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Republic Bancorp Inc. is fighting to keep a right that most other banks have surrendered. The Louisville, Ky., company is preparing to square off against the Federal Deposit Insurance Corp. over refund-anticipation loans, a product that regulators have pressured several other lenders to stop making because it is viewed as predatory.
February 15 -
The announcement by H&R Block that the OCC had rejected HSBC's funding for its refund-anticipation loans suggests regulators weren't willing to wait for the practice's natural death.
December 27
Republic Bancorp Inc. has accused the Federal Deposit Insurance Corp. of multiple abuses of its authority, escalating a battle over refund-anticipation loans.
The Louisville, Ky., company filed a lawsuit Monday in the U.S. District Court for the Western District of Kentucky against the agency. The suit says the FDIC improperly used its supervisory power to try to stop the company's RAL business and to collect information for a pending arbitration hearing on the matter.
Steve Trager, Republic's chief executive, said the FDIC conducted an unscheduled examination in February just days after the company said it would not consent to an enforcement order to end its RAL business. Republic said earlier in the month that it would challenge the order before an administrative law judge.
The agency sent "scores of FDIC examiners from Washington to Republic's offices in Louisville and to the offices of more than 100 tax preparers served" by the company, Trager said in an interview Tuesday.
An FDIC spokesman said the agency does not comment on pending litigation or open institutions.
Jeffrey C. Gerrish, a partner at Gerrish McCreary Smith, said that regulators have the right to examine banks at any point but that the timing of the Republic exam was curious. The moment to examine Republic's banking unit was before the FDIC issued the notice of charges, he said, not when the bank decided to defend the safety and soundness of its product.
"Congress is looking for examples of regulatory harassment, and this sounds like a perfect one," Gerrish said. "They find out the bank is not going to consent so they start sending in the stormtroopers. They are in an administrative process, and that allows for a limited discovery."
The suit says the FDIC used the exam to gather information to help its case. "The FDIC served Republic with a comprehensive and onerous set of requests for documents and information regarding all aspects of its RAL program and sought the production of those documents on an expedited basis," the suit says.
Republic officials "completely support the right of the FDIC and other bank regulators to thoroughly examine Republic Bank and other financial institutions in order to protect the safety and soundness of our industry," Trager said in the interview. "However, no regulator or branch of government should be immune from review, and those that seek such review should have the opportunity to do so without harassment and intimidation."
Beyond seeking relief from retribution, Republic is also asking the court to require the FDIC to "play by the rules" and use the rulemaking process — and not supervision — to set policy.
"This suit seeks to require that any rule against RALs be created only through formal regulatory procedures, out in the open and subject to public comments, scrutiny and criticism, rather than through examinations and enforcement actions," according to the lawsuit.
Regulators and consumer advocates have long characterized RALs as predatory. Several large banks pulled out of the business after prodding from regulators. For these institutions, the sliver of business was not worth fighting over. In early 2010 the $7.9 billion-asset Pacific Capital Bancorp Inc. sold its refund-anticipation loan business after the Office of the Comptroller of the Currency would not grant it permission to make such loans. (RALs had been Pacific Capital's most profitable business.)
So Republic is virtually alone in offering the product. Overall, the tax business contributes 40% to 65% of the company's revenues each year, with RALs comprising about a quarter of that business. The rest comes from electronic processing.
"They are fighting hard because this is a pretty meaningful business for them," said Daniel Cardenas, an analyst at Howe Barnes Hoefer & Arnett. "It has been a strong cash cow."
The FDIC claimed in its February notice of charges that RALs are unsafe and unsound because the bank can no longer rely on the Internal Revenue Service to provide it with a debt indicator. The indicators detailed whether the early refund seeker has a lien for things such as unpaid child support or delinquent student loans.
The IRS announced in August that it would no longer provide the service.
Republic revised its guidelines, strengthened underwriting and capped the RALs at $1,500 per borrower to reduce the risk. So far, the company said it is doing just fine without the indicator.
The company also announced on Tuesday preliminary results of its tax business for the first two months of 2011. Net income rose 70% from a year earlier, to $62 million, because of an increase in electronic refund product volumes, improved pricing on RALs and better-than-expected loan-loss provisions for the RALs.
On a consolidated basis, the company said it expects to earn $68 million to $75 million for the first quarter, compared to $44.6 million a year earlier.
Republic said that it wanted a RAL loan-loss rate of 2.5% or less for 2011. So far, the loss rate has been 2.13%, though Republic said it expects weekly improvement as it receives payments from the IRS, with losses settling between 1.5% and 2%.
"To me this quarter is proof of what the company has been saying: That it can do these loans without the debt indicator," said Douglas Rainwater, an analyst at Rodman & Renshaw, LLC. "The removal of the [debt indicator] increased the risk incrementally. It doesn't make this the Wild West."
So far, Republic has originated about $1 billion in RALs in 2011, or roughly a third of the originations for the same period a year earlier, as the company installed tighter underwriting guidelines and capped the loans.
