October 3, 2019

Lenders Should Be Wary of Lending on Assets Dependent Upon Government Regulations

EXCERPT: Lenders must be wary of lending on assets that have government regulatory involvement, such as taxi medallions. As such, prudent lending should always be done on an individual basis. Any distressed taxi loans should be dealt with swiftly, and Garnet Capital can help.

Loan assets like taxi medallion loans have been showing signs of distress lately prompting lenders to be more prudent with their loan portfolios.

With certain types of loan assets government involvement and protectionism is showing signs of weakness - including taxi medallion loans. Lenders and banks that are involved in such loan types should be wary of their involvement in this realm.

Taxi medallion loans, in particular, have been associated with plenty of defaults as taxi operators struggle, in the face of ride-sharing apps, to stay afloat in many major metropolises across the country.

Taxi Medallions and Loan Defaults

Taxi medallions are transferable permits that allow taxi drivers to operate in the US, with certain cities - particularly very busy and congested ones - using them as their taxi licensing systems. Taxi medallion loans are taken out by taxi operators to fund the purchase of these licenses.

But with the rise of ride-sharing companies like Uber and Lyft, many taxi operators are finding themselves on the wrong end of the spectrum. What was once a flourishing business is now faltering as other entities have come in and reshaped the taxi industry. And right along with the toils of the industry is an increase in bad taxi medallion loans.

Many owners of taxi medallion loans have been defaulting, leaving the financial institutions that offer these medallion loans in some financial hot water. Without any changes being made in the industry, credit unions and banks that hold these loans are going to continue seeing more and more bad taxi medallion loan assets on the books.

Lenders in Major U.S. Cities Are Struggling

In San Francisco, for instance, millions of dollars of taxi medallion loans have remained unpaid with the $1 billion-asset San Francisco Federal Credit Union, and the financial institution is taking the San Francisco Municipal Transit Agency to court claiming that it violated the terms of a partnership designed to protect credit unions when defaulted loans occur.

New York City taxi operators are experiencing stiff competition from ride-sharing programs, which is causing some taxi operators to be unable to make good on their taxi medallion loan payments. 

New York is also seeing its fair share of bad taxi medallion loans. A recent report from Mayor Bill de Blasio’s office found that two-thirds of struggling taxi medallion loans were issued by credit unions. What's even more interesting about the findings of the report is that many of the taxi operators who took cash out of these medallion loans via refinance were using the funds for their own personal household expenses, including buying homes and cars.

Regardless, lenders - including credit unions and others - must be prudent when it comes to lending on assets that have government participation in their performance, such as taxi medallions. Sound lending practices should always be done on an individual basis in order to ensure each particular borrower has been thoroughly vetted before adding a loan asset to the books.

If credit unions and banks have distressed taxi loans on their loan portfolios - or any type of bad loans for that matter - Garnet Capital can help to sell these assets at market prices in a compliant process.

Sign up for our newsletter today.