State of New York Office of the State Comptroller Division of Management Audit and State Financial Services

Transcription

1 State of New York Office of the State Comptroller Division of Management Audit and State Financial Services NEW YORK STATE BANKING DEPARTMENT LICENSING AND MONITORING OF CHECK CASHING FIRMS REPORT 97-S-19 H. Carl McCall Comptroller

2 State of New York Office of the State Comptroller Division of Management Audit and State Financial Services Report 97-S-19 Ms. Elizabeth McCaul Acting Superintendent New York State Banking Department 2 Rector Street New York, NY Dear Ms. McCaul: The following is our report on the New York State Banking Department s licensing and monitoring of check cashing firms for the period from January 1, 1996 through August 15, This audit was done according to the State Comptroller s authority as set forth in Section 1, Article V, of the State Constitution and Section 8, Article 2, of the State Finance Law. Major contributors to this report are listed in Appendix A. March 5, 1998 OSC Management Audit reports can be accessed via the OSC Web Page: If you wish your name to be deleted from our mailing list or if your address has changed, contact the Management Audit Group at (518) or the Office of the State Comptroller, A.E. Smith Building, 13th Floor, Albany, NY

3 Executive Summary New York State Banking Department Licensing And Monitoring Of Check Cashing Firms Scope of Audit The Licensed Financial Services Division (Division) of the New York State Banking Department (Department) is responsible for licensing and overseeing check cashing firms in New York State. All businesses seeking to provide check cashing services in the State must obtain a license from the Division, which first screens the applicants. Once licensed, the firms are regulated through an examination process conducted by the Division. The Division s policy is to examine the operations of each licensee every two years. The Division has 28 employees, including 4 examiners who perform check cashing reviews. Monitoring the activities of these firms is intended to protect consumers interests and to promote public confidence in the check cashing industry. As of October 17, 1997, there were 232 Division-licensed firms operating 864 check cashing facilities throughout New York State. During 1996, the Division examined 97 of its licensees to determine their financial condition and evaluate their compliance with applicable laws and regulations. By May 15, 1997, the Division had examined 29 additional firms. Our audit addressed the following questions regarding the Department s licensing and oversight of check cashing firms during the period January 1, 1996 through August 15, 1997:! Are the Division s licensing and monitoring functions effective?! Does the Department take appropriate actions to correct the problems it identifies?! Does the Department investigate complaints of possible irregularities or violations of laws or regulations in a timely manner? Audit Observations and Conclusions Our audit found that the Division has established and implemented a system of controls to ensure that only qualified applicants are licensed to operate check cashing facilities. We reviewed the applications for the 14 firms that were licensed between January 1, 1996 and May 31, 1997, and found that each had complied with all requirements before receiving a license. (See pp. 4-5)

4 Our review of the files prepared by the Division s Examination Unit during its examination of 33 firms revealed that all of them were performed in accordance with the Division s procedures and guidelines. However, we found that the Division could improve its efforts in the areas of scheduling and following up on examinations. At the time of our audit, the Supervision Unit had not reviewed 2 of the 33 examination files in our sample. In addition, 5 of the 33 check cashing firms we reviewed had repeatedly violated the Banking Law, but were not fined. We recommended that the Division expedite supervisory follow-up of firms with a history of violations and impose fines on persistent violators. (See pp. 6-8) Furthermore, although the Division s goal is to examine the operations of each firm on a two year cycle, we found that 50 of the 235 firms licensed as of May 15, 1997, had not been examined since Division officials advised us that some examinations had been delayed because the positions of two field bank examiners were eliminated in They said the reduced staffing level made it impossible to maintain a two-year examination cycle. We recommend that the Division identify a method to prioritize examinations. One such method is the risk-based approach by which the Division would prepare a formal written risk assessment to determine the level of monitoring required for each firm. This would make it possible to maximize the effectiveness of the Division s examination resources by focusing its efforts on areas where there is the greatest risk. (See pp. 8-9) We found that the Division generally investigates complaints in a timely manner. We recommend that, to enhance customer service, the Division should establish a standard regarding the maximum time necessary to resolve a consumer complaint. (See pp ) Comments of Banking Officials Banking officials agreed with the three recommendations in this report that addressed our findings and conclusions regarding examinations of check cashing firms and indicated that they have taken action to implement them. They did not agree with our recommendation to establish a standard for measuring the timeliness of resolving consumer complaints was necessary. They reported that 95 percent of the complaints received in 1997 were resolved in a timely manner. We believe that establishing a standard would provide a basis for measuring performance and identifying and expediting those complaints which are not resolved in a timely manner.

