Taxi Medallion Loan Concentration at Heart of Melrose CU Consent Order
An examination by state and federal regulators of the undercapitalized $1.9 billion Melrose Credit Union identified unsafe and unsound banking practices, apparent violations of laws and regulations, and significant supervisory concerns, according to a consent order issued 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 the NCUA on Dec. 31, 2015.
On July 3, the NYSFS issued a consent order, mandating that Melrose take all necessary steps in at least 15 areas of the credit union’s operations to function with adequate management supervision and board oversight to prevent any future unsafe and unsound banking 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 for loan/lease losses shortfall, and a concentration reduction plan for its $1.5 billion taxi medallion loan portfolio that is underperforming because of stiff competition from ride-sharing services. In a prepared statement, Melrose said it has fully cooperated with the NCUA and NYSFS, noting it is ahead of the deadlines outlined in the consent order.
In its prepared statement, the credit union said it is seeing positive changes in the medallion industry and that its deposit levels are increasing.
Melrose’s statement, however, did not provide comments about that consent order’s statement of unsafe and unsound banking practices. Specifically, the consent order directed Melrose to address its lending policy deficiencies that were identified in the safety and soundness examination completed at the end of last year. However, the consent order also revealed that lending policy deficiencies were identified in prior reports of examination.
Although the state order does not specify those lending policy deficiencies, it requires the credit union to establish review and monitoring procedures to ensure that all lending personnel adhere to the loan policies and procedures, and that the board receives timely and fully documented reports on loan activity, including a report identifying deviations from the loan policies and procedures.
What’s more, the order requires Melrose to “fund the ALLL shortfall identified during this examination and develop and submit for review …. a comprehensive policy and methodology for determining the ALLL.”
Over the next 90 days, Melrose is also required to develop a concentrations reduction plan to “prudently reduce and manage its tax medallion loan concentration” for New York, Chicago and Philadelphia to the extent that it is feasible given: market conditions, the existing loan portfolio, and the credit union’s authority to restructure or refinance loans.
Melrose manages more than 3,000 taxi medallion loans totaling approximately $1.5 billion. The growing popularity of app-based ride-sharing services, such as Uber and Lyft, have taken a significant toll on the bottom lines of Melrose and other cooperatives that sell and manage medallion loans.
Posting a net loss of $57 million at the end of the second quarter of 2016, a $5.5 million net loss at the end of the first quarter and $176 million in losses last year, Melrose is now undercapitalized, according to its June 2016 call report.
The state’s order also mandated that Melrose develop a classified asset plan to reduce its risk position, eliminate loss charge-offs that have not been previously collected or charged off, and retain qualified management, including the CEO, a CFO and senior lending officer, as well as board and supervisory committee participation.
Two weeks after NYSFS issued its consent order on July 3, Alan Kaufman, who served as president/CEO of Melrose since 1982, left. He was replaced by Steven Krauser, who was appointed interim president/CEO about two weeks after Kaufman’s departure.
The order also mandates that Melrose establish an independent loan review department, develop adequate internal routines and controls consistent with safe and sound policies, create an audit program, a budget plan, a strategic plan, and an ethics and conflict of interest policy.
In addition, the order requires Melrose to increase its primary liquid assets as a percentage of its total assets to a minimum of 3% or to a level sufficient to meet its projected cash requirements for 90 days, whichever is greater.
“[W]e have some of the most aggressive deposit rates in the country and our deposit levels are increasing,” Kyle O’Brien, a spokesperson for Melrose, wrote in a statement. “Today alone we increased deposits by over $1.4 million. We are seeing positive changes taking place within the medallion industry. Individual owner/drivers are making more money than they have in the past, drivers are returning to lease medallions, and we are seeing an uptick of medallion sales.”
“We have also added individuals to our staff that have significant experience to assist us in meeting the requirements and addressing 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 to making positive changes and doing what we need to do to keep our credit union moving in the right direction.”