bank rates

Will Uber Doom Taxi-Loving Melrose Credit Union And Its Competitive CD Rates?

Melrose Credit Union has a problem.

So far, the New York-based credit union continues to offer highly competitive CD rates to savers nationwide.

After holding returns steady for several months, Melrose significantly upped every yield on its rate sheet last week.

It now beats the top nationally available 4-year return from the banks on our CD Rates Leaderboard, as well as approaches the lead in four more terms:

Melrose vs. the CD Rates Leaderboard

Term Melrose Leading rate
1 Year 1.26% 1.30%
2 Years 1.51% 1.52%
3 Years 1.76% 1.85%
4 Years 2.12% 2.00%
5 Years 2.42% 2.45%

But for decades, Melrose has specialized in lending money to the owners of New York taxis who need to buy one of the 13,400 licenses, or medallions, that must be affixed to the hood of every yellow cab.

It always seemed like one of the banking industry’s most lucrative niches as the coveted medallions steadily grew in value, reaching a peak of $1.1 million in 2013.

Then along came smartphone-enabled upstarts like Uber and Lyft, which took the urban transportation scene by storm.

Now that fewer passengers are hailing traditional cabs, taxi drivers are suffering significant hits to their monthly fares, and medallions are being offered for as little as $550,000, according to Crain’s New York Business.

This quick and dramatic change in the taxicab landscape spells major capitalization trouble not just for Melrose, but for three additional credit unions that have heavily funded medallion purchases.

They even went to court seeking an injunction to ban Uber from city streets.

But earlier this month, the injunction was denied and just two weeks later the smallest of the four, Montauk Credit Union, was seized by regulators.

According to the New York Post, state regulators are now poring over the books of Melrose, LOMTO Credit Union (another institution that appears in our Highest CD Rates charts) and Progressive Credit Union.

Melrose is by far the largest of these players. With 75% of its loan portfolio involved in the taxi industry, The Post reports that $400 million of Melrose’s medallion loans are either delinquent or underwater – the borrowers owe more than the medallions are now worth.

So does all of this mean you shouldn’t touch Melrose’s new attractive CD rates with any length of pole?

Not necessarily. And in fact, I’d argue the opposite.

First off, just as with banks, your deposits up to $250,000 are federally insured at any credit union that carries NCUA insurance, as Melrose does.

So even if regulators seized the credit union, your deposits and any interest you’ve already earned are safe and will be paid to you.

The only theoretical risk is that your accounts would be sold to another bank or credit union that decided not to honor the interest rate you’d been promised for the remainder of the term.

But in a period of soon-to-be-increasing rates (once the Federal Reserve starts a series of gradual rate hikes later this year), getting out of a long-term CD is more boon than misfortune.

Any other long-term CD you buy – whether from a bank or a credit union – will carry an early-withdrawal penalty. For year CDs, the mildest penalty I’ve seen is five months’ interest, though most impose a penalty of six to 12 months’ interest, or even worse.

If you buy a certificate of deposit from Melrose, and it ends up being seized within that certificate’s term, what’s expected to happen is you’ll be offered to continue at a new (likely far lesser) rate or exit your CD without any penalty.

Let’s take the example of the chart-topping 4-year deal. If Melrose were seized a year after you made your deposit, you’d effectively earn 2.12% APY on a 12-month CD and then be allowed to exit without any withdrawal penalty.

It’s an excellent deal when you consider the top national 1-year rate is currently paying just 1.30% APY.

Plus, upon exiting, you’ll be looking at much-better-paying CD options for your reinvestment because the Fed’s rate hikes will have gotten underway.

Granted, we have no information that the current investigation will come to Melrose being seized.

So, in the case that it stays in continuous operation, you’d need to be prepared to keep your CD to full maturity, since Melrose’s standard early-withdrawal penalty is somewhat stiff.

But even then, you’ve still won, because you’ll have capitalized on the very highest national rate available to you.

We don’t wish these misfortunes on Melrose or any of its taxi driver borrowers. But for savvy CD savers, it’s good to understand your market risks and opportunities.

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