An examination by state and federal regulators of theundercapitalized $1.9 billion Melrose Credit Union identified unsafe and unsound bankingpractices, apparent violations of laws and regulations, andsignificant supervisory concerns, according to a consent orderissued last month by the New York State of Financial Services.

The joint safety and soundness examination of the Briarwood,N.Y.-based credit union was completed by state regulators and theNCUA on Dec. 31, 2015.

On July 3, the NYSFS issued a consent order, mandating thatMelrose take all necessary steps in at least 15 areas of the creditunion’s operations to function with adequate management supervisionand board oversight to prevent any future unsafe and unsoundbanking practices or violations of law or regulations.

Those areas that Melrose is required to address, for example,include loan policy deficiencies, the funding of an allowance forloan/lease losses shortfall, and a concentration reduction plan forits $1.5 billion taxi medallion loan portfolio that isunderperforming because of stiff competition from ride-sharingservices. In a prepared statement, Melrose said it has fullycooperated with the NCUA and NYSFS, noting it is ahead of thedeadlines outlined in the consent order.

In its prepared statement, the credit union said it is seeingpositive changes in the medallion industry and that its depositlevels are increasing.

Melrose’s statement, however, did not provide comments aboutthat consent order’s statement of unsafe and unsound bankingpractices. Specifically, the consent order directed Melrose toaddress its lending policy deficiencies that were identified in thesafety and soundness examination completed at the end of last year.However, the consent order also revealed that lending policydeficiencies were identified in prior reports of examination.

Although the state order does not specify those lending policydeficiencies, it requires the credit union to establish review andmonitoring procedures to ensure that all lending personnel adhereto the loan policies and procedures, and that the board receivestimely and fully documented reports on loan activity, including areport identifying deviations from the loan policies andprocedures.

What’s more, the order requires Melrose to “fund the ALLLshortfall identified during this examination and develop and submitfor review …. a comprehensive policy and methodology fordetermining the ALLL.”

Over the next 90 days, Melrose is also required to develop aconcentrations reduction plan to “prudently reduce and manage itstax medallion loan concentration” for New York, Chicago andPhiladelphia to the extent that it is feasible given: marketconditions, the existing loan portfolio, and the credit union’sauthority to restructure or refinance loans.

Melrose manages more than 3,000 taxi medallion loans totalingapproximately $1.5 billion. The growing popularity of app-basedride-sharing services, such as Uber and Lyft, have taken asignificant toll on the bottom lines of Melrose and othercooperatives that sell and manage medallion loans.

Posting a net loss of $57 million at the end of the secondquarter of 2016, a $5.5 million net loss at the end of the firstquarter and $176 million in losses last year, Melrose is now undercapitalized, according to its June 2016call report.

The state’s order also mandated that Melrose develop aclassified asset plan to reduce its risk position, eliminate losscharge-offs that have not been previously collected or charged off,and retain qualified management, including the CEO, a CFO andsenior lending officer, as well as board and supervisory committeeparticipation.

Two weeks after NYSFS issued its consent order on July 3,Alan Kaufman, who served as president/CEO of Melrose since1982, left. He was replaced by Steven Krauser, who was appointed interim president/CEO abouttwo weeks after Kaufman’s departure.

The order also mandates that Melrose establish an independentloan review department, develop adequate internal routines andcontrols consistent with safe and sound policies, create an auditprogram, a budget plan, a strategic plan, and an ethics andconflict of interest policy.

In addition, the order requires Melrose to increase its primaryliquid assets as a percentage of its total assets to a minimum of3% or to a level sufficient to meet its projected cash requirementsfor 90 days, whichever is greater.

“[W]e have some of the most aggressive deposit rates in thecountry and our deposit levels are increasing,” Kyle O’Brien, aspokesperson for Melrose, wrote in a statement. “Today alone weincreased deposits by over $1.4 million. We are seeing positivechanges taking place within the medallion industry. Individualowner/drivers are making more money than they have in the past,drivers are returning to lease medallions, and we are seeing anuptick of medallion sales.”

“We have also added individuals to our staff that havesignificant experience to assist us in meeting the requirements andaddressing these issues in a timely manner, and most importantly,we are better positioned with staff to meet all of our members’needs,” he said. “Everyone at Melrose Credit Union is committed tomaking positive changes and doing what we need to do to keep ourcredit union moving in the right direction.”