By Ray Birch
CLARK, N.J.—One medallion lender fears that troubled taxi loans could hit those that bought participations harder than some of the credit unions that originated taxi loans, and as a result is asking NCUA to step in with guidance on how credit unions should manage this growing concern.
Due to the effects of ride sharing services on the taxi industry in New York City, two credit unions have been conserved to date and one—LOMTO FCU in Woodside, N.Y.—may be teetering on the brink. In February, NCUA conserved the $1.8-billion Melrose Credit Union. Medallion lender Montauk CU was conserved by regulators in September of 2015. It was later merged into Bethpage FCU.
Perhaps the larger issue than the fate of Big Apple medallion lenders is the impact on credit unions across the country that have purchased medallion loan participations that are ill-prepared to take big hits to their capital, offered Aspire FCU CEO Tom O’Shea.
“People have been characterizing this as a New York City or regional issue,” said O’Shea, whose $173-million CU originates medallion loans and sells participations. “But this is a nationwide concern for credit unions. In some cases I believe those that buy participations are in a worse positon than some originators.”
Strong Capital Needed
O’Shea said that if participants began buying taxi loans with a capital buffer that was strong, they will likely ride out their problems once the medallion market eventually stabilizes, which O’Shea acknowledges will take some time.
“But if you went into this with a lower capital level, around 7%-8%, and you have to start setting aside more in reserves to fund potential losses, that will hurt your capital position big time,” he said. “Especially if you bought participations that are loans to corporate medallion holders, which are the largest loans and whose values have dropped the most, you could then be at risk for failure or takeover.”
As CUToday.info has reported, Big Apple medallions, whose values had skyrocketed to above $1 million at their peak, have reportedly fallen below $500,000. Some medallions in New York City this year have sold for around $250,000, reports indicate.
O’Shea said that his key point is many of the participants may have done little to prepare for the risk in medallion loans, which had been considered rock-solid, highly profitable loans for more than 50 years.
“Medallion loans are not their focus, so participants may not have kept an eye on the risk and built a capital buffer,” said O’Shea, pointing to the example of Progressive CU. The taxi medallion lender has suffered large losses last year and into 2017, but had 31.10% capital at the close of March.
“This is their main line of business at Progressive, so they have built up tremendous reserves behind it,” said O’Shea. “But many credit unions that bought participations did not go into this with a big capital position and may be taking losses proportionally similar to Progressive.”
Risk Spreads
O’Shea, whose medallion loan portfolio totals around $15 million, explained that his credit union has participated out 90% of the medallion loans it makes. He noted that spreads the CU’s risk and is a similar practice at some medallion lenders—an indication of the extent of these loans that have spread across the country. O’Shea believes the dollar exposure to CUs nationally is significant, reaching into all regions of the country. As CUToday.info reported, one analyst estimates the tally could $3 billion.
O’Shea said the road ahead for Aspire will not be an easy one, but one that the credit union will navigate. Due largely to setting aside greater reserves to address potential future losses, the credit union lost $519,386 during the first quarter of 2017. In comparison, the credit union recorded a quarterly loss of $93,723 one year earlier. Aspire’s delinquency rate as of March 2017 was 4.16%, down from 5.18% as of the end of 2016 and up from 3.09% a year ago. Net worth has slipped from 10.5% at the end of 2015 to 9.81% at the end of March.
“This is going to be tough, and we work with our regulators all the time,” said O’Shea. “We are cutting back our credit union’s general expenses to save money to survive this. It won’t be painless, but we will survive this.”
O’Shea said that Aspire has been working with medallion borrowers to keep them in business, lowering rates and making loan adjustments to help keep the member paying. He also said that when the credit union moves to foreclose, it does not immediately sell the medallion and take the loss, but instead tries to place the medallion with another taxi cab operator to generate some principal repayment until the market stabilizes.
NCUA Assistance Needed
What is needed for both medallion loan originators and participants is greater assistance from NCUA, said O’Shea.
“NCUA wants to help us through this, but they need to provide us with some more guidance,” said O’Shea. “They should have maybe a taxi czar—someone onsite who can help us drive conversations with our participants around the country on how to manage this asset. We need clarity and guidance from NCUA on how to manage this asset—how to reserve for it, how to work through a hardship with the borrower. In my mind we have five different silos at NCUA looking at this situation differently. We need just one, clear perspective, and that has been hard to get.”
NCUA chose not to comment when asked by CUToday.info to respond to O’Shea’s statement, but instead stated that on three occasions since 2010, the agency issued guidance on managing business lending risk—with a particular focus on concentration risk—and on taxi medallion lending specifically:
2010 letter to credit unions on managing business lending risk
April 2014 letter to credit unions and April 2014 supervisory letter on taxi medallion lending
May 2015 letter to credit unions and May 2015 follow-up, with frequently asked questions