1. What are taxi medallions, and how are they used to obtain loans?
Taxi medallions are permits allowing an individual or company to operate a taxicab. Several major U.S. cities, such as New York, issue medallions as part of their taxicab licensing system. Local governments limit the number of medallions available for sale. As a result, the medallions have value and may be bought and sold, or used as collateral for loans.
Taxi medallion lending is a specialized form of credit offered by some credit unions, banks, and other specialized lenders to taxicab and limousine businesses for them to operate in New York City and other metropolitan areas.
With these types of loans, changes in the value of medallions can have a direct impact on loan-to-value ratios and the risk of loan repayment.
2. Are taxi-medallion loans considered business or personal loans?
Taxi medallion loans are commercial or business loans and not personal loans, so consumer-lending metrics like debt-to-income ratios are not as relevant for this form of lending. The proper method of underwriting these loans is to assess the borrower’s ability to repay, based on an appropriate cash-flow analysis.
The structure of these types of loans differs from personal loans, as well. For example, the monthly payments of a commercial loan are often based on a long amortization period, usually between 10 to 25 years, while the loan term is between three and five years, with a balloon payment of the remaining balance due at the end of that term.
3. What is a balloon payment, and why is it used in these types of business loans?
A balloon payment is a larger-than-usual payment made at the end of a loan term. Balloon payments are a common practice with commercial and business loans. They are not designed to penalize the borrower, but rather provide the lender with an opportunity to update its loan documentation and adjust the loan’s interest rate if market rates change. This allows the borrower to benefit from lower regular monthly payments, and they can either pay the remaining balance or refinance the remaining portion of the loan when the balloon payment is due.
4. Why were credit unions allowed to make taxi-medallion loans?
For more than 80 years, credit unions have provided business loans to taxi owners and operators. These credit unions had a long history of successfully lending to taxi owners and operators within their fields of membership, and these loans performed well historically.
In 1998, the Credit Union Membership Access Act was passed and included a statutory cap on member business lending that applied to all federally insured credit unions. However, based on their long-standing history of making these types of business loans, New York City taxi medallion credit unions that supported the taxi industry were one of several categories given an exemption to that cap. The Senate Banking, Housing, and Urban Affairs Committee’s Report, 105-193, for the Credit Union Membership Access Act specifically discussed taxi medallion lending. It stated:
This title provides exceptions for insured credit unions that are chartered for, or that have a history of primarily making member business loans to their members, such as members who are of a specialized vocation, for example: fishermen, farmers, truck drivers and taxi cab drivers .… The Committee intends for the [NCUA] Board to interpret the exceptions under new section 107A(b), to permit worthy projects access to affordable credit union financing. Loans for such purposes as agriculture, self-employment, small business establishment, large upfront investment or maintenance of equipment such as fishing or shrimp boats, taxi cab medallions, tractor trailers, or church construction should not be unduly constricted as a result of the Board’s actions.
5. Does specializing in one type of lending increase a credit union’s risk?
Specialized lending can increase concentration risk.
The NCUA conducted regular supervision of the taxi credit unions and issued guidance to them on concentration risk and business lending, particularly on the risks associated with taxi medallions. For example:
- A January 2010 Letter to Credit Unions on business lending risks and sound management practices with accompanying supervisory guidance on concentration risk, portfolio management, loss reserving and workout capabilities, among other issues.
- A Letter to Credit Unions and detailed supervisory guidance in April 2014 about taxi medallion lending, and the possible risk that could accompany market changes.
- A follow-up letter with guidance in the form of frequently asked questions concerning risks posed by taxi medallion lending in May 2015.
6. What happened to the taxi medallion market?
Until 2014, taxi medallion values in New York City generally had been stable or rose slightly. The delinquency rates for medallion loans were low prior to 2014. Credit unions that supported the industry were also among the most well-capitalized financial institutions in the country and held capital levels that were considered adequate to withstand any potential stress in normal market conditions.
The rapid expansion of app-based competitors, such as Uber and Lyft, quickly disrupted the dynamics of the taxi industry. As the New York City Taxi and Limousine Commission (opens new window) outlines in its data on its public website, the correlation between the inception of ride-sharing and the decline in the number of taxi trips, which is the key revenue driver for the taxi medallion market, is clear. As taxi revenues and leasing income declined, medallion holders found it increasingly more difficult to make loan payments, especially on large loan amounts.
