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Taxi Drivers Invent New Way to Wipe Out Predatory Debt

How NY's yellow-cab drivers earned billions in debt relief and invented a new way to save workers from any kind of predatory debt.

Bhairavi Desai, executive director of NY Taxi Workers Alliance, at the end of the hunger strike Nov 3. (Photo by Oscar Perry Abello)

After years of organizing, weeks of 24-hour protesting outside city hall and a 15-day hunger strike, thousands of taxi drivers in New York City will finally see relief from billions in predatory debt. It’s a plan that many of those drivers helped to craft.

Under that plan, which all parties agreed to Nov. 3, the city is using its financial heft to bring creditors to the table to negotiate the restructuring of thousands of predatory loans.

The drivers will have a majority of predatory debt wiped away, lower monthly payments on their remaining debt and protection from losing homes, personal cars, or other personal assets in case of default. Creditors get to have a stable, predictable, zero-risk income stream. Both sides get fewer headaches and heartaches and not to mention less in legal fees from going through bankruptcy or foreclosure.

There are some up-front costs and a small annual cost to the city under this plan, but it also benefits from gaining stability for a key component of its transportation infrastructure. Not to mention, the city helped create this particular debt crisis in the first place.

The debtors who helped create this plan are exclusively yellow-cab drivers in NYC, but in terms of a response to predatory debt, these drivers have really mapped a way out that can work in many other situations. As long as there’s a relatively small amount of funding and the political will, a local government could bring creditors to the negotiating table and restructure any portfolio of predatory loans, even student loans or distressed mortgages at risk of foreclosure.

“Of all the factors of poverty, debt is the one where people feel like they’re in an underground mine and there’s no hope left,” says Bhairavi Desai, executive director of the New York Taxi Workers Alliance, the driver union behind the plan. “We think this could be precedent-setting.”

Billions of dollars in consumer and mortgage debt are bought and sold every day in the U.S. It began in 1970, and by the mid-1980s, Fannie Mae and Freddie Mac were selling millions in mortgage-backed securities to investors every year. Investors started buying securities backed by consumer debt of all kinds — credit card debt, auto loans, student loans. Payday loans became a thing in the 1990s.

The financial industry has always said securitizing debt is a win for consumers, increasing their access to capital. But in 2013, a report from the Federal Trade Commission said it receives more consumer complaints about debt collectors, including debt buyers, than about any other single industry.

Today there are $11.6 trillion in mortgage-related securities and another $1.5 trillion in consumer debt securities out on the market — including $213.5 billion in auto loans, $146 billion in student loans, and $55 billion in credit card debt, according to the Securities Industry and Financial Markets Association.

NYC taxi medallion loans are a very particular subset of consumer debt, but most of it has already changed hands at least twice. Each medallion is basically a license to pick up street-hailing passengers, and must be affixed to the hood of the yellow cab. But by law, there are currently only 13,587 taxi medallions in the city. Most of them are owned by taxicab companies who own fleets of cabs. Around 4,000 are owned by drivers who own their own cabs — owner-drivers as they’re known.

In a Pulitzer-winning two-part investigation in 2019, the NY Times reported on how the Taxi & Limousine Commission, or TLC, which regulates the taxicab industry in New York, conspired with lenders to inflate the price of the taxicab medallions sold at periodic auctions to help raise funds for a city facing budget challenges starting in 2002. The commission sets the opening bid price for each auction, which peaked at $850,000 in 2014.

The Times investigation detailed how marketing documents and corrupt mortgage brokers billed the medallions as “once-in-a-lifetime” investment opportunities for owner-drivers, who were offered larger and larger mortgages to bid on taxi medallions. With the value of taxi medallions artificially inflated, some established owner-drivers refinanced earlier loans, using the cash to buy homes or start other businesses.

Lenders typically structured the loans to leave a significant portion of the loan unpaid until the end of the term — known as a “balloon payment,” and common for other purposes like commercial real estate. Owner-drivers were told if they weren’t ready to sell the medallion to somebody else they could just refinance at the end of the loan term when the time came for a balloon payment.

But since 2014, the actual market value and earning potential of each taxi medallion crashed as a result of ride-hailing app companies flooding the city — who made sure to lobby the city against any cap on the number of their drivers. Monthly income for owner-drivers is now barely enough to cover for their monthly loan payments of $2,000 to $3,000 or more — terms to which many of them agreed before Uber and Lyft came on the market.

Today the market value of a NYC taxi medallion is around $120,000. But the 4,000 or so owner-drivers carry an estimated average debt of $500,000 for their taxi medallions. That’s $2 billion of debt.

