Compliance Blog

Written by JiJi Bahhur, Director of Regulatory Compliance

Last week, the National Credit Union Administration (NCUA) released an FAQ document that provides additional guidance on taxi medallion lending.  This guidance comes about a year after NCUA’s issuance of Letter to Credit Unions 14-CU-06 and Supervisory Letter 14-04 which we blogged about here.  The FAQs do not impose new requirements, but rather are intended to clarify the guidance provided in the 2014 supervisory letter. 

Credit unions that either make taxi medallion secured loans, participate in these loans, or that are contemplating doing so, may find this additional guidance helpful.  The FAQs contain nine questions related to taxi medallion lending and address, among other things, financial reporting of taxi medallion loans, methods for valuing taxi medallions and influences on the value of the medallions as collateral.

Here’s a taste of what you’ll find:

“What is the “speculative” (or market) premium that is mentioned in the guidance?

A taxi medallion is an income-producing asset. Income-producing assets are generally valued by determining the asset’s net operating income (NOI), which is calculated as the gross revenues generated by the asset, minus any operating expenses before depreciation and interest. The NOI is the basis for determining the economic value of the asset, that is, the value of the asset based on its ability to generate income.

However, the value of a taxi medallion is also influenced by the number of medallions made available by the local taxi authority. A limited supply of taxi medallions in a given market can raise the value of the medallions in that market above the economic value relative to a given level of demand. Simply put, the speculative value is the difference between the economic value of a medallion and the price the market is willing to pay for that medallion.

Examiners should understand that the portion of the value that is identified as the speculative premium is less stable than the economic value supported by the ability of the medallion to generate income. Any change in the market (e.g., increased competition, reduced supply of drivers or other market changes) will have a more pronounced impact on medallion values.

In addition, because the speculative portion of the price is not supported by the taxi medallion’s NOI, repayment of the speculative portion will have to be from another source (such as, the borrower’s liquidity or other earnings of the principal).

As communicated in the guidance to examiners, credit unions that perform proper credit analysis (that is, analysis that identifies sources of repayment and the reliability of those sources) should be able to withstand the impact of fluctuations in the value of taxi medallions. When the repayment relies on sources other than a borrower’s own operations, examiners should determine whether those repayment sources have been identified by the credit union and are committed to the loan repayment via guarantees or additional pledged collateral.”

To view the rest of the FAQs, click here. 

***

Little Big Man.  I just had to share this photo . . . my little man is getting big way too quickly.