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What Does It Mean When Your Credit Union Goes Into Conservatorship?


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.

in New York City, federally insured credit unions have financed about one-third of the city’s taxi medallions.

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.

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.

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.”

Martin   |     |   Comment #1
The taxi medallion are vehicle for bribing the city of NY bureaucrats and used them to collect money, in millions, from Taxi companies who wanted to establish more taxi cabs and maintain the existing.
The taxi medallion loans are nothing more than a sham loans without any assets to cover the loans and were taken from many CUs including Melrose.
This is how the scam works: A taxi company pays millions for the medallions to the city for permits, the taxi company then borrows against those medallions as if they were assets to the company, from various CUs and pockets the money. The loans are left to the taxi companies to service them, but most of the taxi company in NY are insolvent and stopped paying the loans including the loan to Melrose who is left with nothing (holding worthless paper).

Who profited: The city of NY bureaucrats and the taxi companies upper management.

The credit unions were fooled into lending the money.

The NY credit unions lent $2 billion in taxi medallion loans are appealing a court ruling, which rejected their argument that regulatory treatment of medallion taxicabs violated the equal protection clause under the U.S. Constitution.

Taxi-medallion lender Montauk Credit Union, based in Manhattan, will have its operations taken over by the National Credit Union Administration. Melrose is next to be taken over under National Credit Union Administration control.

I blame the city of NY for giving a letter to the taxi companies that the payments for the medallions were legit assets to the taxi companies.
me1004   |     |   Comment #12
Martin, I'm not so sure what you have explained is quite right. The NYC taxi medallions can be sold/transferred to others, and at whatever the market value might be at any time. I thought so and just checked, and even the NYC taxi commission says so:


So does that make them am "asset" under the law? I don't know, and I suspect you have would have to go deep into complex and arcane law to figure out if they need to be an "asset" in order to be sold, but they can be sold, so they do have value to back up a loan.

The issue with the CUs is not that the medallions can;t be sold as not being assets. It is that the value of the medallions has been seriously undermined by the "sharing" alternatives like Uber and Lyft (don't get me going, but it has been shocking from day one that local governments all over have bought Uber and Lyft's lies that they are NOT taxi operations, they are simply "sharing." They are not sharing anything, they are selling a service no different whatsoever from the taxi business).

Just like when the housing market collapsed, and left banks all that then cheap housing that did not back up the size of the loans on them, the CUs that had been formed for the NY taxi industry now find themselves in a similar situation, and more and more tax companies are finding themselves on harder and harder times, unable to make their loan payments.

Further, there will be details in the CU paperwork using them as collateral. They don't even have to take possession of the medallion specifically, they could instead take a percentage investment in it, similar to owning a percentage of the company -- or some other technical approach to backing up the loan with the value of the medallion. But at this point, the medallion isn't worth anywhere near what it was when it was set as collateral.
Nothing   |     |   Comment #14
Probably secured under local version of the UCC.
Martin   |     |   Comment #15
me1004, I will just get to the point, there are 162540 TLC medallion licenses in use in NYC, keep your eye on the point "Licenses" and that is what the medallions are, the city wanted to make them valuable and to sound important and classified them as asset to the owner (the owner must not feel ripped off because some of those medallions cost them in mullions to buy them).
Most taxi and limo services in NYC have been in trouble for some time now and they discovered that some CUs can lend them money back on the medallion licenses and they took the advantage of it.
The rest is a sad story for the CUs because they can not market or sell the papers of the medallions loans, the prospective buyer found out that the medallions are not assets (they expire after a certain time).

The Taxi (cab) companies stopped paying the loans back to the CUs and there we are, NCUA is held responsible for $2 billions of worthless papers. The taxi companies, entities who bought medallion papers from CUs and NCUA are suing the NYC.
Martin   |     |   Comment #24
Comment #19, wrong as usual:


Please scroll down and look at the numbers on the left column.
alan1   |     |   Comment #27
I don't know where you get your medallion numbers from -- they are off the wall. The numbers at the website you listed have nothing to do with the number of medallions.According to the NYC Taxi and Limousine Commission, there were 13,587 medallion taxis in 2015 (same number as in 2014). See 2016 TLC Factbook, p. 3 of PDF at http://www.nyc.gov/html/tlc/downloads/pdf/2016_tlc_factbook.pdf
Martin   |     |   Comment #28
The web site you posted is a PR stunt for the tourists to read some statistics. Go back to the web site (OFFICIAL CURRENT NYC d-base that I posted above) and scroll down to the end to see the number of medallion drivers and their medallion licenses for REAL numbers to pop up. And do not tell me you can not do that or you do not want to do that or you trust tourist leaflet statistics instead of official d-base?
alan1   |     |   Comment #31
The number of medallion cab _drivers_ , and the number of taxi drivers _licenses_issued by the city, , are far greater than the number of cab _medallions_. The number of people licensed to drive cabs (over many decades) is obviously far greater than than the number of medallions issued by the City.
Martin   |     |   Comment #32
alan1 on comment #31, if you look at the column for type of license it is medallion for all, (those are current active licenses), what is confusing to you is the fact that some cab companies bought extra medallion licenses to be able to put more cabs and hire more taxi drivers should the need arises, (the money came from CUs from previously given medallions as collateral for a loan).
Second, some of the licenses were canceled by NYC when they found out that the Taxi companies borrowed and or surrendered the medallions for money on the secondary market (credit union scams). Over 25000 licenses are legally owned now by the credit unions who forked over money for them and who in the process were foreclosed by FDIC and now they own the licenses of many cab companies.
FDIC at one point indicated that they have right to form a management companies and run some of the cab companies, but a judge denied them that right, which in turn, made FDIC to sue the NYC together with the credit unions involved in the scam. FDIC now hold worthless paper of over $2 billions.

I hope the above did shad some light of what really is going on, that is why my posts seamed to you confusing and not genuine. I have been following the development of Melrose and FDIC from day one of the crises.
New Yorker
New Yorker   |     |   Comment #33
The FDIC had nothing to do with Melrose. Melrose is a credit union. I believe there have been no "development[s] of Melrose and FDIC from day one of the crises."
Martin   |     |   Comment #34
Correction on comment #32, I meant to say NCUA, nor FDIC, Please replace it when you read it.
!!!   |     |   Comment #40
And do you really think anyone who believes in tin foil hats has any credibility among educated people? Even plain common sense indicates otherwise. Of course, there appears to be a shortage of that these days.
TOO LATE   |     |   Comment #41
They could have used the Legendary IFMS WHIZ KIDS that saved New York City back in the mid 1970's.
hank   |     |   Comment #7
So I still wonder what is going to happen with Melrose. Montauk was just a tiny CU compared to Melrose. I think there are a limited number of credit unions large enough to absorb it. It is the 114th largest. I hope they don't get liquidated
Martin Rat
Martin Rat   |     |   Comment #18
At least the last of my CD's with them have matured.
Right now, I'm in the process of terminating my membership.
Like a rat deserting a sinking ship.
Rats are smart!
john   |     |   Comment #11
this was bad mgt on the part of the cu,the state auditor should have stepped in long before it was to late
Kaight   |     |   Comment #13
I salute the intelligence, ingenuity and cunning of NY higher ups. They found a way to rake in a couple billion while leaving the NCUA holding the bag. Now the NCUA for all practical purposes is the rest of America . . . that's where the money will come from. This is a form of wealth redistribution, from all of us to NY. We can only hope the higher ups in Illinois and in California are not as smart as the ones in NY. We all could be broke by the time hopelessly bankrupt, failed states cease fleecing us.
Bozo   |     |   Comment #21
Kaight (re comment #13), there is a certain irony at play. Folks (not all, but some) want fewer financial regulations and oversight, until, of course, their own particular ox gets gored. I'm somewhat confused by your lumping in California with Illinois. California is not exactly a failed state. Granted, we rely too much on income taxes (which can swing wildly, based on the tech economy), and Prop 13 needs a major overhaul, but Jerry Brown has been able to bring some sanity to our state's finances. The "temporary" increase in the state income tax for high earners now seems set in concrete. The "car tax" is going back up, but people just shrug.

I remember the dark days years ago when my wife and I were due a refund on our state income taxes, only to be issued an "IOU". Seriously, it happened. We got one. Eventually, the IOUs were redeemed, but those were scary times.