7. Could the NCUA have done anything to prevent this from happening?
The collapse of the taxi medallion market was the result of a number of factors, including a rapid increase in the values followed by the introduction of a major market disrupter in the form of app-based services like Uber and Lyft. Both of these factors are outside the agency’s purview.
The NCUA is a federal financial institutions regulator with specific authority to regulate and supervise credit unions and insure member accounts. The agency is legally obligated by Congress to minimize potential losses to the National Credit Union Share Insurance Fund. The NCUA does not have the legal authority to regulate or intervene in the New York City taxi medallion market or regulate the taxi industry. The New York City Taxi and Limousine Commission is the agency responsible for licensing and regulating the city’s medallion taxis.
8. When the credit unions that support the taxi industry got into trouble, how did NCUA respond?
Beginning in 2014, the NCUA worked with the New Jersey Department of Banking and Insurance and the New York State Department of Financial Services and placed teams of specialists in the credit unions to work with their staffs to try and improve the financial conditions of the credit unions.
When those efforts proved unsuccessful, the agency followed its standard practice to protect member deposits, ensure continued member service, and minimize any potential risks these institutions posed to the broader credit union system and the National Credit Union Share Insurance Fund, which guarantees the deposits of more than 119 million credit union members.
NCUA’s additional actions included:
- Conserving Montauk Credit Union, which was merged into Bethpage Federal Credit Union at no cost to the Share Insurance Fund.
- Conserving and later liquidating Melrose Credit Union. Teachers Federal Credit Union assumed all of Melrose’s members and shares as well as some loans and other assets. The NCUA assumed Melrose’s portfolio of taxi medallion loans.
- Acting as liquidating agent for First Jersey Credit Union, with US Alliance Federal Credit Union assuming most of the assets, shares, and liabilities. The NCUA assumed First Jersey’s portfolio of taxi medallion loans.
- Conserving and later liquidating LOMTO Federal Credit Union. Teachers Federal Credit Union assumed all of LOMTO’s members and shares as well as some loans and other assets. The NCUA assumed LOMTO’s portfolio of taxi medallion loans.
9. What does it mean for a credit union to be conserved?
The NCUA places a credit union into conservatorship in order to resolve operational problems that could affect that credit union’s safety and soundness. During a conservatorship, the NCUA has control of the credit union and the credit union remains open. Members can conduct transactions and accounts remain insured by the Share Insurance Fund. For federally chartered credit unions, the NCUA takes this action on its own. In the case of a state-chartered credit union, the state supervisory authority initiates the conservatorship and, in many cases, appoints the NCUA as agent for the conservator.
Conservatorships can have three outcomes:
- The credit union can resolve its operational problems and be returned its members;
- The credit union can merge with another credit union; or
- The NCUA can liquidate the credit union and return any remaining value and equity to its members.
10. What does it mean for a credit union to be liquidated?
Liquidation means a credit union has been closed. However, a liquidated credit union may be purchased by another credit union, so that members will be able to continue receiving financial services. That transaction includes assuming the liquidated credit union’s members, assets, and some or all of its loans.
If a credit union is placed into liquidation, the NCUA’s Asset Management and Assistance Center oversees the liquidation and sets up an asset management estate to manage assets, settle members’ insurance claims, and attempt to recover value from the closed credit union’s assets. If member shares are not assumed by another credit union, all verified member shares are typically paid within five days of a credit union’s closure.
11. What is the NCUA’s role as liquidating agent?
The NCUA is legally obligated by Congress to minimize potential losses to the National Credit Union Share Insurance Fund.
To meet the agency’s statutory obligations as liquidating agent, the NCUA’s Asset Management and Assistance Center creates an asset management estate to manage a failed credit union’s remaining assets, settle members’ insurance claims, and attempt to recover any remaining value.
Following the failures of the New York City taxi medallion credit unions, the agency managed taxi-medallion loan portfolios from Melrose Credit Union, LOMTO Federal Credit Union, and First Jersey Credit Union.
12. What are the deposit insurance levels offered to credit union members?
The National Credit Union Share Insurance Fund, which is administered by the NCUA, insures individual accounts up to $250,000, and a member’s interest in all joint accounts combined is insured up to $250,000. The Share Insurance Fund separately protects IRA and KEOGH retirement accounts up to $250,000 and provides other coverage as well.
The Share Insurance Fund has the backing of the full faith and credit of the United States. No credit union member has ever lost a penny of insured funds in a federally insured credit union.