5 Contents Introduction Licensing Check Cashing Firms Examinations of Check Cashing Firms Response to Complaints Against Check Cashing Firms Appendix A Appendix B Background... 1 Audit Scope, Objectives and Methodology... 2 Comments of Banking Officials Field Examinations... 6 Following Up on the Field Examinations... 6 Frequency of Examinations Major Contributors to This Report Comments of Banking Officials

6 Introduction Background Check cashing facilities cash checks, collect payments for utilities, distribute public assistance funds, and perform various other financial services. Despite the fact that check cashing is a multi-billion-dollar industry nationwide, the Federal government does not regulate it; each state is responsible for regulating check cashing operations within its borders. Based on a survey published by the Florida Division of Banking and our conversations with banking officials from various states, we learned that most states do little to regulate check cashing firms. New York is one of 19 states that require such firms to be licensed, and it is one of just 10 states that perform field examinations of firms that perform such services. New York State s Banking Law assigns the responsibility for regulating check cashing firms to the New York State Banking Department (Department). The Department s Licensed Financial Services Division (Division) has overall responsibility for licensing and regulating non-bank financial services institutions such as check cashing firms, licensed lenders, insurance premium finance agencies, sales finance companies, money transmitters, budget planners, and investment companies. The Division has 28 employees, including 4 examiners who perform check cashing reviews. As of October 17, 1997, there were 232 Division-licensed firms operating 864 check cashing facilities throughout New York State. The following table shows their locations.

7 Location Number of facilities Brooklyn 231 Queens 191 Manhattan 158 Bronx 148 Long Island 68 Westchester 36 Upstate New York 14 Staten Island 12 Rockland 6 Total 864 During 1996, the Division examined 97 of its licensees to determine their financial condition and evaluate their compliance with the Banking Law and the Department's regulations. By May 15, 1997, the Division had examined 29 additional firms. Monitoring the activities of these firms is intended to protect consumers interests and promote public confidence in the check cashing industry. The Department s Consumer Services Division (Consumer Services) provides additional oversight of check cashing firms by reviewing consumer complaints and ensuring that valid complaints are resolved properly. Audit Scope, Objectives and Methodology Our audit covered the period from January 1, 1996 to August 15, Our objectives were to determine whether the Department s licensing and monitoring functions relating to check cashing are effective, and whether the Department addresses consumer complaints regarding such firms. To accomplish our objectives, we interviewed Department officials, officials from the State Department of Criminal Justice Services, employees and owners of check cashing firms, and officials from the banking departments of various states. We also reviewed and analyzed applicable policies, procedures, rules, and regulations. 2

