Dow-Jones Newswires and other news media are reporting that River City Bank executives have decided to stop making refund anticipation loans after 23 years due to pressure from federal regulators.

Executives at Louisville-based River City Bank have given notice that the bank will exit the RAL business at the end of the 2011tax season “following extensive conversations with its primary regulator,” according to the Dow-Jones story.

The move comes after the Federal Deposit Insurance Corp. notified executives at Republic Bank & Trust Co. earlier this month that Republic has to end its tax-refund loan program. The RAL segment produced about 65 percent of 2010 profits at Republic, the largest Louisville-based bank.

Republic President and CEO Steve Trager has said he’ll fight the ruling.

In refund anticipation loans, tax payers essentially receive an advance on their IRS tax refund from national tax-preparer chains such as Parsippany, N.J.-based Jackson Hewitt Tax Service Inc. in exchange for a fee.

The actual financing comes through banks such as River City and Republic.

In 2008, Trager told me Republic’s average refund loan was $3,400, and Republic’s fee averaged about $110, or about 3 percent of the refund. The loans typically are repaid in 11 days, Trager said at the time, and average about a 1 percent default rate.

But calculated over a full year, that $110 to borrow $3,400 for 11 days works out to about 150-percent annual interest rate.

Government officials and consumer protection groups have criticized the RAL fee as usury.

Previously, IRS officials said they’ll no longer provide third-party refund payments that make possible such loans.

A new IRS pilot is offering direct refunds on pre-paid debit cards to about 600,000 families.

More on River City:

Tax preparers bail on refund-anticipation loans. (Pittsburgh Tribune-Review)

Kentucky Bank to Stop Refund Loans on US Regulator Concerns. (Dow-Jones/Reuters)

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Terry Boyd
Terry Boyd has seven years experience as a business/finance journalist, and eight years a military reporter with European Stars and Stripes. As a banking and finance reporter at Business First, Boyd dealt directly with the most influential executives and financiers in Louisville.

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