New York taxi lender pulls out from under a regulatory cloud.

NEW YORK -- It took five years, but Progressive Credit Union, a New York City institution that finances taxi owners, has finally gotten respect from its federal regulator.

Since a 1989 examination by the National Credit Union Administration, the state-chartered, federally insured credit union in the city's borough of Queens has been hit with two letters of understanding and agreement and has been given less-than-stellar reviews by the regulator.

But after an appeal in August, Progressive's Camel rating of 3 was upgraded to 2, the second-highest rating on the 5-point scale, which grades on capital, assets, management, earnings, and liquidity.

"I'd almost have to admit that we've reached a good working relationship with the regulator," said Robert Familant, Progressive's treasurer. "They know us better, and we know what concerns them."

But this beautiful friendship came only after years of dialogue with the regulator, some of it tense, said Mr. Familant, who inherited the job from his father.

High Concentration

The regulator was troubled by the high concentration of Progressive's loans secured by taxi medallions, Mr. Familant said., A medallion is the city business permit needed to operate a taxi in New York. All told, the loans represent 70% of Progressive's $135 million of assets.

Mr. Familant, whose father brought him into the credit union about 20 years ago, said he can understand the regulator's concern. Twenty-three percent of all business loans held by U.S. credit unions are secured by medallions issued by cities around the nation, he said.

He also understands why the regulator asked for information on the accounts of all customers of the six New York City credit unions that make medallion loans. "When you've got that kind of concentration, you have a reasonable case to search the premises," he quipped.

Though medallion loans are considered business loans, they are not as volatile as, say, commercial real estate loans, because they have a proven cash-flow value, Mr. Familant said.

"As soon as a taxi driver gets his medallion, he goes out and starts making money."

$170,000 per Medallion

The credit union holds a lien on the medallions, which are worth about $170,000 each. The number of medallions is limited by statute, which gives them their value. And the business has a solid future, Mr. Familant said. "It's impossible to imagine New York City without taxis."

Nevertheless, examiners are scrutinizing medallion loans.

One reason is the extra attention they've been paying to all business loans since some New England credit unions took hits on commercial real estate loans in 1989.

Closer to home, though, was the case of fraud-riddled Hyfin Credit Union, which beefed up on taxi medallion loans and was forced into a shotgun merger by regulators in 1986.

Hyfin drained $55 million from the federal insurance fund, although much has been recovered. "After Hyfin they went after all state charters," Mr. Familant said

Progressive, which had received a Camel rating of 1 -- the highest -- in 1987, got a 4 after its 1989 examination. "Between 1987 and 1989 they emphasized reevaluating member business loans," Mr. Familant said. "They were looking at them differently."

Letter of Understanding

The credit union also had to sign a letter of understanding and agreement binding it specified goals.

Under this letter, Progressive rewrote all policies regarding its taxi medallion lending and increased its due diligence, Mr. Familant said.

In 1989 the medallion loan portfolio had a delinquency rate of 15% to 18%, Mr. Familant said.

"We were lax," he acknowledged. "We knew we could catch up" with delinquent borrowers, he said. "They weren't going anywhere."

Progressive wasn't losing money, Mr. Familant added. "The delinquencies never translated into chargeoffs. That gave us room not to do the due diligence we should have."

Under pressure from the regulator, the credit union formed a collection department. Since then the delinquency in its medallion portfolio has fallen steadily. In September it had no delinquent taxi medallion loans.

In 1990 a problem-case officer was assigned to the credit union. In 1991 Progressive received another 4 rating, and the letter was simplified.

As a result of these two letters, Progressive has revised its underwriting system, which involves getting a copy of the customer's rate card and of tax forms and industry standards published by the city.

Rating Is Appealed

The second letter expired in March of this year. And although the credit union's key ratios were high -- 30% capital and a return on assets of of 5.5%, the highest for any credit union with more than $100 million of assets -- it received another 3 rating. That led to Mr. Familant's August appeal.

"I thought all the key ratios and trends indicated a higher rating. Capital and earnings had to have been 1's and liquidity had to have been a 1. If those three things are 1's, how could we get a 3?"

The 2 that was won in a September examination is "a fair rating," Mr. Familant said, noting that Progressive has $700,000 of foreclosed properties and $2.3 million of nonperforming real estate loans on its books. "And a concentration of loans can be a concern to a regulator."

Meeting with the Regulator

On Oct. 5 Mr. Familant and representatives of other credit unions chartered by New York State that make taxi medallion loans met with Layne Bumgardner, director of the National Credit Union Administration's region 1.

Mr. Bumgardner disclosed the percentage of medallion loans in credit unions' business portfolios and said he wanted to explain his agency's continued interest in the area.

"As a regulator he had to be diligent in investigating it," Mr. Familant said.

In an interview, Mr. Bumgardner said his agency has "some things developing internally on taxi-medallion lending." There was concern stemming from the losses incurred by Hyfin and other credit unions, he said, "and we want to make certain we don't have similar problems again."

Mr. Familant said he is happy that Progressive can continue to serve the taxi drivers of New York City.

"This credit union started 75 years ago making business loans to small-businessmen," he said. "That's what we still do."

Progressive Credit Union at a GlanceAssets $135 millionReturn 5.9%

on assetsNet income $5.8 millionthrough (versus $7.3September million for full-year |92)Capital 32.5%President Emmanuel LacherEmployees 17Location New York

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