13. What else did NCUA do to protect the former members and borrowers of these credit unions?
When the New York City taxi medallion credit unions closed, the NCUA followed our standard practice to communicate with members at the time of liquidation. Each borrower received regular communications in the form of statements explaining what the NCUA was, how their loans would be serviced, how to make payments, and how to contact the servicer the agency used. The NCUA also proactively contacted borrowers if they were past due and took measures to ensure borrowers could continue to make in-person payments at locations where they had previously.
14. Many taxi-medallion borrowers are under financial strain. What has NCUA done to help them?
The NCUA recognizes the current condition the New York City taxi medallion market has placed an enormous financial and emotional strain on medallion holders and their families. We understand that behind every loan is a family.
Where it could, and within its authority under the law, the NCUA worked, through our servicer, with borrowers on an individual basis to provide relief, including restructuring loans to reduce payments and interest rates. Following the closure of the taxi medallion credit unions, the agency refinanced or modified more than 600 loans.
15. Why were you not able to modify or refinance more loans?
A number of factors complicated our efforts to modify or refinance the New York City taxi medallion loans.
First, it is important to remember these are business and commercial loans and therefore work differently than consumer loans. To evaluate a borrower’s ability to repay the loan effectively, the NCUA collected and evaluated financial information about each business and met with borrowers to discuss the business’ cash flow prior to modifying a borrower’s loan. Loan documents and legal papers had to be prepared, and closing dates scheduled. This is a time-intensive process, which required frequent contact with the borrower and their cooperation.
Second, the fluctuating value of the medallions that were used as collateral to secure the loans and, in some cases, the high levels of cash taken out to finance other purchases — such as residential real estate, automobiles, or education — when the loans were refinanced also presented challenges.
Additionally, the taxi medallion ownership structure in New York City, including the role of mini-fleet owners and large relationship fleet owners, created unique obstacles as well.
16. Did the NCUA employ improper debt collection practices?
No. The NCUA treated all borrowers with dignity and respect. The agency contracted with reputable loan servicers that observed all applicable consumer and borrower protection laws and used industry-standard policies to collect any monies owed as part of the terms of the loans. The NCUA strived to balance its responsibilities as liquidating agent to collect all monies due with its desire to work with borrowers and to keep drivers in their vehicles.
17. Why has the NCUA not been transparent about its actions?
The NCUA has been as transparent as possible while upholding its responsibility to protect borrowers’ confidential data and supervisory information as required by our regulations and federal law. For more information on the agency’s actions to date, please visit our webpage at https://www.ncua.gov/news/responding-collapse-new-york-city-taxi-medallion-market/timeline-nyc-taxi-medallion-crisis.
18. How much did the failure of the taxi medallion credit unions cost?
Collectively, these failures cost the Share Insurance Fund approximately $750 million.1
19. Is there a possibility that the financial trouble that affected these taxi credit unions could spread?
No. The credit union system’s exposure to the taxi medallion market today is limited to just a few institutions. The NCUA is confident that the system’s exposure to these troubled assets is limited and manageable, and the agency continues to monitor the situation closely.
20. How is the NCUA improving its examination program following the failure of these credit unions?
Following the collapse of taxi medallion credit unions, the NCUA’s independent Inspector General published a Material Loss Review (opens new window) and made recommendations for improvements in the agency’s examination program:
- Instituting a formal process to regularly identify, analyze, and document concentration risk issues in credit unions or groups of credit unions, including but not limited to loan concentrations that could potentially pose a significant risk to the Share Insurance Fund. Additionally, the Inspector General suggested the NCUA should consider developing appropriate thresholds for different concentrations that would require increased levels of risk mitigation and resources to minimize the risk to the Insurance Fund.
- Revising examination quality control procedures to prioritize assessing and developing risk responses for credit unions with high levels of concentration risk. The procedures should require escalated review of repeat informal enforcement actions for unresolved recommendations. If the repeat actions represent safety and soundness concerns, escalated enforcement action, including formal enforcement action, could be warranted.
- Including an update to the annual examination scope requirements that examiners review credit unions’ lending procedures with respect to analyzing the ability of the borrower to meet debt service requirements. This would help ensure that examiners address through the enforcement process any credit unions not sufficiently considering the borrower’s ability to repay the loan due to undue reliance on the value of the collateral. If left unresolved, this also would ensure the quality control procedures review the need for elevated enforcement action.
The NCUA agreed with all of the Inspector General’s recommendations and is in the process of implementing all three of these improvements by the end of 2020.