Another rough ride for financial institutions?


Key Findings

§  Potentially predatory lending practices in the New York taxi medallion market may have led to artificial inflation in medallion prices

§  Since the medallion price bubble burst in late 2014, more than 950 medallion owners have already filed for bankruptcy

§  In September 2019, federal prosecutors opened an investigation into possible lending fraud in the New York City taxi industry

§  Fideres’s investigation finds that bad lending practices, not the rise of Uber, are at the basis of the current crisis


Background

Medallions are small metal plates attached to the hood of a New York yellow taxi, certifying it for use throughout the city. There are two kinds of medallion ownership structures: independent medallions and mini-fleet or corporate medallions.

The medallion pool is rarely expanded, and the relative scarcity contributed to its high value for years. When the city does issue new medallions, they are sold at auction. Post-auction, medallions are transferable on the open market by licensed brokers. From 2014 to 2018, the pool remained constant at 13,587 medallions.

From 2002 to 2014, the average price of a medallion increased from $200,000 to more than $1 million, although driver incomes remained constant. Data indicates that approximately 4,000 drivers purchased medallions in that period. The increase in medallion prices was largely fueled by debt and unhealthy lending practices from credit unions and banks.

In late 2014, the medallion market collapsed, and prices fell dramatically from more than $1 million for an independent medallion to just $335,000 in June 2019. Since the collapse, hundreds of medallion owners have filed for bankruptcy.

  More than a decade of market malpractice

While industry officials were quick to blame the emergence of ride-hailing services like Uber and Lyft as the cause, the reality is more complex. Available evidence suggests that, for more than a decade, lenders and intermediaries engaged in unsound lending practices, which had the effect of artificially inflating medallion prices:

§  A New York state loophole allowed lenders to classify medallion deals as business loans rather than consumer loans. Consumer loans feature far more disclosure rules and protections.  

§  New York lenders in some cases required small-business loan applicants to sign a confession of judgement, preventing applicants from contesting any subsequent allegations of default

§  Lenders typically included a balloon clause, requiring payments to be made all at once after a period of three years or extended with inflated interest rates

§  Major banks partnered with fleet owners and brokers to provide loans in the medallion market. These industry intermediaries were not subject to the same regulatory scrutiny as banks

§  Some fleet owners purposely overbid for taxi medallions to drive up prices

The era of liberal lending in the medallion market hinged on the idea that the value of medallions would continue to rise. Following the 2014 market crash, the majority of these loans became unsustainable. The total book value of medallion loans in 2017 was approximately $4.9 billion.

The Bubble Burst

Role of non-profit credit unions

Non-profit credit unions specialized in medallion loans were key to the niche banking system around the taxi industry. Given their substantial positions in the medallion loan market, non-profit credit unions fared worse than the larger financial institutions following the crash. The following chart represents the 2017 New York City loan valuation figures for the major lenders. 

From 2017 to 2018 the National Credit Union Administration closed or merged several credit unions for unsafe business practices in medallion lending. Melrose Credit Union held as much as $833 million in taxi medallion loans at the time of its liquidation in 2018.

Between 2010 and 2014 roughly 1,500 people bought taxi medallions. Including refinancing of old loans and extensions required by banks, medallion owners signed at least 10,000 loans in that time.

Regulatory actions 

§  In May 2019 the New York attorney general began an inquiry into the taxi industry. Federal prosecutors opened a separate investigation into possible lending fraud in the industry just months later.

§  Fideres’s preliminary investigation finds that bad landing practices, not the rise of Uber, are at the basis of the current crisis

§  To support a potential claim against credit unions and lending intermediaries, Fideres can build an economic competition model of “but-for” prices in the medallion loan market absent predatory lending behavior. This would form the basis for a preliminary class-wide damages estimate.