The lion’s share of taxi medallion loans were made by credit unions, which are regulated by the National Credit Union Administration. In the aftermath of the taxi medallion debt crisis, the agency shut down four credit unions with taxi medallion loans, charging one of their former CEOs for “breach of duties.” It was at that point that the agency itself took ownership of the former credit unions’ taxi medallion loans.

In February 2020, after weighing a number of other options, the agency sold the majority of its taxi medallion loan portfolio to Marblegate Asset Management, a private equity firm, for an undisclosed price.

Loans like these are typically bought and sold at a steep discount from the face value of the loans, sometimes just pennies on the dollar. The loans are “underwater” — meaning the debt owed is higher than the market value of the underlying asset. The debt seller is usually just trying to recoup anything instead of foreclosing on all the loans and taking the full loss plus the costs and headaches of the foreclosure process. The debt buyer is betting they’ll be able to recoup more than what they’ve paid.

The risk for the debt buyer is why someone like a city government has some leverage in these situations. By stepping in to guarantee the taxi medallion loans in case of default, the city can take a portfolio full of $500,000 question marks and turn each of them into $200,000 plus 5% annual interest in guaranteed income for the lender.

“You move the lender’s risk, you move their numbers,” Desai says. “The beauty of it is, because you’re able to move their numbers low enough, you limit the defaults and therefore it becomes a lower risk for them. But in order to get them to do it we need the guarantee from the city.”

Reducing the amount owed on each loan also reduces the monthly payments to something more manageable for each driver. From the drivers’ perspective, that’s money that can now go to their home mortgage or their landlord or to feed their families. From the lenders’ perspective, it reduces the risk that the drivers will even go into default.

The plan also negates the personal guarantees that drivers signed under the original loan terms — before, if drivers went into bankruptcy or foreclosure, lenders could seize a driver’s cab, home or other personal assets to recover any amount still owed on the loan. The city guarantee removes that possible outcome.

Under the terms of the agreement reached by the New York Taxi Workers Alliance, the city and Marblegate Asset Management, the city will grant each owner-driver $30,000 for a down payment on a $200,000 loan, leaving each with $170,000 in debt to be repaid at 5% interest over 20 years, fully amortized — meaning no more balloon payments, either. The monthly payments on the debt will be around $1,100 — just a bit higher than the $800 monthly payment that the union first proposed.

“We worked with financial advisors to come up with a plan that would bring lenders to the table,” Desai says. “We had Zoom calls with screen sharing looking at excel models of the risk-sharing. We would look at the loan amortization schedules with people throwing out numbers.”

Desai told drivers at the victory celebration that all parties involved in this agreement with Marblegate are committed to working out identical loan restructuring terms with all the other lenders that still own some loans that weren’t purchased by Marblegate. “No one is going to be left out, we’re coming for everybody,” Desai said last Wednesday.

The costs to the city include upfront costs for the down payment grants, as well as covering for any defaults on these loans over time. Eventual cost estimates are around $100 million, depending on how many drivers default over time. Compare that to the $850 million that the city earned from taxi medallion sales during the period it was artificially inflating prices.

Or compare the $100 million cost to the $1.2 billion in debt that will be wiped away under the NYTWA plan — 4,000 owner-drivers with an average debt of $500,000 reduced to $200,000.

The money in this case is coming from the American Rescue Plan Act. Thousands of local governments across the country are still figuring out what to do with all the relief dollars they’ve gotten or will soon receive from the federal government. NYTWA managed to get the ear of New York Senator Chuck Schumer, who expressed his desire to local officials that some of those funds in New York City to go toward relief for taxi medallion owner-drivers.

Initially, the city started implementing its own taxi medallion debt relief plan using ARPA relief dollars, a plan NYTWA rejected as insufficient to end the debt crisis that has claimed at least 9 drivers by suicide over the last several years. It took additional lobbying — not to mention a 15-day hunger strike — to get the city to back the NYTWA plan.

Nearing hour three of their victory celebration on November 3, drivers briefly considered continuing the protest until all the remaining medallion lenders had signed onto the deal. Taxicab driver and hunger-striker Augustine Tang triumphantly declared, “I’m going home!”

This article is part of The Bottom Line, a series exploring scalable solutions for problems related to affordability, inclusive economic growth and access to capital. Click here to subscribe to our Bottom Line newsletter. The Bottom Line is made possible with support from Citi.

Oscar is Next City's senior economics correspondent. He previously served as Next City’s editor from 2018-2019, and was a Next City Equitable Cities Fellow from 2015-2016. Since 2011, Oscar has covered community development finance, community banking, impact investing, economic development, housing and more for media outlets such as Shelterforce, B Magazine, Impact Alpha, and Fast Company.

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Tags: new york citytaxisdebt

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