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FDIC: RALs are Unsafe, Unsound

Adam Rust's picture

Posted February 11, 2011

The FDIC sent a "Notice of Charges" to Republic Bancorp, asserting that it considers its refund anticipation loan (RAL) program to be  "unsafe and unsound." The filing, which RBCAA published overnight, establishes the possibility of an administrative hearing for Republic to contest the FDIC's Notice in the next 60 days. The following is an excerpt from Republic's 8-K:

The Federal Deposit Insurance Corporation (the "FDIC") has communicated to the Bank in the past that, in its opinion, RALs, which are used by millions of taxpayers nationwide each year, are not of value to the end-users...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 from the IRS is unsafe and unsound.

This is a punch that is coming two months earlier than anyone would have expected. It wouldn't have been a surprise if this announcement came on April 18th. Then again, there probably isn't a lot of difference. The RAL season is virtually over by the third week in February. A final notice, if reached, is not due until 90 days after the Administrative Hearing.

Republic countered that has very high capital ratios.

Nevertheless, this could mean that the beginning of the end is finally here. The FDIC is the primary regulator not just for Republic, but also for both River City Bancorp and for Ohio Valley Bancorp. Those three are the only remaining RAL originators left.

Jackson Hewitt shares dropped 15 percent at the opening bell this morning, and are now trading at around $1.50 per share. It is interesting to note how JTX has been unable to convince investors that it can capitalize on having loans at a time when Block does not. Jackson Hewitt "soared" to $2.30 in the days following the HSBC decision.

Liberty Tax Service is another large chain that relies upon Republic Bancorp as its source for its refund loans. Liberty is not obligated to acknowledge the Notices because it is not a publicly traded entity.

Neither Ohio Valley Bancorp or River City Bancorp, the other two providers of refund anticipation loans, have made an announcement this morning.