Taxi Medallion CUs Lending Apace Despite NYC Law
Nearly a year after a New York court upheld a law that some critics complained created unfair competition within the taxicab sector, credit unions that sued over it said they are holding their own.
In June 2013, the New York State Court of Appeals upheld the Hail Accessible Interborough License Act authorizing the establishment of street hail livery service that allowed New York to sell 2,000 additional medallions for wheelchair-accessible yellow taxicabs in Brooklyn, Queens, the Bronx, Staten Island and northern Manhattan. Taxi medallions are licenses that allow for the ownership and operation of a taxi.
The decision came more than a year after the Taxicab Service Association, a group of credit unions that finance medallions, filed suit seeking to invalidate the HAIL Act. The TSA includes the $1.9 billion Melrose Credit Union in Briarwood and the $300 million Lomto Federal Credit Union in Woodside, along with the $685 million Progressive Credit Union and $163 million Montauk Credit Union, which are both in the city of New York.
At the time, the TSA said HAIL was in direct competition with New York's yellow cabs, noting it authorized the mayor alone to flood the market with 2,000 new yellow cab medallions. The group also claimed the law would devalue yellow taxi medallions and potentially trigger a credit crisis for the $5 billion medallion lending industry.
So far, the New York law hasn't had an impact on the TSA credit unions, they said.
“We’re still doing business as we’ve always did. The medallions have been very stable,” said Richard Kay, president/treasurer of Lomto and TSA president. “The legislation that passed hasn't disrupted the marketplace at all. We’re doing OK.”
Kay said the bulk of Lomto's portfolio consists of taxi medallions – nearly $300 million, which mirrors the credit union's asset size.
However, despite the robust financing, Kay is questioning an NCUA April supervisory letter to field staff alerting them about an increase in taxi medallion loan activity in certain markets and the potential risks for credit unions.
The NCUA said as of April 2014, the market value of a taxi medallion continues to benefit from record low financing costs and liberal underwriting terms. Low or decreasing interest rates on loans can make a medallion more affordable to a buyer even if the borrower does not experience a corresponding increase in income, the regulator noted.
“While recent history reflects a continuously rising market price for medallions, an adverse change in market conditions and economic cycles can decrease prices,” the NCUA wrote in the April 1 letter. “When economic conditions change, credit unions that engage in significant levels of liberal financing can suffer from significant loan-to-value shortfalls. The real estate market crisis of 2008 demonstrates how quickly a collateral-deficient loan portfolio can impair a credit union's viability.”
Credit unions that offer liberal loan terms may be exposed to elevated risk, requiring heightened due diligence, risk modeling and mitigation strategies, the NCUA said. Liberal terms include extended amortization schedules, interest-only payment terms and unsupported cash-out refinancing.
In addition to ensuring that quality of financial information used in a credit union's financial analysis matches up with the level of risk and complexity of the borrowers’ and principals’ operations, the NCUA urged examiners to look at the debt service coverage ratio, which is the amount of cash available from operations to meet annual interest and principal payments on all borrower debt and to pay unfunded capital expenses.
“It seems to me the NCUA is trying to micromanage what the credit unions can do, and that's really the board's job,” Kay said. “Business lending rules already exist. They are putting requirements in that letter that go way beyond what their regulations call for.”
Kay said he also has issues with the debt service coverage ratio that the NCUA has instructed examiners to take a stronger look at. “Business lending rules don't require debt ratio coverage ratio analysis. We do this in our underwriting anyway but the board should decide what the ratio will be,” he suggested.
Progressive CU has also fared well with its taxi medallion loans since last summer, said Robert Familant, president/CEO.
“There haven't been any noticeable changes in an adverse way from HAIL,” he said. He referred questions about the NCUA's recent supervisory letter to Kay.
Over the past 40 years, Montauk CU has never suffered a loss in a taxi medallion-related loan and has never written off a single penny of principal in any taxi-related loan in the cities the cooperative services, Louis Jimenez, CEO/treasurer, said in a March 12 comment letter to the NCUA on the risk-based capital proposal.
While Montauk supports the concept of having a risk-based capital structure, Jimenez said the proposed formula is unfair to credit unions chartered historically for the purpose of making business loans.
Under the NCUA's proposal, the current risk weighting for business loans at Montauk would require the credit union to sell approximately $30 million in performing taxi medallion loans, Jimenez said. Montauk would not be able to make any more loans until either its deposits increased dramatically or existing loans were paid down, he added.
Rather than having $30 million earning a margin averaging 5.25% in order to meet the 10.50% risk-based capital requirement to be considered well-capitalized under the proposal, Jimenez said, Montauk would have to either invest the funds into overnight money market deposits at approximately 35 basis points or turn those dollars into personal loans without the security of the taxi medallion.
He suggested the NCUA consider either exempting credit unions chartered primarily to make business loans or having a .50 credit provided in each business lending category if there is less than 1% in charge-offs over the past three-year period.
Meanwhile, New York City is prepping to issue 6,000 taxi permits in June under the HAIL Act, according to city officials. Since last summer, another 6,000 had already been administered.