Taxi lending abuses a larger scheme in New York

A New York Times investigation earlier this week suggested that the massive collapse in medallion prices for taxis in New York City since 2014 was not primarily the result of further competition from Uber and Lyft. Instead it was the inevitable result of unsustainable lending practices.

Low-paid taxi drivers who dreamed of becoming their own boss took out loans that required them to pay $ 1 million or more. Payments often only covered interest owed by borrowers, and interest rates skyrocketed if loans were not repaid within a few years. From a lender’s perspective, loans only made sense as long as the prices of medallions continued to rise.

Taxi drivers, many of them immigrants, suffered dire consequences after taking out loans on terms they did not fully understand.

Since the articles were published, various politicians have launched potential responses that narrowly target the lending of taxi medallions.

New York Mayor Bill de Blasio ordered a probe taxi credit brokers. Other local officials suggested that the city buy expensive loans at discounted prices then write off a lot of the debt.

Senator Charles Schumer, DN.Y., has asked the National Credit Union Administration to conduct a review of supervisory practices at institutions that engage in the lending of taxi medallions.

But taxi drivers aren’t the only businessmen who are routinely cheated by unscrupulous lenders. The same goes for entrepreneurs, restaurateurs and owners of various other types of struggling small businesses. Many high-cost commercial lenders are based in New York City, where exceptionally favorable laws provide a safe haven for these businesses.

Some aspects of the New York City taxi loan market were unique. For example, local authorities had a vested interest in keeping the prices of medallions high, since the city generated income from the proceeds of sales. Indeed, the Times showed that government officials enabled loans that put many borrowers in dire straits.

“New York City, more or less, is our partner,” Andrew Murstein, President of Medallion Financial, noted in an interview in 2011.

But in other ways, the taxi driver loans looked like deceptively marketed loans that trapped a wide variety of cash-strapped small business owners.

Since New York City taxi loans were classified as business loans rather than consumer loans, they did not have to include standard information regarding interest rates. They often included significant fees and terms that unsophisticated borrowers did not understand.

And according to the Times, some taxi medallion lenders have used a tool that, under New York law, offers a particularly powerful way to collect business debts. Empire State lenders can require applicants for small business loans to sign a document called a confession of judgment, which prevents them from disputing any subsequent allegations that they are behind on their payments.

A Bloomberg News survey last year found that merchant cash advance companies, which provide expensive finance to small businesses across the country, have at times abused the New York court system by forging documents and lying about the amount owed to them in order to get quick judgments that cannot be challenged by the borrower.

Small businesses that use merchant cash advances are required to make daily payments based on a percentage of their daily income. Merchant cash advance companies avoid complying with strict New York usury rules by classifying their funding not as a loan, but rather as a purchase of future business credit card receipts.

Bloomberg articles also chronicled the role of Marshals of New York – appointed mayors who enforce court rulings, get a share of the proceeds from the sale and have been accused in some cases of improperly seeking to collect money outside the city.

As evidence of business loan abuse in New York has grown, little has happened at the state level, although there appears to be a growing appetite for reform.

Last year, the New York State Department of Financial Services argued in a report that borrower protection laws and regulations should apply equally to all consumer and small business lending activities.

Bloomberg survey would have triggered probes by the New York Attorney General’s Office and the Manhattan District Attorney’s Office. Thursday, Bloomberg reported that the Federal Trade Commission has also opened an investigation into potentially unfair or deceptive practices in the area of ​​cash advances to merchants.

Lending practices that hurt taxi drivers are part of a larger pattern in New York City, which has become the nation’s capital for predatory business lending. It remains to be seen whether state lawmakers and regulators will make the connection.

Bankshot is American Banker’s column for real-time analysis of today’s news.

Elizabeth J. Harris