OIG cites poor underwriting, unresponsive boards in report on failed taxi medallion CUs; says NCUA could have acted earlier

An inspector general report on three credit unions that failed in 2018 under the weight of taxi medallion loans, costing the federal share insurance fund an estimated $765.5 million, recommends that the federal regulator improve monitoring of loan concentrations in credit unions, revise examination quality control procedures, and ensure that examiners review credit unions’ lending procedures – with a focus on ability to repay.

The report by the National Credit Union Administration (NCUA) Office of Inspector General (OIG) is dated March 29 and reviews the causes of the failures of Melrose Credit Union, LOMTO Federal Credit Union and Bay Ridge Credit Union, all in New York. All three, the report says, maintained “significant concentrations” in loans collateralized by taxi medallions.

Since these credit unions were chartered for the purpose of making member business loans, the report states, they qualified for an exemption from a federal statutory limit on MBL portfolios to 175% percent of their net worth. However, it says that the credit unions failed to identify and appropriately monitor loans to associated borrowers, which for MBLs is limited to 15% of net worth. Exam reports “reflect several instances when the Credit Unions exceeded the regulatory limit to associated borrowers, resulting in additional concentration risk to the loan portfolios.” It’s unclear how many times this happened since the credit unions did not appropriately identify and document loans made to associated borrowers, it states.

The report notes the impact of technological innovation in the form of mobile ride-sharing companies like Uber and Lyft on the market, the disruption it caused to the taxi industry, and the losses to credit unions on loans that were collateralized by taxi medallions. It also points to inadequate underwriting practices, over-valuation of the taxi medallions, boards and management being unresponsive to issues raised by examiners, and a lack of overall risk management strategies at the institutions.

Additionally, it says NCUA might have acted earlier and mitigated the loss to the National Credit Union Share Insurance Fund. (NCUSIF).

“We determined NCUA may have mitigated the loss … had they taken a timelier and aggressive supervisory approach regarding the Credit Unions’ concentration risk and failure to follow industry accepted lending practices for MBLs,” the report states. “Specifically, had the NCUA acted more aggressively through formal enforcement actions for repeat DORs [documents of resolution], which had not been corrected by management, improvements may have been made to inadequate lending practices and risk management policies, thus reducing the loss to the Share Insurance Fund.”

Material Loss Review of Meorose Credit Union, LOMTO Federal Credit Union, and Bay Ridge Federal Credit Union (Report #OIG-19-06 March 29, 2019)