Taxi Troubles Take Odd Turn

Actions by the New York City Council might brighten prospects for cabbies and increase the value of the taxi medallions many of them have used as collateral for loans.

That, in turn, might help two Queens credit unions that were placed into NCUA conservatorship last year: Melrose Credit Union, Briarwood, N.Y. ($1.1 billion in assets, 19,864 members) and LOMTO Federal Credit Union, Woodside, N.Y. ($156.2 million in assets, 2,283 members).

Melrose and other New York credit unions with large taxi medallion loan portfolios have contributed a disproportionate share of losses among the nation’s 5,600 federally-insured credit unions.

Losses deepened in the second quarter for Melrose: It lost $61.3 million in the three months that ended June 30, worsening from a $20.2 million net loss a year earlier. LOMTO’s net loss was $11.3 million, about the same as a year earlier.

Taxi medallions and Melrose have come under increased scrutiny this year. On Aug. 19, The New York Times reported that federal prosecutors were investigating possible fraud by Michael D. Cohen, president Trump’s former lawyer, in connection with more than $20 million he borrowed from Melrose and Sterling National Bank in late 2014 using taxi medallions as collateral.

The newspaper cited unnamed sources who said investigators were looking at whether the value of the medallions was misrepresented and whether Cohen hid income from his taxi business.

Based on the Times report and Securities and Exchange Commission filings by Sterling National Bank, almost all those loans would have come from Melrose. Sterling’s filings show its total taxi medallion-backed loans fell from $61,590 at the end of 2015 to $42,010 in taxi as of June 30, representing just 0.2% of its total loans.

An NCUA spokesman told CU Times that the allegations and investigation of Cohen are not related to the NCUA’s decision this month to file an administrative complaint against Alan S. Kaufman, who was president/CEO of Melrose from 1998 to 2016.

The Aug. 2 complaint said Kaufman violated the law and breached his fiduciary duties by unjustly enriching himself and family members at the credit union’s expense over two decades. It asked the court to order Kaufman to pay $3.5 million in reimbursement plus $1 million in civil penalties. Kaufman told CU Times Aug. 8 that the actions were an attempt by the NCUA “to cover up for their mistakes with Uber.”

The complaint also mentioned a taxi medallion business it claims Kaufman ran out of Melrose’s headquarters with help from Melrose employees.

Cohen pleaded guilty in federal court to bank fraud, tax evasion and campaign finance violations on Aug. 21.

The taxi medallion losses have had a significant impact on credit unions. Among the 5,646 federally-insured credit unions in March, 1,260 carried non-agricultural commercial loans not backed by real estate – the category that includes taxi medallion loans. On average, those loans accounted for less than 1% of all credit union loans. However, losses among 10 credit unions with these commercial loans accounted for nearly three quarters of losses in the first quarter.

Most credit unions had net income in the first quarter. Among the 933 credit unions with net losses, those 10 accounted for 76% of the losses even though they accounted for a mere 0.4% of all credit union loans.

While financial reports filed by Melrose provide little explanation for problems related to its nearly $1 billion in taxi medallion loans, SEC filings from public companies shed more light on that subject.

Even though Sterling’s exposure was microscopic, it followed common protocol among SEC filers of separating out the category after medallion values began plummeting with the rise of Uber, Lyft and other ride-sharing services.

Sterling noted it had downgraded $24,032 in loans from one borrower to substandard, stating, “We are closely monitoring the collateral values, cash flows and performance of these loans” – boilerplate language that has appeared in each subsequent report.

By the end of 2017, Sterling had added another set of loans into the substandard basket, both in non-accrual, with $33,083 outstanding. In the first half of this year, it took a $1,996 charge-off “to reflect the decline in the value of collateral.”

Another New York lender to taxi companies shed further light on the financial landscape. Medallion Financial Corp. held $258 million in taxi medallion loans as of June 30, down $195 million from a year earlier, much of it from charge-offs and foreclosures.

New York City medallion values reached a high of $1.3 million in 2011, but have plummeted in recent years. Medallion Financial took $24.8 million in loan loss provisions in the second quarter to mark its loans to a net value of $181,000 for New York City medallions and $35,000 for Chicago medallions.

Andrew Murstein, the bank’s president, told investors on an Aug. 14 call the city’s Aug. 8 action to limit ride-sharing services would help bring more fairness to the business, raise wages for drivers and increase the value of medallions.

But he emphasized that taxis were in the bank’s rear-view mirror. He said the bank’s medallion portfolio was now at its lowest level since 2003, while it was expecting growth from its $791 million in consumer loans and $80 million in non-medallion business loans.

“The medallion losses, I believe, are coming to an end,” Murstein said.

“We’ve been writing off a lot aggressively the last few years, taking very conservative positions,” he said. “The key for us is just to get that medallion portfolio behind us and get it to a break even.”

Medallion Financial’s taxi medallion portfolio is about the size of Progressive Credit Union of New York, the second-largest medallion loan holder among credit unions with a portfolio of $296.4 million as of June 30.

Progressive ($423.8 million in assets, 2,980 members) lost $21.6 million in the second quarter, compared with a $19.4 million loss a year earlier. The Manhattan credit union lost $52.1 million in 2016 and $81.9 million in 2017, but had $3.6 million in net income in this year’s first quarter.

The first quarter gain reflects the $18 million the credit union grossed in March by selling 9,105 square feet of its 24,136 square feet of office space at 131 West 33rd St. in Manhattan. Progressive announced details of the sale to its members shortly after the deal closed, saying it had purchased the office space at $445 per rentable square foot in 2009, and sold it for $945 per rentable square foot.

Call reports showed Progressive had $10.8 million in one-time gains from sales of fixed assets in the three months ending March 31, boosted by the real estate gain. Its June call report showed that line as $9.2 million, indicating $1.5 million in one-time losses.