LOUISVILLE (CN) - Republic Bank & Trust sued the FDIC in Federal Court, claiming the federal agency "has apparently decided to force all lenders out of the business of making Refund Anticipation Loans ... a lawful product that permits taxpayers to borrow against their future tax refunds."
The Louisville-based bank claims the Federal Deposit Insurance Corporation "has undertaken what appears to be a concerted effort to eliminate 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: "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. Separately, this lawsuit seeks to require that FDIC not attempt to circumvent the rules governing a pending adjudicative proceeding involving Republic's RAL lending by use of its power of 'examination' to conduct one-sided discovery for that proceeding, in derogation of APA requirements and Republic's rights."
The complaint continues: "Prior to last tax season, Republic was one of several banks that offered RALs. Over the course of six weeks (from late December 2010 through early February 2011), Republic's main competitors - HSBC, Ohio Valley Bank, and River City Bank - each were forced out of the RAL market by federal regulators; Ohio Valley Bank and River City Bank agreed with FDIC to exit the business after this season was over. FDIC presented Republic with a demand that it, too, agree to exit the RAL business after this year. When Republic management refused to accede to the demand because it was not provided with a reasonable period of time to consult with its Board of Directors, the FDIC filed a Notice of Charges and commenced an adjudicatory proceeding to force Republic to stop making RAL loans after this year."
In declaring tax refund anticipation loans "unsafe and unsound," Republic says: "Despite the FDIC's authority to prescribe regulatory standards for safe and sound credit underwriting, 12 U.S.C. §1831p-1(a)(1)(C), the FDIC has eschewed the normal rulemaking process and, on information and belief, 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 FDIC's apparent decision to institute new de facto credit underwriting standards through enforcement actions, rather than the rulemaking process, is a clear abuse of discretion."
The bank claims that "less than one week after the administrative proceeding was formally started, the FDIC instituted what it has alternatively referred to as an unscheduled 'examination,' a 'targeted visitation' or an 'investigation' of Republic and independent tax offices focused on RAL lending."
According to the complaint: "As part of this unscheduled action, 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. In addition, the FDIC issued third-party subpoenas (without seeking permission of the Administrative Law Judge) to more than one hundred of Republic's business partners who process RAL applications and visited their establishments simultaneously, using what apparently was hundreds of examiners. Needless to say, these tactics - which occurred at the height of the 2011 tax preparation season - are not permissible through an adjudicative proceeding."
Republic adds: "In sum, if the FDIC believes that RALs are a potentially unsafe and unsound product, the FDIC can issue credit underwriting standards through the orderly and deliberative regulatory process. Rather than do so, however, the FDIC has sought to drive the last bank offering RALs out of the market by abusing its examination and enforcement powers. The FDIC's conduct is arbitrary, capricious, an abuse of agency discretion, harassing and intimidating, and violates Republic's right to due process of law."
Republic says it only wants to make sure the FDIC "plays by the rules." It seeks an injunction for violations of the Administrative Procedure Act and the Constitution.
Republic is represented by Sheryl Snyder with Frost Brown Todd in Louisville, and Thomas Hefferon, with Goodwin Procter of Washington, D.C.
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