In working with close to a thousand institutions across the country, including some of the institutions leading the taxi medallion lending space, the following three recommendations have been compiled as a way to audit and improve the medallion lending process.

Recognize the role global cash flow has to play in credit decisioning. While a global analysis is required for non-medallion commercial loans too, it's as critical for these taxi relationships as it is for other business loans. Members involved in medallion loans can range from simple relationship structures to more complex, intermingled entities where debt and cash flow overlap. A global cash flow analysis – or "consolidated statements" as referred to by the NCUA – combines entities and identifies potentially double counted cash flow so that the institution can adjust accordingly. With a global cash flow analysis, the institution has an accurate read on the cash available to service debt payments, and documentation of the global analysis will be a required read for examiners and loan review specialists.
Consistently use a risk rating matrix for these loans. Your credit union undoubtedly has a risk rating matrix that it uses for member business loans. The next step is to develop and then consistently use a template that's used specifically for medallion lending. The objectivity of the template and uniformity in its application will demonstrate an understanding of the industry's unique risk characteristics and a commitment to objectivity in risk assessments. The medallion lending matrix can include industry performance benchmarks – for example, sales growth/decline for NAICS 485310 – as well as global metrics that incorporate risk from the business owner and not just the business. Global metrics could include global debt service coverage (the NCUA specifically calls for greater than 1.25 global DSCR), FICO score or personal credit score of the member, or a global probability of default for the entity.
Document all the calculations and assumptions used in credit decisioning. This principle isn't unique to medallion loans, but it becomes more critical for these loans because of the increased scrutiny and risk. The loan policy in the credit union should clearly outline the documents collected from borrowers throughout the life of the loan, and if the credit union uses a workflow system or CRM, track the collection of those files to combat document exceptions. The following types of files are likely part of your credit union's requirements: Tax returns for the borrower or principal, the personal financial statement of the borrower, tax returns for the business, up to date appraisals for the medallion, financial projections if it's a new member for the credit union, and potentially GAAP-compliant or audited financial statements for more complex relationships where intermingled cash flow is suspected. Auditors and examiners will likely also look for documented covenants on these loans, showing that the credit union has put in place requirements for updated financial statements at least yearly. Unique to medallion lending credit unions, there is an additional requirement that the institution keeps on file: A copy of the governing tax authority's policy for markets served by the credit union. This document should outline the regulations that govern the institution's borrowers and dictate fee structures, medallion sales, etc.

While these three recommendations are not enough to guarantee a smooth exam or review for medallion loans, they do capture some of the main requirements: Complete information, consistency and documentation. For credit unions that rely on disparate software or spreadsheet systems for credit analysis, member relationship management, document tracking and risk rating, it may be challenging to see these three principles through for each loan. Whether the institution invests in automation, other process improvements or simply more staff to underwrite these loans effectively, by following these three recommendations, the institution is better prepared to mitigate risk among medallion loans.

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3 Ways to Bolster Taxi Medallion Lending

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