8 We did our audit according to generally accepted government auditing standards. Such standards require that we plan and do our audit to adequately assess the operations of the Department that are included in our audit scope. Further, these standards require that we understand the Department s internal control structure and compliance with those laws, rules and regulations that are relevant to those Department operations in our audit scope. An audit includes examining, on a test basis, evidence supporting transactions recorded in the accounting and operating records and applying such other auditing procedures as we consider necessary in the circumstances. An audit also includes assessing the estimates, judgments and decisions made by management. We believe that our audit provides a reasonable basis for our findings, conclusions and recommendations. We use a risk-based approach when selecting activities to be audited. This approach focuses our audit efforts on those operations that have been identified through a preliminary survey as having the greatest probability for needing improvement. Consequently, by design, finite audit resources are used to identify where and how improvements can be made. Thus, little effort is devoted to reviewing operations that may be relatively efficient or effective. As a result, our audit reports are prepared on an exception basis. Comments of Department Officials A draft copy of this report was provided to Department officials for their review and comments. Department officials generally agreed with our findings and recommendations. They indicated that they have taken action to implement three of our four recommendations. However, they did not agree that the Department needed to establish a standard for measuring the timeliness of resolving consumer complaints. Our review of all of the complaints handled by consumer services in 1996 showed that 25 percent (4 out of 28) took more than two months to resolve, however, in the absence of a standard there is no procedure for determining whether it was processed in a timely manner. Therefore, Department officials should reassess their position regarding this recommendation. Their comments were considered in preparing this final report and are included as Appendix B. Within 90 days after final release of this report, as required by Section 170 of the Executive Law, the Superintendent of the New York State Banking Department shall report to the Governor, the State Comptroller and the leaders of the legislature and its fiscal committees, advising what steps were taken to implement the recommendations contained herein, and where recommendations were not implemented, the reasons therefor. 3

9 Licensing Check Cashing Firms Businesses that want to operate check cashing facilities in New York State are required to obtain a license from the Department. To protect the public from unqualified or unscrupulous operators, the Department has promulgated regulations, referred to as the Superintendent s Regulations, that cover such facilities. According to Part 400, Section 400.1, of these regulations, an applicant is required to: a) demonstrate that it has net liquid assets of at least $10,000 for each of its locations; and that it has an existing right of access to a line of credit of not less than $100,000 at a banking institution; [This is usually documented by a letter of credit from the applicant s bank.] b) have at least one year of experience in the check cashing business in New York State or hire a person with such experience or equivalent background; [The Division maintains a record of employees at all check cashing institutions in the State. It uses this list to verify the applicants claims of previous experience.] c) authorize a private investigation company to conduct a background check on the firm, prepare a report on that independent investigation, and then submit the report directly to the Division; and d) submit a set of fingerprints as well as the appropriate fees along with the application. [The Division transmits the fingerprints to the New York State Department of Criminal Justice Services and the Federal Bureau of Investigation. It will not issue a license unless it receives confirmation from these agencies that none of the principals of the firm has been convicted of a felony.] Division management is responsible for establishing and maintaining a system of controls to ensure that only qualified applicants are licensed to operate check cashing firms. We found that such controls have been established and implemented and that as a result, the Division is providing customer service to the industry by issuing licenses in a timely manner. We reviewed the application folders for the 14 check cashing firms that were licensed between January 1, 1996 and May 31, In each case, we found that the Division obtained documentation that all licensing requirements were met before it issued a license. In reviewing the application folders, we also 4

10 considered the length of time it took the Division to process the applications. According to instructions on the application, the background and fingerprint checks usually take two to three months of processing time. In addition, once all required documents have been found to be satisfactory by the Division, there is a 90-day statutory period for approval or disapproval of an application. Our review showed that five applications had been processed within three months. The other nine applications took longer to process because initially the applicants did not provide all the necessary documents. While the overall processing time for these nine ranged from four to ten months, we found that all nine were approved by the Division within 90 days after the Division found all required documents and data to be satisfactory. 5

