New York City was supposed to be the stronghold of the taxi industry. Yellow cabs are ubiquitous, an inexpensive and familiar way to traverse the concrete jungle.

Medallion Financial (NASDAQ: TAXI) historically made a mint by financing taxi medallions, which are required to operate taxicabs in several large cities. Today, 38% of its total portfolio is made up of loans to medallion owners in New York City.

But even in its last remaining bastion, the taxi industry is feeling pressure from rideshare services such as Uber and Lyft. The industry is under so much pressure, in fact, that four New York credit unions have sued the City of New York for failing to protect the taxi industry's monopoly on hails for transportation services.

What we know
In a 38-page complaint, the credit unions -- Melrose, Progressive, LOMTO, and Montauk -- argue that the city hasn't done enough to protect the interests of medallion owners and lenders. All four are among the largest lenders to the medallion industry.

The strongly worded petition notes that "borrowers are falling behind on their monthly loan payments, and performing loans will soon fail as they mature with balloon payments that medallion owners cannot afford to pay."

Underlying the stress to the industry is a clear trend of falling taxi revenue. The complaint notes that "year over year data for March 2015, for example, shows that taxi trips are down almost 15% and meter revenue is down more than 9%." The petition also suggests that medallion values have dropped precipitously: The "fair market value of an individual medallion is now less than $675,000."

This is an incredible development, as the last public record of an arm's-length sale of a New York City medallion took place in March of this year at a price of $800,000. If true, this would be the first indication of falling prices in nearly two months -- not one medallion traded hands in April, and data for May won't be published until June.

It's not just a credit union problem
It's important to understand that the four credit unions were not particularly loose lenders. Using data provided by each credit union, it can be determined that the involved lenders have, on average, loaned roughly $500,000 or less against the medallions in their portfolio.

Credit Union

Loans Outstanding

Medallions as Collateral

Loans per Medallion

Progressive

$722 million

1,432

$504,190

Melrose

$1.56 billion

3,110

$501,607

Montauk

$50 million

108

$462,963

LOMTO

$138 million

647

$213,292

Source: Calculations by author from data on pages 14-15 of the verified petition.

At the peak of the market, individual medallions were trading hands for $1.05 million. At that price, even the most aggressive lender in the table above -- Progressive -- would have been lending at loan-to-value ratios of roughly 50%.

Medallion Financial noted in its 2014 annual report that its portfolio was originated at an approximate loan-to-value range of 50%-75%. We can only surmise that neither its portfolio nor its exposure to potential losses is substantially different from the credit unions'. As for the potential impact to Medallion Financial, 51% of its managed investment portfolio, which includes assets in its Medallion Bank subsidiary, is made up of loans to medallion owners.

When collateral loses its value
Ultimately, lenders fear that the medallions backing their loans will have little or no value. The credit unions warned in the lawsuit that as "loans start to fail, a cascade of foreclosures is certain to follow, causing the medallion market to collapse."

There were 13,437 medallions in existence in New York City as of 2014, according to the 2014 Taxicab Fact Book published by the NYC Taxi & Limousine Commission. Through April 2015, only 11 medallions have traded hands in true, arm's-length transactions.

Should lenders start foreclosing on medallions, they'll be selling into a market that has nearly evaporated. Prices will only fall, putting more borrowers underwater.

This is a clear warning sign for Medallion Financial shareholders. A market that was once believed immune to ride-sharing apps clearly isn't, putting to rest the notion that Medallion Financial's portfolio, which is dominated by loans to New York medallion owners, is inherently safe from the disruptive force of new transportation start-ups.

A bet on Medallion Financial has become an almost binary bet on the ability and willingness of municipalities to regulate ride-sharing apps out of existence. At least so far, it seems local regulators are neither able nor willing to do so.

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Jordan Wathen has no position in any stocks mentioned.

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