NEW YORK–It’s a simple premise told often: taxi medallions were a low-risk collateral for lenders until being “disrupted” by ride sharing services, causing their values to plummet and lenders to suffer deep losses.
But it’s a far more complex picture than that, with many lenders—including credit unions and their CEOs who were making millions–regulators, government officials and agencies, and the taxicab industry itself all sharing in the blame, suggests a new analysis by the New York Times.
And in the end it wasn’t just lenders and their insurance funds taking the hit, but primarily low-income immigrants whose lives have been so upended nearly a dozen have committed suicide and nearly 1,000 others left bankrupt. And the new investigation further suggests that while the emergence of Uber and Lyft is the frequently cited reason taxi medallions declined in value, the market would have most likely crashed anyway as a bubble inevitably burst.
In a two-part, nearly 10,000-word piece headlined, “They Were ‘Conned’: How Reckless Loans Devastated a Generation of Taxi Drivers,” the Times said its investigation found “much of the devastation can be traced to a handful of powerful industry leaders who steadily and artificially drove up the price of taxi medallions, creating a bubble that eventually burst. Over more than a decade, those leaders channeled “thousands of drivers into reckless loans and extracted hundreds of millions of dollars before the market collapsed.”
‘Huge Profits’
Among those “powerful industry leaders” were credit union leaders, according to the Times. As CUToday.info has reported extensively, all of the credit unions in major cities across the U.S. that specialized in taxi medallion lending have been conserved, at a cost of approximately $750 million to the National Credit Union Share Insurance Fund.
But before the crash of the last decade ever occurred, plenty of people were cashing in, the Times’ investigation found, including the city of New York, which made more than $855 million by selling taxi medallions and collecting taxes on private sales in the runup to the crisis.
“These business practices generated huge profits for bankers, brokers, lawyers, investors, fleet owners and debt collectors,” the Times reported. “The leaders of nonprofit credit unions became multimillionaires. Medallion brokers grew rich enough to buy yachts and waterfront properties. One of the most successful bankers hired the rap star Nicki Minaj to perform at a family party.
“But the methods stripped immigrant families of their life savings, crushed drivers under debt they could not repay and engulfed an industry that has long defined New York,” the report continued. “More than 950 medallion owners have filed for bankruptcy, according to a Times analysis of court records. Thousands more are barely hanging on.”
A Classic Bubble
The taxi medallion market shows all the signs of a classic bubble inflation: lenders and loosely regulated private lenders wrote risky loans and encouraged frequent refinancing, and drivers took on debt they could not afford, under terms they often did not understand—with many of the parties either perpetuating or believing that taxi medallions could never sink in value, the Times reported.
As the Times noted, between 2002 and 2014, the price of a New York City taxi medallion rose to more than $1 million from $200,000, even “though city records showed that driver incomes barely changed.” The Times quoted Haywood Miller, a debt specialist, as observing, “The whole thing was like a Ponzi scheme because it totally depended on the value going up. The part that wasn’t fair was the guy who’s buying is an immigrant, maybe someone who couldn’t speak English. They were conned.”
Big Cheerleader
Among the biggest cheerleaders, the Times said, was New York City’s Taxi and Limousine Commission, which as prices skyrocketed, sold new medallions declaring they were “better than the stock market.” A spokesperson for the TLC said it wasn’t its job to regulate lenders.
In all, the Times reported over a 10-month period it interviewed 450 people, built a database of every medallion sale since 1995 and reviewed thousands of individual loans and other documents, including internal bank records and confidential profit-sharing agreements.
The investigation found example after example of drivers trapped in exploitative loans, including hundreds who signed interest-only loans that required them to pay exorbitant fees, forfeit their legal rights and give up almost all their monthly income, indefinitely, the Times said.
“I don’t think I could concoct a more predatory scheme if I tried,” Roger Bertling, the senior instructor at Harvard Law School’s clinic on predatory lending and consumer protection, told the New York Times. “This was modern-day indentured servitude.”
The Times noted lenders were among those that believed medallion values would keep increasing, as they almost always had, and that no one could have predicted Uber and Lyft would emerge.
