The NCUA may be forced to increase loss reserves for the Share Insurance Fund as the value of taxi medallions plunges, putting credit unions that made medallion loans at risk, NCUA board member Rick Metsger said Friday.
“Prices for New York taxi medallions at two recent public auctions have been considerably lower,” Metsger said, speaking at the Oregon Department of Financial Services CEO roundtable. “That, combined with a continued increase in already high delinquency rates on medallion loans, suggests the Share Insurance Fund’s reserves may have to increase in the very near future.”
Metsger said the agency warned credit unions about concentration risk in 2010 and issued a more specific warning about taxi medallions in 2014.
“While recent history reflects a continuously rising market price for medallions, an adverse change in market conditions and economic cycles can decrease prices,” Larry Fazio, NCUA’s Director of Examination and Insurance, said, in the 2014 letter to agency field staff. “When economic conditions change, credit unions that engage in significant levels of liberal financing can suffer from significant loan-to-value shortfalls.”
The value of taxi medallions has plunged as a result of ride-sharing services such as Uber and Lyft.
“We have known, and warned about, this risk for some time,” Metsger said, “but the bill is about to come due.”
He said that credit unions that have operated prudently will have to pay for losses incurred by a small number of credit unions that gambled on a market that was “disrupted and a bubble that burst.”
Metsger said that the NCUA’s ability to curtail taxi medallion lending was limited by a provision in the Credit Union Membership Access Act that exempted credit unions chartered for the purpose of making or had a history of primarily making member business loans from loan caps.
The Senate report on the legislation specifically mentioned taxi medallion lending as a type of loan that was exempt from the cap.
“Most credit unions cannot put more than 12.25 percent of their assets into member business lending,” Metsger said, adding “but the taxi medallion credit unions were able to put up 100 percent of their assets.”
Metsger said the medallion crisis must be considered when the agency decides what share insurance fund reserves it must have, as well as any calculation of share insurance fund distributions next year.
“This reinforces why we needed to increase the fund’s normal operating level this year, to account for any significant losses that otherwise might have required a sudden and significant premium charge to credit unions,” he said.
Two credit unions, Melrose Credit Union and LOMTO Federal Credit Union are operating under NCUA conservatorship.
The agency recently came under fire from credit unions when it increased its normal operating level.
Metsger also criticized efforts to change or repeal the NCUA’s risk-based capital rule, which is scheduled to go into effect in January 2019.
“I am happy to consider changes in our risk-based capital rule that will strengthen the system,” he said. “But, trade groups seeking to repeal the rule completely ignore the fact that the adoption of a risk-based capital rule is both required by federal law and good public policy that protects credit union members. The situation with the taxi medallion credit unions only adds an exclamation point to this fact. It is a prime example of why we need a strong risk-based capital system.”
The House Financial Services Committee is scheduled to mark up legislation next week that would force the NCUA to kill the risk-based capital rule.