11 Examinations of Check Cashing Firms The Banking Law authorizes the Department to regulate check cashing firms. In addition to screening applicants through the licensing process, the Division monitors such firms through an examination process. Two units within the Division are involved in the examination process - the Examination Unit and the Supervision Unit. The Examination Unit performs field examinations of check cashing firms. Ten field bank examiners are assigned to the Examination Unit. At any given time, about four of these 10 are usually performing examinations of check cashing firms. The Supervision Unit employs five bank examiners who review the work done by the Examination Unit and follow up on any concerns raised as a result of the examination. Field Examinations Article IX-A of the Banking Law and Part 400 of the Superintendent s Regulations establish examination requirements to ensure that check cashing firms receive an adequate level of scrutiny during a field examination. According to those requirements, the Division s examiners use a comprehensive checklist that delineates specific steps the examiner should follow to ensure completeness and compliance with the regulations. A field examination includes reviews of required liquidity and credit lines, as well as a determination that fees charged to consumers are proper and that all employees have been registered with the Department. The examiners also verify that required signs are posted and that the licensee has complied with record-keeping and reporting requirements. In addition, they verify that the facility is not cashing checks valued at more than $2,500. (Certain government and payroll checks are exempt from this requirement.) We reviewed files prepared by the Examination Unit during its examination of 33 check cashing firms. (This included all of the 29 firms the Division reviewed during the period from January 1, 1997 through May 15, 1997, as well as 4 firms reviewed during a prior period.) We found that the examinations of all 33 firms were done according to the Division s procedures and guidelines. Following Up on the Field Examinations Division procedures indicate that the Supervision Unit is to review and follow up on examiners work papers after a field examination is performed. Such follow-up entails reviewing the examiner s work papers to determine whether the examination has been performed properly. Supervision Unit staff also check the work papers to see whether the examiners found any violations of the Banking Law. If an examiner finds violations, the Superintendent is supposed to write a letter to the firm s officials, asking them to explain why the firm violated the Banking Law. If the firm s response to the letter is 6

12 deemed inadequate, the Supervision Unit has the right to impose a fine as high as $5,000 for any one violation. However, before a fine can be imposed, a committee consisting of the heads of each unit within the Division, as well as the Division s Deputy Superintendent, meets to decide whether a fine is warranted and to determine the appropriate amount for the fine. Once a fine is imposed, the check cashing firm has the right to contest the fine and request a hearing. We found that the Supervision Unit had not reviewed the work papers for 2 of 33 firms in our sample. Agency officials told us that the two examination reports had not yet been reviewed because inadequate staffing had resulted in a backlog of work. In response to our draft report, Department officials agreed to expedite supervisory reviews and...continue to follow-up with those firms that have a documented history of violations. In addition, although 5 of the 33 check cashing firms had repeatedly violated the Banking Law, none had been fined as of July 25, (The five firms included the two whose examinations had not been reviewed by the Supervision Unit.) These violations had been reported during previous examinations; they concerned areas such as record-keeping, failure to report change of employees status, and failure to maintain the required liquidity balance. The following chart indicates the date of the most recent examination that reported a recurring deficiency. It also shows the date the violation was first noted and the date the Department last took action regarding the violations, up to July 25,

13 Check Current Cashing Date Violation Examination Date Last Firm First Noted Date Action Taken A 12/24/93 3/18/97 3/18/97 B 12/15/94 1/02/97 1/02/97 C 10/18/93 2/18/97 5/29/97 D 8/19/93 7/22/96 12/16/96 E 3/12/92 & 2/4/97 5/12/97 3/14/94 Department officials pointed out that the process of imposing fines is a lengthy procedure, since the check cashing firm has the right to refute the examination results and request a hearing. In addition, the Division first communicates with the firms and tries to work with them to correct the violation. However, we believe firms that violate the law repeatedly should be fined on a more timely basis. Fining persistent violators may discourage other check cashing entities from violating the law. In response to our draft report, Department officials agreed to expedite the imposition of fines on persistent violators. The response stated The imposition of fines is a recent initiative in the Licensed Financial Services Division. It was instituted in The assessment of fines are based on the significant of the violation and whether is it a repeat violation. Frequency of Examinations The Deputy Superintendent established a schedule that requires examinations of check cashing firms on a two-year cycle. Our review of the Division s Rolling Examination Schedule dated May 15, 1997, showed that 50 of the 235 firms licensed at that time had not been examined since Our review of these 50 showed that, on average, the Division was 10.5 months behind schedule. As of May 15, 1997, examinations had not been performed on 17 of the 50 for more than 3 years; and the remaining 33 had not been examined for periods ranging from 29 months to 36 months. A significant number of check cashing operations are not examined as frequently as the Division s policy requires, a practice that could result in delayed identification and correction of problems. Division officials advised us that examinations had been delayed because the positions of two field bank examiners were eliminated in They said it would not be possible to maintain a two-year examination cycle at the current staffing level. Therefore, 8