‘We Didn’t Do Anything’
“People love to blame banks for things that happen because they’re big bad banks,” Robert Familant, the former head of Progressive Credit Union, which specialized in medallion loans, told the Times. “We didn’t do anything, in my opinion, other than try to help small businesspeople become successful.”
According to the Times’ investigation, Familant made about $30 million in salary and deferred payouts during the bubble, including $4.8 million in bonuses and incentives in 2014, the year it burst, according to disclosure forms.
Among the Findings
Among other findings in the Times’ investigation:
- In New York, a “cutthroat industry” had grown around taxis, with most individual owners giving way to family-owned fleets. Fleet drivers typically worked 60 hours a week, made less than minimum wage and received no benefits, according to city studies.
- Those who borrowed money to buy a medallion typically had to submit a large down payment and repay within five to 10 years. The conservative lending strategy produced modest returns. The city did not release new medallions for almost 60 years, and values slowly climbed, hitting $100,000 in 1985 and $200,000 in 1997, the Times reported. And then “everything changed.”
- The primary change took place in the early 2000s when a new generation took power in New York’s cab industry who saw medallions as “ATMs.” A new company, Medallion Financial, went public in 1996, and it focused lending to lower-income drivers, which was riskier but more profitable, the Times reported. The strategy began to be used by the industry’s other major lenders — Progressive Credit Union, Melrose Credit Union and Lomto Credit Union, “all family-run nonprofits that made essentially all their money from medallion loans, according to financial disclosures.” By 2013, many medallion buyers were not handing over any down payment at all, with one former exec at a CU saying, “It got to a point where we didn’t even check their income or credit score.”
- Lenders also encouraged existing borrowers to refinance and take out more money when medallion prices rose, according to interviews with dozens of borrowers and loan officers. There is no comprehensive data, but bank disclosures suggest that thousands of owners refinanced, the Times found.
- “As lenders loosened standards, they increased returns. Rather than raising interest rates, they made borrowers pay a mix of costs — origination fees, legal fees, financing fees, refinancing fees, filing fees, fees for paying too late and fees for paying too early, according to a Times review of more than 500 loans included in legal cases. Many lenders also made borrowers split their loan and pay a much higher rate on the second loan, documents show,” the Times found. “Lenders also extended loan lengths. Instead of requiring repayment in five or 10 years, they developed deals that lasted as long as 50 years, locking in decades of interest payments. And some wrote interest-only loans that could continue forever.”
- The Times said that in almost every loan it reviewed there was a clause that spiked the interest rate to as high as 24% if it was not repaid in three years.
- Fleet owners and brokers, “technically,” began issuing many loans and weren’t subject to the same regulations. They did loans that were frankly insane,” Larry Fisher, who from 2003 to 2016 oversaw medallion lending at Melrose Credit Union, told the Times. “It contributed to the price increases and put a lot of pressure on the rest of us to keep up…A lot of people tend to blame others for their own misfortune…If they want to blame the lender for the medallion going down the tubes the way it has, I think they’re misplaced.”
- As medallion prices kept increasing, the industry became strained. Drivers had to work longer hours to make monthly payments. Eventually, loan records show, many drivers had to use almost all their income on payments, the Times found.
- Numerous borrowers, most especially those who do not speak English or speak English well, said they were duped by the loan terms. One borrower, Abdur Rahim, a Bangladeshi immigrant, alleged in a lawsuit that his lender, Bay Ridge Credit Union, inserted hidden fees. “In an interview, he added he was told to lie on his loan application. The application, reviewed by The Times, said he made $128,389, but he said his tax return showed he made about $25,000,” the Times said. “Bay Ridge CU told the Times there were no hidden fees.
- Several employees of lenders told the Times they were pushed to write loans, encouraged by bonuses and perks such as tickets to sporting events and free trips to the Bahamas.
