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April 10, 2014 – To highlight the risk associated with participating in taxi medallion lending, NCUA released Letter to Credit Unions 14-CU-06, along with accompanying Supervisory Letter 14-04, for credit unions that are contemplating or are already involved in this form of lending.

NCUA Letter to Credit Unions 14-CU-06 noted that recent market forces have "contributed to a significant increase in medallion values in several major metropolitan markets." It says, "As a result, credit unions that offer or participate in these loans can be exposed to increased risk."

Taxi medallions are metallic symbols attached to the hoods of taxicabs – in New York City, for example – that are licensed to pick up passengers on the street in the city. The number of taxi medallions is limited, so the medallions can be costly. NCUA Supervisory Letter 14-04 states, "Credit unions that practice proper credit analysis and take steps to limit loans to amounts that are based on a borrower's ability to repay through operations should be able to withstand the impact of fluctuations in the value of taxi medallions."

The supervisory letter, directed at examines, cautions about certain loan terms, including extended amortization schedules, interest-only payment terms and unsupported cash-out refinancing.

In its supervisory letter for examiners, NCUA says credit unions should be evaluated to ensure they have:

• sound governance and policies over their taxi medallion lending;
• strong underwriting and documentation practices; and
• effective ongoing servicing procedures and risk management controls.