of revenues. The refund-anticipation loans make up about a quarter of that segment. It charges consumers $61.22 to immediately get an amount of money equal to their income tax return. The average loan is repaid in 12 days.

The $3.6-billion company has made such loans for 15 years and has no interest in stopping, Steve Trager, its president and chief executive, told American Banker. Despite consumer advocates' depiction of the product, Trager said it is reasonably priced and in demand. "We charge a one-time fee of $61.22. That's it. That is less than my cell phone bill," he said. "There are millions of taxpayers who demand that product and we've provided it very successfully."

FDIC: Product Is Unsafe & Unsound

Earlier, the FDIC issued Republic Bank and Trust Co. a notice of charges for an order to cease and desist and a notice of hearing. At the crux of the notice is the FDIC's assertion that the product is unsafe and unsound because the Internal Revenue Service said last year it would no longer give refund-anticipation lenders data about borrowers such as tax liens from unpaid child support or student loans. The IRS' rationale was that electronic filing has dramatically narrowed the window between filing and issuing a refund, making RALs unnecessary.

The FDIC and the IRS declined to comment.

With the bank not planning to consent to the order, Republic and the FDIC will go before an administrative law judge in 60 days, meaning Republic's tax business will likely not be interrupted before the end of this year's tax season.

Trager said that although the IRS debt indicator is a useful tool, his company made do without it. Republic tightened underwriting standards and mitigated risk by capping the loans at $1,500. The IRS estimates the average return to be $3,003 this year.

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