Speech
First Deputy Superintendent of Banks Daniel A. Muccia Testifies Before the New York State Assembly Standing Committees on Banks and Consumer Affairs and Protection, Discusses the Suspension of CashPoint Network Services, Inc.

September 24, 2004

CashPoint was licensed as a money transmitter under Article 13-B of the Banking Law on May 1, 1996. CashPoint provided bill payment services through a network of approximately 700 agent locations throughout New York State.  Approximately 500 of these agents are licensed check cashers.  The other agents are entities such as bodegas and similar types of neighborhood convenience and variety stores.  From its inception until shortly after its suspension the principal owners of CashPoint were two brothers, Bernard and Samuel Brevdah, who each had a 50 percent ownership interest in the licensee.  Following the suspension of Cashpoint's license Bernard Brevdah transferred his ownership to his brother Samuel Brevdah.  The Brevdah brothers also jointly owned two check cashing licenses operating in New York State, Uribea Realty Corporation and Bronx Check Cashing Corporation.

As a money transmitter, CashPoint accepted cash from consumers for payment to various major consumer billers including Con Edison, Verizon, Cablevision, Keyspan and the NYC Housing Authority, among others.  CashPoint also contracted with the City of New York to cash payroll checks for its employees, through designated agents of CashPoint that are licensed check cashers.  In addition to conducting such payment services throughout New York State, CashPoint also conducted similar operations in more than twenty other states, some of which did not require licensing of such money transmission services. CashPoint's annual volume of payments nationwide in 2003 was estimated to be approximately $3 billion.

Immediately upon learning that CashPoint could not meet its obligations, the Department temporarily suspended CashPoint's money transmitter license on April 21, 2004. The Department also issued a Superintendent's Order prohibiting CashPoint from transferring or appropriating any funds or assets.  On April 22, 2004 an involuntary petition under Chapter 7 of the Bankruptcy Code was filed in the Bankruptcy Court of the Southern District. The Trustee in Bankruptcy has agreed to a continuation of the temporary suspension of CashPoint's license until a date to be determined in the future.  The Department also temporarily suspended the check cashing licenses of the Uribea Realty Corporation and the Bronx Check Cashing Corporation on April 28, 2004. The check cashing licenses remain suspended pending a hearing.

While it is too early in the bankruptcy proceedings to determine the extent of the losses, preliminary estimates based on incomplete information estimate the funds unaccounted for as approximately $75 million.  There is also an additional $10-20 million owed by CashPoint to banking institutions.  Offsetting that amount, New York agents of CashPoint are estimated to hold $9.9 million in payments that were not deposited in the CashPoint controlled account.  It is not known how much is held by non-New York agents of CashPoint.  The United States Bankruptcy Judge issued an order on May 13, 2004 requiring agents of CashPoint to turn over to the Trustee any monies that they received from customers for payment of bills through CashPoint.  Some 70 percent of the CashPoint agents are licensed check cashers, increasing the likelihood of compliance with the Judge's Order.  The process of marshalling assets from agents, banks and others is ongoing and we await its completion.  In addition, CashPoint has two outstanding bonds aggregating $1 million, which were issued for the benefit of New York consumers and the Superintendent of Banks.  The State Transmitter of Money Insurance Fund (Transmitter Fund) presently contains $4.3 million, which can be used to reimburse defaulted payments on New York instruments.  In addition, under Article 13-C of the Banking Law, authorizing the Transmitter Fund, and Chapter 1 of the Unconsolidated Laws of 1977, the Department has the ability to borrow up to $6 million from the State Property and Liability Insurance Security Fund to pay claimants if funds in the Transmitter Fund are insufficient. 

To date, the Department has received approximately 8000 consumer inquiries, either in phone calls, letters or faxes, related to CashPoint.  When we eliminate duplications, this amounts to about 2700 consumers that have submitted information about a potential claim to us.  In discussions with the consumers, the Department has advised them to maintain bills and receipts showing proof of payment, to try to settle the matter directly with the biller, and to submit the information to us. We in turn are submitting this information to the bankruptcy trustee.  The bankruptcy trustee will be sending a notice to the consumers on our list advising them on how to submit a formal claim to the trustee.  In addition, we have urged the utility and housing billers to exercise forbearance with respect to the consumers while this matter is being reviewed by all parties to determine the scope of financial losses and potential recoveries.  I am happy to report that, based on these discussions, most billers, particularly the regulated utilities have been very cooperative regarding their treatment of the consumers who made payments through CashPoint that did not reach their intended destination.

