Confirmed: RALs Over for River City and Perhaps for Republic

The FDIC is shutting down refund anticipation loans and refund anticipation checks.

I just spoke to a source at River City Bank in their tax group. I asked him if could confirm that the FDIC told River City that they had to stop making refund anticipation loans.

“Yes,” he said, “it is true.”

Why?

“As far as we know, they are acting against the third party relationships.  They are concerned with tax preparers, as opposed to bank personnel.”

He was clear that the timing was not specific, and that RALs could very possibly remain available through next tax season.

“It is unofficial”, he said. “We’re hoping that they will let us go one more year, but after that, that is how it is looking at this point.”

I pressed him to say if this would be the case for other banks.  Would it be the case for Republic?

“Yes,” he said, “unofficially, that is the case.”

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The FDIC has had concern in the past about the ability of bank partners to monitor their tax preparer partners. That was the basis for their cease-and-desist order against Republic Bank, issued last year. Republic is one of the tax prep partners for Jackson Hewitt. It makes sense that the underlying justification for this new directive would spring from the same anxiety over the lack of oversight.  It is hard to make sure that scores of tax franchisees are following the law. It has been hard for the FDIC to even get the bank partners to agree to take responsibility for their staffing and training.

As an advocate, I have to say that this is very exciting.  This means that the day that we’ve been working towards for at least four years is now here.

RALs are not done.  JP Morgan Chase and HSBC will not be touched by this decision. Moreover, the source at River City emphasized that this might not be something that shuts down their participation for at least one year.

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I spoke to a source at Republic’s tax products group.  He could not confirm that Republic had received this letter.  In fact, he was somewhat upbeat.  He said that with the OCC’s release of a guidance last month, it seemed plausible that there would be a long-term future for refund loans products.

“Now that we have an official statement on how do this and be in compliance,” he said, “its much better.”

“I think it is good,” he added. “It would not be fair for the government to say that Chase and HSBC can do this, but Republic and other state-regulated banks cannot.”

He added that the FDIC had said that they would be speaking with Republic, but that action had been delayed.

It has been quite a year for regulatory attention on this market.  First, the IRS established new training standards for tax preparers.  Then, the OCC issued guidelines for refund anticipation loans. Now, it seems that the FDIC is stepping in to close the door on bank participation in RALs.

The FDIC did the same thing a few years back with payday lending. They did not make payday lending illegal, but they refused to allow their banks to fund it.  That alone impacted the payday market. Given the liquidity demands of funding RALs, a lack of bank participation would cripple the RAL market. It seems possible that without scale, that preparers would not even be able to have enough access to RALs to make them a standard offering in their stores. That situation would be predicated on Chase and HSBC exiting as well (and no new banks entering!), though.