Taxi Troubles Deepen
The New York City taxi industry dropped to a new low in March when the Taxi and Limousine Commission reported a medallion sold for $241,000.
The medallions — tin plaques affixed to yellow cabs giving operators the right to drive a NYC taxi — were purchased for $1 million or more in 2014 and 2013. But since the ridesharing app called Uber rolled into town, taxi medallions declined by 50% and more.
If taxi medallion values continue to drop and competitive pressures from Uber, Lyft, Gett and Via intensify, credit unions with taxi medallion loan portfolios and those that invested in taxi medallion participation loans will likely see their losses mount. Moreover, the potential for National Credit Union Share Insurance Fund losses and write-downs means the entire industry will be impacted.
According to the NCUA, the $2.9 billion in total taxi medallion loans represent about three tenths of 1% of the credit union's overall lending of $869.1 billion. About $2 billion is carried on the balance sheets of seven credit unions and $900 million in participations loans were sold.
Marvin Umholtz, president/CEO of Umholtz Strategic Planning and Consulting Services in Olympia, Wash., argues that the NCUA's implication that the potential taxi medallion loan losses represent a fraction of the outstanding loans is a meaningless flawed fact designed to redirect attention away from the potential for NCUSIF losses and write-downs.
Currently, the taxi medallion crisis will determine the fate of the $1.7 billion Melrose Credit Union, which manages more than 3,000 medallion loans. The future of other credit unions that manage large medallion loan portfolios is also uncertain. For example, the $236 million LOMTO Credit Union, which is undercapitalized at 5.87% with a delinquency rate of 14%, could be placed into conservatorship. The $591 million Progressive Credit Union with a net worth of 32% remains on safe ground for the time being though it posted sharp increases in delinquencies and charge offs last year, according to NCUA financial performance reports.
Progressive and LOMTO did not return CU Times’ messages seeking comment.
Melrose, New York's 10th largest credit union, was placed into conservatorship in February by the New York State Department of Financial Services, which appointed the NCUA as the conservator. This gives the federal agency the authority to manage Melrose in an effort to resolve its issues and determine its future prospects.
Credit union experts and industry observers say the federal agency has some options but none of them will be easy or painless.
Interestingly, the credit union still promotes taxi medallion loans on its website home page as the “Melrose Taxi Action Center, providing answers to questions on many issues including medallion leasing, sales and purchases, TLC and DMV summonses, vehicle purchases and more.”
But according to one cabbie, who recently filed a federal lawsuit against Melrose, the credit union wasn't providing any answers to help him modify his loan because he could no longer afford the payments. Nixon Jeanpierre said he contacted the credit union last year to work out a new loan agreement, but noted in his complaint that since the “new [NCUA] team [arrived] they have been very disrespectful.”
Jeanpierre claimed persons hired by Melrose removed the medallion from his taxi in April without due process and is suing the credit union for $5 million.
“They’ve been asking me to give my house as collateral against the loan,” he wrote in court documents. “They asked me to take a life insurance to secure the loan. And they want me to give them my VeriFone [payment] account, that way for every fare I pick up the money will go to them and they will give me a debit card to withdraw money.”
Jeanpierre also claimed Melrose wanted to increase his loan interest rate from 4% to 8% and reduce the amortization from 25 years to 22 years.
Since 2016, nine taxi cab owners who could not repay their Melrose medallion loans have declared bankruptcy in federal court. That indicates the credit union is working with most medallion owners whose loans are delinquent. Melrose's delinquency rates have increased from 18% at the end of the first quarter of 2016 to 28% at the end of last year's fourth quarter, according to NCUA financial performance reports.
While the federal agency can continue to work with medallion borrowers to repay delinquent loans while helping Melrose diversify its loan portfolio, those goals may become overwhelmingly arduous.
“The big issue that is confronting Melrose, LOMTO and Progressive is that the taxi medallion market has been fundamentally disrupted by technology, and the NCUA has no ability to affect Uber and Lyft,” Keith Leggett, a retired SVP and senior economist for the American Bankers Association, said. “Another big issue is that you still have a bunch of medallion loans, which are going to be coming due. From what I understand, most of them were interest only, so how do you roll over those loans if the loans are well above the value of the medallions?”
Eventually, he said, credit unions will be forced to write down their taxi medallion loans to market values just as other banks have done.
For example, Capital One Financial Corp. said more than 80% of its $690 million taxi medallion loans could default and BankUnited also said nearly 60% of its loans backed by taxi medallions were at risk, according to national media reports. Additionally, Medallion Financial Corp. said it lost $3.6 million from its medallion loan portfolio.
And while the tax medallion credit unions have been working to diversify their portfolios, they may not have enough time to develop those portfolios to levels that could help them remain viable, Leggett said.
While the NCUA doesn't put a period on how long the Melrose conservatorship will last, the federal agency's examiner's guide says the NCUA aims to have conservatorships completed within two years whenever possible, Henry Meier of the New York Credit Union Association pointed out.
Another option the NCUA may explore, Meier noted, would be to merge Melrose with another credit union.
Montauk Credit Union, which was placed into conservatorship because of its financially troubled taxi medallion loan portfolio, was consolidated in March 2016 with the $6.9 billion Bethpage Federal Credit Union in Bethpage, N.Y.
“The NCUA would be primarily concerned that any merger into a continuing credit union, if possible given Melrose's size, took into consideration the financial strength and management ability of the continuing credit union,” Meier said. “We saw this approach play out when Bethpage took over Montauk.”
Like Montauk, Melrose is one of the only remaining open charter credit unions in the state, so when Bethpage acquired Montauk, it also acquired Montauk's open charter, Meier said.
While Melrose open's charter is an attractive selling point, Leggett said only six to eight of the nation's largest credit unions could realistically execute a consolidation.
In addition to the NCUA's challenges with Melrose and potentially other credit unions, the federal agency will be faced with the issue of how the NSCUIF will be ultimately impacted if the taxi medallion crisis continues to deepen.
After reading the 40-page NCUA 2016 Financial Statement Audits, a caveat included about the NCUSIF caught Umholtz's attention.
“[The] NCUA's recent supervisory actions resulted in the conservatorship of a federally insured credit union [Melrose] on February 10, 2017,” the report said. “Estimated losses related to this conserved credit union are determined as part of the general reserve methodology and are contained within the Insurance and Guarantee Program Liabilities in the Balance Sheets. Actual losses could vary and may be materially different from the estimated losses recognized as of December 31, 2016.”
“The NCUA's Inspector General – who manages the outside auditors that assess the NCUA's various funds’ status – wisely included this paragraph that identified the potential taxi medallion loan loss threat to the NCUSIF,” Umholtz said. “It appeared that the NCUA's Inspector General fully recognized the potential seriousness of the taxi medallion loan loss financial threat to the NCUSIF's equity cushion.”
The NCUA declined to comment.
What's even more troublesome to Umholtz, however, is that some industry analysts have speculated that the unregulated ride-sharing applications like Uber and Lyft will ultimately drive the taxi medallion loan values to zero.
Umholtz believes the NCUA board and NCUA senior staff, as well as others in the credit union industry, are in a state of denial concerning the potential cost to all federally insured credit unions.
“The temptation for the perception-sensitive NCUA board and the NCUA's nervous senior staff will be to give it more time – and pay yet a higher bill later,” Umholtz said. “Regardless, extend and pretend, or kick-the-can-down-the-road, are not the best options.”