Loans secured against taxi medallions, once a profitable income source for a host of U.S. credit unions, have soured in recent years as ridesharing services such as Lyft and Uber take a growing slice of the market.
The shift toward rideshare services has left credit unions holding billions in delinquent loans related to these medallions — a type of operating license that some municipalities require taxi drivers and companies to purchase in order to operate cabs. And while many of the credit unions impacted are based on the East Coast — particularly in New York — at least one institution in Los Angeles holds substantial taxi medallion debt.
Hollywood-based First Entertainment Federal Credit Union had at least $20 million in taxi medallion loans on its books as recently as 2015, according to two sources with direct knowledge of the financial institution’s loan portfolio. The sources, who spoke on the condition of anonymity because they were not authorized to disclose the information, said the taxi loans began to sour in 2015, and First Entertainment set aside millions to cover write-offs. The set-asides rose in both 2016 and 2017, before falling last year, the sources said.
The medallion debt was part of a collateralized loan package First Entertainment purchased in the early 2000s, according to the sources. These loans were typically made to drivers in cities such as New York, San Francisco and Chicago where medallions at their peak could cost hundreds of thousands of dollars. Los Angeles does not have a taxi medallion program — it has nine taxi franchise operators, and drivers are licensed through an L.A. Department of Transportation program.
The medallion loans were seen at the time as a safe bet, according to the sources and other industry experts. But as Uber Technologies Inc. and Lyft Inc. quickly rose to prominence, demand for taxi services fell sharply, and medallion owners have struggled to pay off loans taken out to purchase the licenses.
“Uber and Lyft came around and decimated the market,” one individual who has seen First Entertainment’s books said. “At the time these loans were made, no one could have imagined — they were good, solid investments.”
According to this person, the delinquent medallion debt was partially responsible for a rise in set-asides to cover loan defaults First Entertainment reported in 2015, 2016 and 2017 — years when ride sharing services solidified their dominance over taxis. The institution’s so-called “loan loss allowance” at its peak in 2017 represented 1.8% of the credit union’s total outstanding loans. The allowance came down to 1.6% in 2018.
Frank Wasson, First Entertainment’s chief executive, did not return calls requesting comment.
Medallion meltdown
First Entertainment is hardly alone in holding poor performing medallion loans although it does appear to be one of the larger holders of medallion debt in Los Angeles.
Chatsworth-based Premier America Credit Union, which has $2.6 billion in assets, has also been hit by the collapse in taxi medallion values.
Public records filed by the state-chartered institution with California financial regulators show it had $7.8 million in medallion loans in 2017, which dropped to $3.4 million last year as it began to write off the bad loans. The filings show that nearly half of the loans in 2018 were more than 90 days past due. The year before there were $2.6 million in loans more than 90 days past due.
The National Credit Union Administration, a federal agency that regulates credit unions, estimated that as many as 100 credit unions nationwide had bought into these pools of taxi medallion loans.
The NCUA’s inspector general also said in a March report that the agency had not been aggressive enough in policing three New York credit unions with large amounts of taxi-related debt. Those loan portfolios went into default, costing the agency’s share insurance fund — which all U.S. credit unions pay into — more than $765 million.
“It was a pretty damning indictment of the NCUA,” said former Glendale Area Schools Federal Credit Union Chief Executive Stuart Perlitsh, who retired in March 2017.
The taxi medallion report came less than a month after the NCUA approved a $160 million payout from the share insurance fund to eligible credit unions — the second largest payout by the fund since it was created in 1970. Refunds paid to the credit union industry are considered rebates for maintaining healthy reserves and not needing to tap the share insurance fund to deal with failed institutions.
The payouts to the nation’s approximately 5,400 credit unions imply that the community banking system remains financially healthy overall and that the worst of the medallion loan crisis might be in the rearview mirror.
Shared risk
While the overall hit attributable to bad medallion loans was significant, experts said most credit unions were able to ride out the storm. Some institutions —particularly in taxi medallion strongholds — did fail. Credit unions like First Entertainment and Premier America were less exposed because their medallion debt was part of packaged loans sold off by other credit unions and represented a smaller percentage of their outstanding loans.
“Since most credit unions did these loans through participation, that limited their ultimate exposure,” said Keith Leggett, an economist who follows the credit union industry. “With First Entertainment, they had well over $1 billion in assets so they could easily absorb $20 million and potential charge offs.”
Sherry Javad, chief operations officer of the San Francisco Credit Union, said her institution owned approximately 600 taxi medallion loans from 2010 through early 2016. Javad declined to provide a dollar figure associated with those medallion loans.
Javad said in an email that many of the medallion loans are off the institution’s books because there have been foreclosures and “other events” that have reduced the number. She said the SFCU also tries to accommodate cab drivers facing difficult loan repayments when possible.
“We try and do whatever we can to help the drivers stay in their loans,” Javad said.
She added that her credit union had previously sold some portion of its medallion loan portfolio to credit unions in Los Angeles but declined to disclose specific institutions.
NCUA spokesman John Fairbanks declined to comment on the organization’s March medallion debt report, and also declined to disclose whether there are any other specific credit unions in Los Angeles affected by the medallion meltdown.
Mark Leyes, a spokesman with the California Department of Business Oversight, which regulates state-chartered credit unions, also declined to comment.
“We can’t comment on those specifics or the makeup of a portfolio,” Leyes said.
