When New York state took over a small credit union in September, the reason it cited was “unsafe and unsound conditions” at the institution. The real reason may be Uber.
The New York City-based Montauk Credit Union had roughly $170 million in outstanding loans -- one-third of which were to taxicab operators that have been struggling to pay their bills since the growth of ride-sharing companies like Uber and Lyft.
Taxicab operators typically take out loans for medallions, the city-issued licenses that cabs need. A few years ago, medallions were a hot commodity in New York City. The city severely limits how many new licenses it issues every year, driving up the demand for them and their value. Just two years ago, a single license could sell for as much as $1.3 million, according to Standard & Poor’s (S&P) Capital IQ.
Enter Uber, which isn't subject to the same licensing regulations as taxi companies so its drivers don't need a medallion to operate in the city. This loophole has let the company’s fleet of drivers grow over the past five years to about 30,000 drivers in New York City, while there are only about half that number of yellow cabs licensed in the city. As Uber’s estimated value has more than doubled to $51 billion in the past two years, the value of the city's taxi medallions has shrunk from $1.3 million to $750,000.
The problem isn't specific to New York. In Chicago, S&P estimated medallions are worth around $240,000 -- down from $360,000 in 2013. And according to CommonWealth Magazine, the average price of medallions in Boston this year was about $400,000 -- down from more than $660,000 last year.
The plummeting value of taxi medallions doesn't just hurt cab companies. Much like the housing bust shook the home loan industry, banks across the country that specialize in medallion loans are now taking a hit. With the crash in prices, many loans are now underwater, and lenders are reluctant to continue to refinance as the loanholders struggle to make payments. Instead, lenders are demanding final loan payment -- and medallion owners have started defaulting on their loans.
“It’s a pretty dramatic example of ride-sharing’s impact on the industry as a whole,” said Arnold Gevero, associate director at S&P Capital IQ.
In the case of Montauk Credit Union, data cited by Credit Union Today shows that about 3 percent of its loans were delinquent before the state took it over. In addition, it's cash-on-hand and interest income had fallen to just 10 percent of its total holdings -- just a half year earlier it had been more than 12 percent. Many credit unions have somewhere between 15 percent and 30 percent of its holdings in those types of assets to act as a financial buffer.
A spokesperson for the New York Department of Financial Services declined to expand on the details of the takeover and whether the state was concerned that other banks were similarly overleveraged. But the state's finance institutions aren't making their worries secret. Last month, a group of them sued New York City and its Taxi and Limousine Commission for allowing Uber to operate, saying the company is destroying their businesses and threatening their livelihoods. Melrose Credit Union recently warned the city that medallion owners may not be able to repay $212 million coming due in the next few months. And this summer, taxi mogul Evgeny Freidman -- who owns fleets in Boston, Chicago, New Orleans and Philadelphia -- filed bankruptcy papers for several of his New York companies after Citibank sought to foreclose on 46 medallions owned by them.
Uber operates in nearly 200 U.S. cities, and S&P predicts the effects of the taxi medallion crash will spread beyond New York -- although prices there have fallen the most dramatically. The company's analysis identified at least four other financial institutions across the country that have made lending to the taxi medallion industry a significant part of their business and could be at risk. Two of those -- Melrose and Lomto Federal Credit Union -- are based in New York. The other two are Florida-based BankUnited, Inc. and Colorado-based Signature Bank.
By S&P’s assessment, the situation will get worse before it gets better for taxis and their lenders. It suggests financial institutions with large exposures to the taxi medallion industry “take appropriate steps to measure and mitigate this increasing credit risk.” As ride-sharing companies “look set to become long-term competitors of the taxicab industry,” the analysis went on, “medallion prices are poised to continue to decline until a more competitive equilibrium.”