Credit Union Involvement
Specifically reporting on credit unions, the Times said the CUs kept “making new loans. But between 2010 and 2014, they sold the loans to other financial institutions more often than in the previous five years, disclosure forms show. Progressive Credit Union, run by Mr. Familant, sold loans off almost twice as often, the forms show. By 2012, that credit union was selling the majority of the loans it issued.”
In a statement to the Times, Familant said the selling of loans was a standard banking practice that did not indicate a lack of confidence in the market.
The Times said it found the CEO of the former Melrose Credit Union, Alan Kaufman, had the highest base salary of any large state-chartered credit union leader in America in 2013 and 2015, records show, and that the CU’s medallion lending supervisor, also made millions.
The medallion bubble burst in late 2014.
About NCUA
Anytime a bubble bursts, such as with the housing crisis of more than a decade ago, the question is asked why no one noticed. The same holds true with taxi medallion loans. But the Times’ analysis found several people in New York City’s government began warning of potential doom long before the crash occurred. Their warnings went unheeded in New York City, New York’s state capital, Albany, in Washington, and in Alexandria, Va., the headquarters of NCUA, the Times found.
The Times pointed a 2019 report by NCUA’s Office of Inspector General that chastised the agency for not aggressively enforcing rules in medallion lending, as CUToday.info reported here.
Under the subhead, “A chairman named Dollar,” the Times reported lenders had found a “receptive audience at the National Credit Union Administration.
The Times said that under former Chairman Dennis Dollar, NCUA “issued waivers that exempted medallion loans from longstanding rules, including a regulation requiring each loan to have a down payment of at least 20%. The waivers allowed the lenders to keep up with competitors and to write more profitable loans.”
Following Congress
But Dollar told the Times the agency was following the lead of Congress, which passed a law in 1998 exempting credit unions specializing in medallion loans from some regulations. The law signaled that those lenders needed leeway, such as the waivers, he said.
“If we did not do so, the average cabdriver couldn’t get a medallion loan,” Dollar was quoted as saying.
The Times added, “The federal law and the NCUA waivers were not the only benefits the industry received. The federal government also provided many medallion lenders with financial assistance and guaranteed a portion of their taxi loans, assuring that if those loans failed, they would still be partially paid, according to records and interviews. As lenders wrote increasingly risky loans, medallion prices neared $500,000 in 2006.”
According to the Times, some former employees of NCUA, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency tried to raise issues with loans and were told not to worry. The Securities and Exchange Commission and the Federal Reserve Board also oversaw some lenders and did not intervene, the Times noted.
Unusual & Risky
“It was obvious that the loans were unusual and risky,” Patrick Collins, a former NCUA examiner told the Times, but the belief inside the agency was the loans would be fine because the industry had been stable for decades.
By 2008, the price of a medallion rose to $600,000, and the TLC was dialing back much of its oversight, the Times found, even as at least four employees raised concerns about the medallion prices and lending practices, according to the employees.
The Times’ investigation found in 2012, 2013 and 2014, NCUA’s OIG routinely documented instances of credit unions violating lending rules.
“The NCUA chose not to penalize medallion lenders or impose extra oversight. It did not take any wide industry action until April 2014, when it sent a letter reminding the credit unions in the taxi market to act responsibly,” the Times reported.
Lawsuit Alleges Super Bowl Trips, Other Perks
A spokesperson for NCUA told the Times the agency took actions to ensure the credit unions remained solvent, which was its mission, and added Congress allowed the lenders to concentrate heavily on medallion loans, which left them vulnerable when Uber and Lyft arrived.
Dollar was among several people, the Times reported, who said Congress exempted the taxi trade from rules because it was supported by former United States Senator Alfonse D’Amato of New York, who was then the chairman of the Senate Banking Committee.
While it has shuttered and merged all of the taxi medallion-lending CUs, NCUA has brought civil charges against former Melrose CEO Alan Kaufman, alleging he used company funds to help industry partners in exchange for gifts such as free Super Bowl trips, as CUToday.info reported here.
Kaufman told the Times NCUA made up the charges to distract from its role in the crisis.
“I’m definitely a scapegoat,” Mr. Kaufman said. “There’s no doubt about it.”