The Federal Deposit Insurance Corp. has proposed a $2 million fine against Republic Bank & Trust Co. after the bank tried to coach tax preparers using its refund anticipation loan products on how to respond in case the FDIC visited them.

The Louisville, Ky.-based bank’s parent company, Republic Bancorp, revealed in a regulatory filing last Thursday that it had received an amended notice of charges for a cease-and-desist order from the FDIC. Republic is the main RAL provider for tax prep chains Jackson Hewitt and Liberty Tax Service, along with thousands of other local tax preparers. As of January, Republic had over 10,000 electronic return originators using its services.

The FDIC had warned Republic back in February that its RALs were “unsafe and unsound” without a debt indicator from the IRS showing whether taxpayers owed outstanding debts to the federal government or for student loans or child support (see FDIC Wants to Shut Down RALs for Jackson Hewitt and Liberty). The IRS stopped providing the debt indicator this tax season.

The amended notice reveals a number of other problems that the FDIC found with Republic’s RAL program, including violations of the Truth in Lending Act, Equal Credit Opportunity Act, the Federal Trade Commission Act, the Gramm-Leach Bliley Act, and interference with examinations of financial institutions.

In mid-February, the FDIC began visiting a random sampling of 250 tax preparers in 36 states who had previously used Republic’s RAL products to see if they were in compliance with federal and state laws and regulations governing RALs. About two hours after the visits began, the bank sent an email to all of its electronic return originators instructing them what to do in case the FDIC examiners visited or examined them.

The email included a link to a Frequently Asked Questions document posted on an internal Web page at the bank. The Web page included 79 suggested answers to FDIC examiner questions. Later, after the FDIC asked Republic about the email and the FAQ document, the document was removed from the bank’s internal Web page.

In addition, the FDIC found that over 87 percent of the Republic-affiliated tax preparers it called on the phone about the cost of obtaining a RAL did not inform them of the annual percentage rate, in violation of Truth in Lending laws. When FDIC examiners looked at some of the files of each of the electronic return originators they visited, a number of the loan files were missing the written Truth in Lending disclosures required by law.

The FDIC also found instances of overt discrimination on the basis of marital status. A number of the tax preparers who do business with Republic do not process a RAL application for applicants who are married filing a joint tax return, when the applicants’ spouses do not want to apply for the RAL. The FDIC said the practice of not processing a RAL application when one spouse does not want to apply for the loan constitutes overt discrimination on the basis of marital status, and violates the Equal Credit Opportunity Act.

The FDIC also found that tax preparers did not have proper physical and electronic safeguards for the protection of confidential consumer information, such as shredders or locked dumpsters, in violation of the Gramm-Leach-Bliley Act. Over half of the tax preparer offices had no alarm system.

The FDIC also alleged that Republic engaged in unfair and deceptive actions, such as implying that customers would receive the full amount of their refunds minus fees in one or two days by getting a RAL, despite the fact that the RAL amounts were limited by Republic to $1,500.

Consumer advocates applauded the FDIC’s move. “We are pleased that the FDIC took strong and appropriate action against Republic and its tax preparer agents,” said Jean Ann Fox, director of financial services for the Consumer Federation of America, in a statement. “FDIC enforcement of federal consumer and privacy laws will protect some of the most vulnerable taxpayers—low-income families that receive the EITC.”

"The FDIC's investigation finds that, not only are RALs pricey and risky for consumers, but some tax preparers aren't bothering to comply with basic consumer protection laws in making them," said National Consumer Law Center staff attorney Chi Chi Wu.

The bank has the opportunity to answer the FDIC’s charges and is set to face an administrative law judge, who will decide whether the bank should be subject to the $2 million fine.

Republic defended its practices in announcing the FDIC notice. The bank pointed out that since it received the original notice in February from the FDIC, its RAL business has proceeded with only 1.61 percent of its RALs remaining unpaid, and a much lower default rate than many other traditional forms of consumer credit.

“The concerns expressed by the FDIC with regard to the bank’s underwriting of financial risk on RALs during this tax season, we believe, were proven to be unfounded in light of our performance,” the bank said in a statement. “We are disappointed that the FDIC has followed up on this success with an amended notice with further claims of violations associated with the business as well as a proposed assessment of a civil money penalty against the bank in the amount of $2 million.”

“The amended notice follows the bank’s successful tax season and represents an effort that involved hundreds of federal examiners simultaneously visiting the bank and 250 tax offices that offered the bank’s tax products,” Republic added. “These unannounced visitations began on Feb. 15, 2011, just days following the issuance of the February 9th notice and the bank’s respectful disagreement with the FDIC’s conclusions about the safety or soundness of its RAL business. The bank looks forward to a fair and objective hearing on all the FDIC’s claims and remains optimistic that the prescribed administrative process will enable us to properly present information that will support the bank’s disagreement with the FDIC’s claims.”

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