Granted, the dark clouds on the horizon for California involve woefully underfunded public pensions. Our solons in Sacramento have managed to kick that can down the road for years. I suspect, as always, the "fix" will involve howls and screams from public employee unions and taxpayers alike, but we will survive. Current public employees will have to cough up a bit more, as might taxpayers. It's not an issue which brings out torches and pitchforks. We'll do what we have to do, and move on.
Bozo   |     |   Comment #22
Kaight, I suspect the image of California as a "failed state" is somewhat of a myth advanced by those who disagree with its policies. In terms of finances, Kansas should (or could) learn something from California.
Bozo   |     |   Comment #23
With respect to comment #22, Kansas really blew it with the Sam Brownback experiment. I grew up in Kansas. I went to K - 12 in Johnson County. I went to Shawnee Mission East. The educational system was one of the finest in the country. Kids (including me) went from Shawnee Mission East to some of the best colleges and universities in the country. Then, Brownback came in with his crazy ideas to "starve the beast", which he did. Thankfully, he's gone now. Trump appointed him to some roving ambassador for religion, or whatever.

Under Brownback, Kansas was a "failed state".

I won't be offended if Ken deletes this series of posts as "off topic", but I had to get certain things off my chest, as it were.
Ginzy   |     |   Comment #25
Bozo, as a fellow Kansan, also a Johnson County educated child through the ninth grade, I detect a certain liberal bias in your comments. Although I left the midwest forty years ago I have always been proud of my midwestern roots. What I find interesting about your comments, is that if you look at statistics nationally and compare California Public Schools to Kansas and many, many more states, California scores pretty far down in all categories. While you may not approve of the Governor's approach to government the voters re-elected him by almost four points. I went to Nations report card to look at the statistics and comparisons of schools. By the way Bozo, I was born in Kansas and lived in Mission and Overland Park, you went west I came east and here we are, regardless of ideology, looking for the best deals on interest rates.
Att   |     |   Comment #26
California's economic success is due to the many individuals and groups that created such companies as Apple, Google,Facebook, Oracle etc. Many began as startups. You have a government that takes high taxes from these companies and workers with some of the highest state income and sales tax rates. Temporary taxes that almost always seem to become permanent. The state also has much debt and unfunded liabilities from years of over promising and kicking the can down the road (Many states are the same boat with even bigger problems). Is California in better shape than Kansas? I would agree but they have many issues too. I read that retiree medical and dental benefits alone are underfunded by $74 billion. In some states pension benefits are guaranteed by the state constitution.
me1004   |     |   Comment #29
I agree with the comments about the underfunded pensions in Calif. However, California is not the least bit unique about that, maybe states and cities and school districts all over have done the same.

And you pick and choose about taxes. Yes, high income tax, but low property tax -- which is of MAJOR benefit to the longtime business, paying property taxes at the 1978 value of the property. Frankly, that tax system is anti-competition, the exiting businesses have a major advantage over newcomers.

And Bozo, your IOU had nothing to do with failed finances; that was because the Legislature missed the deadline to adopt a budget for the year, and under law, the controller is not allowed to issue any money until it does. The Republicans and Democrats could not come to agreement on priorities, and neither had enough numbers to adopt a budget with their own party alone as it takes I think it is 60% to adopt the budget, not 50%.
Bozo   |     |   Comment #35
me1004 (re comment # 29), you are no doubt correct about those IOUs. All I remember is that the "warrants", as I believe they were called, created quite a stir.

As for Prop 13, it routinely ignites controversy as to commercial properties. The controversy then fizzles, and it's back to business as usual. As to residential properties, Prop 13 is now pretty much settled in our DNA. It is the state equivalent of the "third rail". When I read about how much new purchasers pay in property tax hereabouts, I tend to gag.
Bozo   |     |   Comment #36
Re comment # 35, as to residential properties, Prop 13 has a perverse effect on the "highest and best use" of many residences. Empty nesters, in 4BR, 2 1/2 BA houses in great school districts are reluctant to sell, as a result of Prop 13 and the capital gains tax. The $500K exclusion doesn't go all that far for long-time homeowners here in the Bay Area. Better to die and leave the house to the kids, with a step-up in basis.

Adding insult to injury, CA taxes LTCG on the sale as ordinary income.
Nothing   |     |   Comment #37
Go to NY where some argue the high property taxes has kept a cap on prop values in upper NY
Jackson&LaSalle   |     |   Comment #42
Chicago's cabbies are screaming bloody murder,,,,,Cook County just passed a historic unpopular sweet drink "soda tax" to give keep them afloat, which is under heavy fire. Do we have a Jung synchronicity in the making that some might call dark grey swans aloft. Game that one out.
jennifer   |     |   Comment #43
I don't think it should matter whether they have a conservative or liberal handle it after a credit union goes under. By title of this article, it seems they think a conservative should handle it.
AL CAPP FAN   |     |   Comment #44
i m stupefied.

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