14 in the absence of being able to adhere to its examination schedule, we recommend that Division officials identify a method of prioritizing the examinations that have to be completed. One such method is the risk-based approach by which the Division would prepare a formal written risk assessment to determine the level of monitoring required for each firm. This would enable the Division to maximize the effectiveness of its examination resources by focusing its efforts on areas with the greatest risk. Division officials advised us that, currently, they do consider risk in scheduling some examinations. For example, they will expedite an examination if they receive a complaint indicating that a serious violation has occurred. However, the Division has not implemented a formalized, comprehensive risk-based approach. In response to our draft report, Department officials indicated that We have prioritized the scheduling of examinations according to risk. We believe this approach will make the examination process more efficient and effective. Recommendations 1. Expedite supervisory follow-up of firms that have a history of violations. 2. Expedite the imposition of fines on persistent violators of the Banking Law. 3. Reassess its current methodology for scheduling examinations of check cashing firms and consider utilizing a risk-based approach. (The Banking Department agreed to implement all three recommendations.) 9

15 Response to Complaints Against Check Cashing Firms Consumer Services is responsible for reviewing consumer complaints and ensuring that valid complaints are resolved properly. Examiners and student interns within Consumer Services investigate the circumstances surrounding each complaint by soliciting a written response from the check cashing firm. Subsequently, the Director of Consumer Services reviews the file and determines whether an appropriate course of action was taken. We reviewed all of the 28 check cashing complaints that Consumer Services recorded in The nature of the complaints included refusals to cash customers checks, overcharges of check cashing fees, shortchanging customers, and cashing forged checks. We found that Consumer Services had investigated all 28 complaints. Ten of these complaints were deemed to be valid and resulted in consumer refunds where applicable, while six were deemed to be invalid. In one case the complainant was referred to another agency. In the remaining 11 cases, Consumer Services could not determine the validity of the complaints because there was disagreement between the complainant and the check cashing firm about the facts of the case, and it was not possible to determine which version was accurate. Many of these complaints involved consumers who walked away from the check cashing window and subsequently claimed that they were short-changed or given counterfeit bills. Consumer Services advises complainants that it will take at least 30 days to investigate their complaints. However, there is no standard for the maximum time allowable to resolve a complaint. Of the 28 complaints that we reviewed, 14 were closed within fewer than 30 days. It took Consumer Services between 32 and 65 days to complete investigations of 11, while 3 of the 28 cases took longer than 65 days to resolve. The investigation period for one of these latter cases totaled 133 days. The Department reported improved performance in In response to our draft report, Department officials stated that they received a total of 56 complaints against check cashers in They indicated that approximately 95 percent of these complaints were resolved within 30 days. Based on the results of our review, it appears that the Consumer Services is generally investigating complaints in a timely manner. We believe that, to enhance customer service, the Division should establish a standard regarding the maximum time necessary to resolve a consumer complaint. 10

16 Recommendation 4. Establish a standard regarding the maximum time necessary to resolve a consumer complaint. (The Department believes this recommendation is unnecessary because its current procedures are effective in ensuring the expeditious resolution of most complaints. We continue to believe that implementation of this recommendation would enhance customer service by identifying any complaints that are not resolved within an established time frame.) 11

17 Major Contributors to This Report William Challice David R. Hancox Carmen Maldonado Stanley Evans Barry Mordowitz Tenneh Blamah Christine Chu Helen Crick Alex Ruiz Marticia Madory Appendix A

18 Appendix B

19 B-22