Republic Bancorp, the last bank still funding refund anticipation loans, settled its suit with the Federal Deposit Insurance Corp, agreeing to stop the loan program in 2013.
The bank sued the FDIC to be allowed to continue funding the lucrative loans which regulators have branded unsafe. Republic had claimed that the FDIC should develop a clear set of standards for these loans and not ban them outright.
Under the settlement, Republic will be allowed to fund RALs, which are offered by tax preparers and repaid with the borrowers' tax return, for the 2012 tax season but will have to stop its program after that.
The FDIC also withdrew its "cease and desist" order against the bank, which had applied restriction to how the bank could run its Tax Refund Solutions unit.
The regulator also lowered the penalty on the bank to $900,000 to $2 million.
Republic, which had set aside a $2 million reserve, will record a gain of $1.1 million in the fourth quarter.
The bank said the shutdown of its RAL program will have a material impact on its earnings in 2013. The program contributed more than $20 million to Republic's income in 2011.
RALs are also a significant selling point for the bank's other tax services.
After the exit of JPMorgan Chase and HSBC's U.S. unit from the business, Republic was the last bank funding the loans for tax preparers like Jackson Hewitt and Liberty Tax.
The bank will still require to notify the FDIC before it adds business lines, new products and large new clients to its Tax Refund Solutions unit.
Shares of Republic closed at $20.77 on Thursday on Nasdaq.
(Reporting by Jochelle Mendonca in Bangalore; Editing by Gopakumar Warrier)