Sometimes, you’re connected to the world in ways you can’t imagine. Consumers are delighted about ride sharing companies like Uber and Lyft that have reduced the cost of travel dramatically, often about half what you might have paid in a taxi. But that new competition has taken a toll on the taxi cab industry. Why should you care? Believe it or not, it could impact your credit union.
“The taxi industry continues to experience disruption from the rapid expansion of competitors, such as Uber and Lyft, which use smartphone app-based ride-sharing services. This market disruption has affected the expected revenue streams of medallion holders and, in turn, the value of the taxi medallions themselves, which give taxis exclusive rights to accept street hails and passenger pickups at ports and terminals,” says John Fairbanks, a public relations specialist with the Office of Public and Congressional Affairs in the National Credit Union Administration.
He explains that medallion holders generally rely on taxi service and leasing revenue as the primary means of repaying the loans they took out to purchase the medallions. As taxi revenues and leasing income decline, medallion holders may find it increasingly more difficult to make loan payments, especially on large loan amounts. Taxi medallion lending is a specialized form of credit offered by some credit unions, banks and other specialized lenders.
This is particularly a big deal for New Yorkers, in New York City, federally insured credit unions have financed about one-third of the city’s taxi medallions. Taxi medallions serve as the underlying collateral for such loans, and changes in their market value can have a direct impact on the borrower’s loan-to-value ratio and the risk of the transaction. The unique role of taxi medallion credit unions was specifically recognized by Congress in the Credit Union Membership Access Act of 1998.
Three New York credit unions have been impacted. Melrose Credit Union and LOMTO Federal Credit Union are both under NCUA conservatorship and Montauk Credit Union had to merge with Bethpage Federal Credit Union.
All this opens the door for a discussion about why a credit union can go into conservatorship and what happens to the members.
“There are a variety of reasons that can lead to a credit union being conserved. The reasons range from overall mismanagement of the credit union to noncompliance with the regulations. A lot of times the key indicator is that a credit union has a low net worth ratio. You see this when credit unions have been hit by poor economic conditions, or when they have not diversified their product offerings and income. Melrose is a perfect example with its high concentration of medallion lending,” says Jeremy Smith, a compliance officer with PolicyWorks, a provider of compliance management and other services for credit unions.
What are the options when a credit union finds itself in this unfortunate predicament?
The LOMTO and Melrose stories are still unfolding, but typically one of three things happen -- liquidation, merger, or the credit union digs themselves out of conservatorship. “The best option would be to dig themselves out of conservatorship, but that is something that rarely takes place. A lot of these credit unions are small credit unions and they just don’t have the resources to do this. It's also tough, especially if you are conserved because of local economic issues,” says Smith.
The next best option is the merger. That allows the member to still receive the financial benefits of being with a credit union. This also allows the community to continue to thrive because the financial services remain. Often times the credit union that is taking on the conserved credit union has much more resources and products to offer as well.
But there can be a downside. “The credit union they merge with may not have the same focus, such as being a teachers’ credit union, which is why they may have joined the credit union in the first place,” Smith explains.
He adds that liquidation is always the last resort, or at least the last action you want to see. Once a liquidation takes place the NCUA’s Asset Management and Assistance Center steps in. The AMAC steps in to complete the liquidation steps and works with those members on recovering their assets.
Fairbanks weighs in, “By way of comparison—and not suggesting this will be the same scenario playing out—we in 2015 conserved another taxi, Montauk, and in 2016, we facilitated a merger into another credit union, Bethpage, at no cost to the agency. I probably can’t discuss the pros and cons other than to say, in a conservatorship, the credit union remains open, and members can conduct normal business. In a merger, members still have a credit union, just a new one. In liquidation, if the credit union is not likely to come out of conservatorship, and NCUA cannot facilitate a merger, members are still insured up to the limits of federal law, which reduces or completely avoids losses to them, depending on whether they have deposits above the insurance limits.”
But Fairbanks provides assurance, “Member accounts at all federally insured credit unions, including the seven credit unions that underwrite taxi medallion loans, remain protected by the Share Insurance Fund. NCUA insures accounts up to the limits provided in law. No member of a federally insured credit union has ever lost a penny of insured savings.”