Bank Wants to Keep Making Refund Anticipation Loans, Sues FDIC

Consumer advocates have been preparing to dance on the grave of the much-despised tax refund anticipation loan (RAL), but one of the few banks still writing such loans has sued the Federal Deposit Insurance Corporation (FDIC), claiming it is illegally trying to force an end to the so-called “instant refund” loans.

Republic Bank & Trust,

Regulators earlier forced big banks, including JPMorgan Chase and HSBC, to stop making the refund anticipation loans, which carry high interest rates and fees and are widely viewed as predatory loans that take advantage of low-income workers eager to get their hands on their tax refund.

The action against bigger banks by the Office of the Comptroller of the Currency and the Office of Thrift Supervision left only smaller, state-chartered banks making the loans, including Republic, which is the lender for both Jackson Hewitt and Liberty Tax Service.

But then the FDIC, which regulates state-chartered banks, advised Republic and the two other banks still making RALs that the loans were unsafe and unsound.

The FDIC based its finding on the Internal Revenue Service's decision to stop issuing theDebt Indicator, a service that helped tax preparers and banks make RALs by acting as a form of credit check. The Debt Indicator revealed whether a taxpayer’s refund would be paid or would be intercepted for government debts. Consumer advocates had strongly urged termination of the Debt Indicator, and applauded the IRS’s action.

But all of these actions by various federal agencies look like to Republic like a “concerted effort toeliminate RALs - a longstanding product that is popular with consumers - by labeling them as 'unsafe and unsound."

Republic claims the FDIC violated the Constitution's Due Process clause and the Administrative Procedure Act: "

In declaring tax refund anticipation loans "unsafe and unsound," Republic says,the FDIC ignored its normal rulemaking process and “instead sought to enforce its policy decision effectively to outlaw RALs through an enforcement action against Republic.”

“The FDIC's basis to do so is suspect because no applicable federal or state statute or regulation currently prohibits RAL lending or requires the use of specific underwriting standards. Indeed, previous legislative attempts to regulate RALs failed,”the bank's lawsuit argues.

The suit seeks an injunction staying the FDIC from imposing its enforcement action and allowing Republic to continue making tax loans.