Who is Minding the Hen House at Republic?

The FDIC had issued a cease and desist order for Republic Bank and its RAL business.  Wait – it’s not a clean sweep, however.  The cease and desist does not mean that it can not make RALs but that it applies to the practices and policies that lead to the violations.  Yet to correct their deficiencies will be hard and expensive.

For consumers, this is a very important development.  Refund Anticipation Loans (RALs) are utilized by many tax filers, the majority of whom are low income. RALs drain the impact of our nation’s leading anti-poverty program, the Earned Income Tax Credit.  By providing so many RALs, Republic’s business plan intercepts public funds that have been designated for a stated object of federal policy. RALs are a unintended recipient of these funds.  It has raised of some some legislators, including Charles Schumer (D-NY) and Daniel Akaka (D-HA). A bill seeking regulatory constraints upon RALs has been co-sponsored by Akaka, along with Max Baucus (D-MT), Mark Pryor (D-AR), and Charles Grassley (R-IA).

This is a copy of the actual order. (pdf)

The FDIC has created a costly and high standard of compliance, which may lay the groundwork for a total cease and desist if they can’t meet the standard.   Highlights include:

1)  Training all of their RAL originators on all relevant compliance issues. And not just the agency, but everyone in the agency that talks with a customer.   This is in effect establishing a minimum training program for tax preparers who use RALs.  The FDIC is doing what the IRS should have in requiring standards.  This will be a huge challenge.  Sure, a national company like Jackson Hewitt can demonstrate a standard training program implemented for its employees and franchises is possible.  How will they certify a training program on TILA, ECOA, Reg B, etc for all of the mom-and-pop RAL providers?  Go online, read and take a test maybe?

2)  Auditing at least 10 percent of its RAL providers.  Auditing includes every type of review  – testing, site visits, statistical analysis for compliance with all consumer laws.  If the outside review finds problems, then they have to be corrected.  Holy cow, an audit system for tax preparers paid for by Republic Bank.  Thank you Republic.

3)  Auditing Republic Bank RAL operations. So in addition to auditing the RAL providers, Republic pays for an external auditor to audit the bank – twice a year.  The FDIC has to approve the audit standards and performance.  Sounds like the FDIC just had Republic pay for its own oversight so the FDIC won’t have to.

4)  The board of directors has to sign off on committee meeting minutes, audits, reviews, plan development. The FDIC talks about management as if it is not to be trusted.   If someone disagrees it has to be noted.  The board of directors has a level of a high level of involvement.  Something is going on, because the board of directors is in large part – Management!  Of the ten board members, two are employees and three are Tragers.  That leaves five directors who are independent, according to the definition of the SEC.  T Insiders control 51.87 percent of shares, according to Thomson. There are two classes of voting shares as well, with preferred shares given a voting power that is much greater than common.  This is one more step that insulates RBCAA from external influence.

Is the FDIC trying to highlight the conflict of interest of Steve Trager serving as both CEO and Chairman? The FDIC is asking the board to oversee management.  Will that work? It is hard to know for certain. Still, the FDIC is asking Republic’s board to oversee a reorientation of its business, and that will be difficult as management dominates the board.

There is no end date on the order.  This order is good for as long as the FDIC feels like it.