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Letter to Credit Unions No.: 15-CU-03
Taxi Medallion Lending Questions and Answers
May, 2015

NCUA has issued LTCU 15-CU-03 to update its April, 2014, guidance on taxi medallion lending (LTCU 14-CU-06). The updated guidance incorporates Frequently Asked Questions that expand on NCUA’s supervisory expectations regarding taxi medallion lending. Among the issues discussed:

  • NCUA’s guidance does not create additional requirements for taxi medallion lending beyond Part 723’s commercial lending underwriting requirements. Rather, NCUA views the guidance as providing a framework within which examiners may evaluate whether a credit union has met ยง723(6)(g) ability to repay and underwriting requirements.
  • Taxi medallions are income-producing assets and such assets are generally valued by determining the asset’s net operating income (NOI). NOI is calculated as the gross revenues generated by the asset, minus any operating expenses before depreciation and interest, and serves as the basis for determining the economic value of the asset. However, given that 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. This speculative value is less stable than true economic value and must be considered when underwriting any loan.
  • Even though taxi medallions have no physical depreciation, they are subject to economic changes. NCUA believes prudent risk mitigation practice requires an appropriate amortization of principal in order to withstand any adverse economic changes that could influence demand. In guidance to examiners, NCUA suggests 25 years as the maximum prudent amortization period, but also cautions that amortization periods should be shortened when market influences could adversely affect the medallion industry and medallion values.
  • Because many taxi medallion operations are interconnected (a mini-fleet medallion owner typically holds two taxi medallions and does not drive the taxi, instead leasing the medallions to drivers) the relationships between various parties and entities involved with a given medallion can be complex. Therefore, NCUA believes consolidated financial statements can help a credit union evaluate the borrower’s ability to make lease payments and to meet lease payments of all associated mini-fleets and present a clearer picture of the revenues, expenses, and funds available to service the debt of the associated mini-fleet entities.

While the consolidated financial statement should be part of a global cash flow analysis of a corporate medallion borrower/principal, a tax return and financial statement should suffice for an independent operator.

  • While 1.25X is the recommended debt service coverage ratio (DSCR) for a taxi medallion loan, credit unions should tailor the acceptable DSCR for each taxi medallion borrower based on the financial merits of the borrower and current and prospective market conditions.
  • NCUA examiners have been directed to confirm that a credit union bases its minimum DSCR on traditional cash flow measures that reflect all influences on cash flow from operations, including any transfers of cash from the borrower to other entities, shareholders, owners or principals, and unfunded capital expenditures.

 

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