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FDIC and Republic Agree: No RALs After April '12

Adam Rust's picture

Posted December 9, 2011

Republic Bank & Trust (ticker:RBCAA) says that it has reached an agreement with the FDIC to terminate their refund anticipation loan ("RAL") program after the end of the next tax season.

Prior to this morning's 8-k, Republic and the FDIC were on course to settle their disagreement about

Republic's Tax Refund Solutions division through a legal hearing in Feb. 2012. The FDIC had ordered Republic Bank & Trust to cease its RALs. Republic's push back on that was the issue at hand for the hearing. Republic filed a concurrent lawsuit against the FDIC.  With today's news, the need for hearing is moot. In fact, part of the agreement specifically says that both sides will drop their claims.

Neither the FDIC nor Republic probably had one percent certainty over how the administrative law judge ("ALJ") would decide their disagreement. With today's 8-k, though, my reaction is that Republic seems to have blinked.

The settlement gives Republic a few bones. For one, Republic is allowed to prospect for new transactions. This means that they will be able to pursue acquisitions, which as long as they are sound, should be able to gain approval from the FDIC. Republic will get to record $1.1 million in pre-tax income this quarter, because the new agreement drops the FDIC's penalty against the bank to $900,000. It had formerly been $2 million. Last, the FDIC will suspend the 2009 cease-and-desist order that it placed against Republic.

Those rewards probably don't do much to blunt the bitter taste of the FDIC's sanctions.

Republic has to drop its RAL program altogether by April 30th, 2012. Although Republic operates an extensive set of traditional financial services - mortgages, small business lending, and other activities - the RAL business is its most lucrative. Non-interest income within Republic's Tax Refund Solutions ("TRS") division was $59 million in 2010. Overall, the bank recorded $64 million in net income across its entire operations in 2010.

Republic will still offer refund anticipation checks. However, they will do so under extensive scrutiny from the IRS. Most of the new agreements are essentially the dictates within the old cease-and-desist. Now, however, the solutions for the problems documented in the 2009 order are now operationalized. Republic is responsible for providing positive proof that their partner preparers are adequately trained. In turn, the FDIC says it will verify that training by conduction spot checks at ten percent of Republic's partner tax prep affiliates. All of their partner preparers are going to have to face additional monitoring to prove that they are preparing returns well. Any mock-up of a new advertisement for tax settlement products will have to get the FDIC's approval, as well.

In short, the FDIC is going to be the new drill sergeant.

Republic even has to let the FDIC if they are doing well. If the volume of tax settlement products goes up by a threshold relative to last year (25 percent), then the FDIC has to know about it. If Republic wants to offer any new kind of tax settlement product, then again, the FDIC has to know about it. Do you get the trend here? If Republic contemplates doing anything more than changing the doorbells with the Tax Refund Solutions division, then FDIC has to know about it.

The decision culminates years of efforts by regulators and consumer advocates to eliminate a product whose value proposition rested on several specious claims: first, that RAL consumers were so desperate for money that virtually any price was legitimate. Second, that everyone should ignore the constant fraud that accompanied tax advance loans as a series of unrelated one-time problems and not empirical evidence of a widespread lack of training among partner preparers. Third, that the quality and price of preparation was not factored by the availability of tax products.

The price of RALs varied every year. A single issuer might have several different price schedules in their agreements with different preparers. Without exception, the fees were high. Moreover, the availability of a RAL often allowed preparers to charge more for their tax prep.