Losses piling up from credit union loans for taxi cab medallions that are falling in value may require the federal fund that insures savings in credit unions to increase loss reserves, a member of the board overseeing the fund told an audience Friday.
National Credit Union Administration (NCUA) Board Member Rick Metsger, speaking to the Oregon Department of Financial Services CEO Roundtable in Salem, said lower prices for New York taxi medallions at two recent public auctions, plus a continued increase in “already high” delinquency rates on medallion loans, indicated that reserves for the National Credit Union Share Insurance Fund (NCUSIF) may have to be increased soon.
Metsger pointed to the loan losses as a reason the agency increased the “normal operating level” (NOL) of the insurance fund from 1.3% of total insured shares to 1.39% earlier this year. (The NOL is the level of reserves relative to the savings insured that the agency determines it will need address losses.)
“We have known, and warned about, this risk for some time,” Metsger said, according to a release from the agency. “But the bill is about to come due. Unfortunately, a lot of credit unions that followed supervisory guidance and lent 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.”
In his remarks, Metsger pointed out that the agency issued a “Letter to Credit Unions” in 2010 (LTCU 10-CU-03) warning of concentration risk, and another letter in 2014 (LTCU 14-CU-06) specifically about taxi medallion lending.
The NCUA board member asserted that the agency’s ability to regulate “speculative taxi medallion lending” is limited by a 1998 amendment to the Federal Credit Union Act (via the Credit Union Membership Access Act, H.R. 1151) that specifically exempted certain credit unions from the statutory member business lending cap of 12.25% of assets. The credit unions earning the exemption either were chartered for the purpose of making member business loans, or had a history of primarily making the loans.
“Most credit unions cannot put more than 12.25% of their assets into member business lending,” Metsger said, “but the taxi medallion credit unions were able to put up 100% of their assets” in the loans. He said that the credit unions, Melrose and LOMTO (both in New York), are operating under NCUA conservatorship; both made taxi medallion loans.
In other comments, Metsger said the taxi medallion losses indicated the need for a “risk-based” capital system. NCUA is scheduled to institute such a system for federally insured credit unions in 2019.
“A major principle of financial regulation is that all risks are not equal, and one size does not fit all,” Metsger said, according to NCUA. “That is why the U.S. and all major industrial nations have risk-based capital standards. We seek to minimize the risk that a few credit unions that want to gamble with other people’s money will lose their bets and pass the costs onto other credit unions and their members.”
Metsger had strong words for credit union trade groups that have argued for the agency to repeal the capital rules – and have also lobbied Congress to rescind the rules via the Congressional Review Act (CRA).
“I am happy to consider changes in our risk-based capital rule that will strengthen the system,” Metsger 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.”