Executives at Louisville’s largest bank have given up their two-year battle with federal regulators and consumer advocates and are getting out of the tax refund loan business, giving up the bank’s most profitable piece of business.

Reuters reported this morning that  Republic Bancorp, holding company for Republic Bank & Trust Co., has settled with the Federal Deposit Insurance Corp, agreeing to stop tax-refund loans in 2013.

Republic is the last bank in the United States to withdraw from the business.

The bank’s surrender is a big deal because in 2010, refund-anticipation loans, or RAL, represented a whopping 65 percent of Republic’s net income for 2010, and it’s not clear whether Republic can find another niche anywhere near as profitable.

Republic’s RAL business had a record year in 2010, generating net income of $44.2 million, or 65 percent of the bank’s total annual net income of $64.8 million, according to the bank’s earnings reports.

In refund anticipation loans, Republic put up the cash for tax processors such as the now bankrupt Jackson Hewitt to give instant refunds, taking a fee. The fee was bout $61 for a $1,500 RAL.

The loans generally were for a matter of days, so the RAL fee worked out to about a 150-percent annual percentage rate, which consumer groups said was usury.

In the banking industry, this was a HUGE story, a futile fight that it didn’t take a genius to see wasn’t going to have a happy ending for Republic. (Shockingly, you didn’t read a word about this in the Courier-Journal or Business First.)

For years, the Feds had been putting up regulatory roadblocks to Jackson Hewitt, which was the main national tax return processor, and the banks that supplied the capital for the loans:

  • Last May FDIC officials threatened Republic with a $2 million fine related to the bank’s refusal to stop making tax refund anticipation loans.
  • Last February, FDIC officials filed a cease and desist notice ordering Republic to get out of RAL.
  • Last year, the Internal Revenue Service stopped RAL banks from accessing information about borrowers including liens, forcing Republic and other banks to make RAL without accurate risk assessment, a big FDIC no-no.
  • Last tax season, FDIC deployed examiners en masse, simultaneously visiting Republic  and 250 tax offices that offered the bank’s tax products.

Republic CEO Steve Trager fought back, suing the FDIC, claiming the feds overstepped their authority by ordering Republic and other banks to end tax refund anticipation lending without the usual legal process of hearings and comments.

But just like fighting City Hall, taking on the pillar of the federal banking system can be, well,  frustrating.

According to Reuters, Republic execs conceded shutting down RAL program will have a “material impact on its earnings in 2013.”

We bet!

So far, the agreement hasn’t had a material affect on Republic’s share price. Shares of Republic, which trade on the NASDAQ automated exchange under the symbol “RBCAA,” were trading Friday about about $22 (up 6 percent at times over Thursday’s closing price!), close to the 52-week high of about $24.

On the positive side, Republic will be allowed to stay in for the 2012 tax season, according to Reuters. The FDIC withdrew its “cease and desist” order against the bank, which included RAL restrictions.

Regulators lowered the penalty on the bank to $900,000 from $2 million.

The question is for Republic management, “Now what?”

But at least Republic execs bought themselves a year to figure it out.

Consumer protection groups already are issuing celebratory statements:

 WASHINGTON, Dec. 9, 2011 /PRNewswire-USNewswire/ — Advocates at the Community Reinvestment Association of North Carolina (CRANC), the Consumer Federation of America (CFA), and the National Consumer Law Center (NCLC) applauded the FDIC’s settlement with Republic Bank & Trust which requires the bank to terminate its refund anticipation loan (RAL) program after the end of the next tax season. In a regulatory filing released last night, Republic Bank & Trust (RBCAA) announced that it had reached an agreement with the FDIC to cease offering RALs after April 30th of next year.