Credit Union Is Suing San Francisco Over Taxi Medallion Meltdown

In 2010, San Francisco started selling taxi medallions to cab drivers. The city made millions of dollars. Today, the market for these taxi permits is in a shambles -- the drivers who bought them are stuck with toxic assets, and the credit union that the city asked to finance loans for the medallions is suing for its losses.

A medallion is a permit to operate a taxi, and for years it was a surefire investment. Medallions were free and were awarded to taxi drivers based on seniority. Drivers would often wait over a decade to get one. And once they had a medallion, they could rent it out to make passive income when they weren’t driving. This was the de facto retirement plan for a cab driver, but it all started to change eight years ago.

In 2010, San Francisco was struggling to balance its budget. To make extra revenue, then-Mayor Gavin Newsom took a page from New York City’s playbook. He “monetized” the city’s medallions. Newsom had the city start selling them for a fixed price of $250,000 apiece. All this went back on a promise Newsom had made to keep the existing taxi medallion system in place.

And $250,000 is a steep price for a cab driver. The city needed a lender to offer loans to drivers who wanted to purchase a medallion. But drivers are often immigrants with no credit history. Major banks weren’t interested in such high-risk lending. So, the city turned to its credit unions.

Jonathan Oliver is CEO of the San Francisco Federal Credit Union, one of three credit unions in the city. These credit unions fill a vital niche for the area.

“A lot of the programs we do in the city are things traditional banks won’t do,” Oliver said.

The San Francisco Federal Credit Union does things like finance small businesses and affordable housing projects. It also provides banking for minors. The credit union partnered with the city to offer medallion loans to drivers at a much-reduced interest rate: just 5 percent.

Oliver said the credit union should have been charging somewhere around 18 percent for these loans. But this was a program sanctioned by the city and intended to help local drivers. Oliver said city officials committed to San Francisco doing anything it could to ensure the medallion market, and by extension the taxi industry, remained viable. Oliver said that is the reason the credit union issued such low-rate loans.

At first the medallion market hummed along. The city sold approximately 700, and it made millions. But then San Francisco allowed Lyft and Uber to come operate in the city without medallions.

Medallions limit how many cabs can be on the road at one time. Because they weren’t made to abide by the permitting regulations, Lyft and Uber were able to flood the city’s streets with cars. They used their venture capital money to undercut taxi rates and eviscerate the industry.

Taxi earnings plunged. Drivers started struggling just to make their loan payments. Around 100 taxi drivers have now defaulted, and the medallion market is totally frozen. Not a single one has sold in almost two years.

Oliver said the city has done virtually nothing to keep its promise.

“They've kinda put their head in the sand and said, 'OK, well this situation is maybe going to fix itself or is just going to disappear,' ” Oliver said.

So, the credit union is suing.

Oliver estimates the credit union's losses from medallion loan defaults to be $28 million. City officials have told KQED that state law constrained how it could regulate Lyft and Uber. Both the credit union and drivers said the city could have done much more to prevent the taxi industry from being unfairly undercut, and the medallion market from being rapidly destroyed.

The drivers who bought medallions are now shackled with these toxic assets -- worthless pieces of tin, as many drivers now refer to them. No one is buying the medallions. Even after all the changes in the industry, they are still fixed at $250,000, and drivers are on the hook for the loans.

Many of the drivers were counting on these medallions for their retirement. Now they’re driving to make the minimum payments on the loans. Some have taken on additional jobs just to keep from defaulting.

It is unclear what will happen for the drivers and their debt as this lawsuit unfolds. Oliver said he hopes that taking legal action will spur a conversation with the city on how to untangle this mess.

The San Francisco City Attorney’s Office won’t comment directly on the details of the lawsuit, but says it's currently reviewing it.