The Associated Press March 2, 2011, 8:56AM ET

Republic Bank in Ky. sues FDIC over refund loans

A Kentucky bank claims federal regulators are overstepping their authority in an attempt to end the practice of lending money based on future anticipated tax returns.

Republic Bank & Trust Co., wants a judge to stop the Federal Deposit Insurance Corp. from trying to end the loans, called Refund Anticipation Loans or RAL, because the law doesn't give regulators the power to do so.

Republic Bank, based in Louisville, sued the FDIC in U.S. District Court on Tuesday.

The suit is the latest front in a battle between the bank and federal regulators. The FDIC is pursuing an administrative case against Republic Bank, calling the tax return loan practice "unsafe and unsound."

FDIC spokesman David Barr would not comment on Republic Bank's lawsuit, but said the agency has been reviewing the loan practice in question.

"The FDIC has been carefully scrutinizing whether Refund Anticipation Loans are a safe and sound product given the absence of a debt indicator due to the IRS decision," Barr said.

In the lawsuit, bank attorney Sheryl Snyder said the FDIC lacks the authority to stop the lending because no law gives it the power to do so. Instead, Snyder said, regulators have taken it upon themselves to effectively snuff out RALs through administrative enforcement actions.

"The FDIC has undertaken what appears to be a concerted effort to eliminate RALs -- a long-standing product that is popular with consumers -- by labeling them as `unsafe and unsound'," Snyder said in the lawsuit.

Republic Bank CEO Steve Trager told The Associated Press that the tax refund loans are popular with customers and have a delinquency rate of 2.13 percent this year, a figure he expects to go down as more refunds are paid out.

"Let the results speak for themselves," Trager said.

Under refund anticipation loans, a tax preparer works with a bank to secure funds to make the loans once a tax return is complete. The money is fronted, then the loan repaid and fees collected by the bank once the tax refund is processed. The FDIC said Republic Bank made $3 billion in refund loans in 2010.

The FDIC and other federal regulators have been cracking down on banks working in the refund anticipation loan market. The FDIC notified banks handling the loans that doing so without having debt information from the IRS is not a good practice.

The IRS stopped providing the debt information, which revealed if an entire or partial refund would be intercepted to pay off debts, to banks and tax preparers last year. J.P. Morgan Chase, one of the larger refund anticipation lenders, voluntarily stopped making the loans.

Federal agencies, including the Office of Thrift Supervision and the Office of the Comptroller, barred some institutions from making the loans. Since then, two smaller Kentucky-based banks, Ohio Valley Bank/Fort Knox Financial Services and River City Bank, agreed to drop out of the market after the 2011 tax preparation season.

Last month, the FDIC ordered Republic Bank to stop the refund loan practice. In the charging documents, the FDIC says Republic made about 836,000 such loans in 2010, totaling over $3.011 billion, roughly equal to the average assets of the bank.

The order goes before an administrative law judge on April 18.

"At this time, we just want a fair review of the safety and soundness of our tax business, which the administrative process is designed to provide, without fear of retaliation," Trager said.

The loans become riskier now that the Internal Revenue Service no longer allows banks access to which taxpayers owe the IRS money and how much, the FDIC said. Without that information, Republic and other banks have no way of calculating an accurate tax refund on which to base a loan, the agency said.

In a report issued Monday, The National Consumer Law Group, which opposes the use of such loans, said Republic Bank charges a customer $61.22 for a RAL of $1,500. That rate amounts to an annual interest rate of 149 percent, the group said.

River City Bank, also based in Louisville, charged a $17.50 fee for a loan of $750. The consumer group calculated the annual interest rate at 85 percent.

Those fees come on top of a tax preparation fee, which averages about $189, the consumer group said.


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