FDIC issues Cease and Desist to Republic (RBCAA)

The FDIC has issued a cease and desist letter against Republic Bank of Kentucky (RBCAA).  The issues concerns the funding of refund anticipation loans (RALs) by RBCAA.  The FDIC is asserting that Republic does not have adequate safeguards in place to thwart fraud among the tax preparers that submit their refund applications to RBCAA.

RBCAA also got its Community Reinvestment Act Evaluation today.  The company did well on services and investments, earning a high satisfactory rating.  However, on the lending test, RBCAA got a “needs to improve.  A “needs to improve” is a very bad score.  In recent years, less than 3 percent of all ratings have been as low as this.

RBCAA would be stung if they were unable to continue with their RAL lending.  Although the bank has regular branches in Louisville, they draw a substantial portion of their business from their tax refund services (TRS) segment.  In 2007, TRS consisted of 11 percent of net income.  Its steady income, too, so going forward it might be a hard thing to give up.

Losses on what would appear to be a relatively risk-less business, given that the Federal government provides underwriting to cue Republic if a filer has an outstanding tax lien, were actually 1.14 percent of TRS revenue in 2007.

The RALs are troubled by the lack of a healthy securitization market, more broadly.  It is not yet evident how investors will respond to short-term securities made up of RAL loans for this year.

The market is shrugging off the news today.  RBCAA is down about 2 percent.