Regarding the timing of the defaulted payments, whatever circumstances caused the loss of funds, from the consumer perspective, it appears that most of the potential consumer losses in New York State occurred in the April cycle of bill payments.  We can say this with some assurance because we believe if the March payments for February utility and rent bills had not been made by CashPoint, the Department would have received consumer complaints about past due amounts on bills for which they had made payment.  This did not occur, though the Department has subsequently received anecdotal information that late payments were made to billers by CashPoint for a period of time prior to the suspension in April.

The Department intends to commence a formal claims process once the bankruptcy proceeding has been completed.  The deadline for filing pre-petition claims with the bankruptcy trustee was September 14, 2004.  We continue to be in close contact with the trustee and requested that we receive as much information as possible as soon as possible.  The good news is that the Department has very reliable data from which to identify claimants for relief from the Transmitter Fund.  This includes the records of the customers, the CashPoint agents of which 70 percent in New York are licensed check cashers, and the billers'.

What remains unclear at this time and which will require additional time to sort out is the total amount of claims that may be eligible for reimbursement from the bond proceeds and Transmitter Fund after the bankruptcy proceedings are completed.  Under the provisions of Article 13-C of the Banking Law, a claimant may be either a holder or purchaser of a New York instrument.  A holder may be either a person who is in possession of the instrument and is the named payee thereon, e.g., a biller, or in possession of an instrument issued or endorsed to such person or the bearer.  Thus, even if the customer, as the purchaser, is determined not to be liable for payment to the biller and therefore is not a claimant, the billers as holders may make claims upon the Transmitter Fund.  As indicated previously, the available resources from the bankruptcy estate to reimburse potential claims in all likelihood will not be sufficient to cover the total defaulted payments, therefore we expect payments from the proceeds of the bonds and the Transmitters Fund will be required.

Finally, I would like to address what steps we are taking to minimize reoccurrences of this type of situation.  This event has highlighted some human and supervisory shortcomings of the Department.  Our assessment of this situation, following some study of the matter, is that the Department may have missed some red flags and did not adequately identify the financial risk posed by CashPoints' business model.

While I cannot discuss any aspects regarding how or why this failure to transmit and make payments occurred, because of pending criminal investigations in which the Department's Criminal Investigation Bureau is participating, I can tell you that from our perspective, as one of CashPoint's licensing authorities, we found it disturbing that we did not detect the problems at CashPoint sooner. For this reason we have conducted a post mortem review as well as a complete review of the money transmitter examination process.  As a result of these reviews, we have reassigned personnel, increased the resources of the Licensed Financial Service Division, revised the examination schedule to more frequent annual on-site examinations, revised key examination procedures and report pages, and increased off-site surveillance and reporting requirements. We are also taking steps to increase the timely communication between state regulators when dealing with a multi-state licensee.  All of these steps are designed to re-orientate the examination and supervision of money transmitters from a point-in-time compliance approach to a more forward looking financial analysis and safety and soundness approach.  In addition, we are currently reviewing the laws and regulations that apply to money transmitters and the operation of the Transmission Fund.  More broadly, this same activity will be undertaken with respect to all non-bank or non-depository entities that we supervise.  Further, senior staff has reviewed each most recent money transmitter examination to make sure no particular problem identified in the examination has been overlooked or some aspect of a licensee's operations had not been adequately examined. The Superintendent has the right to adjust the bond amounts required of money transmitters.  Based on targeted examinations of money transmitters the Department recently conducted, the Superintendent has already required one transmitter to increase its bond amount from one to five million dollars and has required others to restructure their balance sheets to maintain sufficient levels of liquid assets.

Finally, there is a broader issue that this incident highlights. It relates to the scope of financial regulation by this state and other states and the allocation of resources for that purpose.  Clearly, state legislators have directed the expansion of state financial regulation since WW II at non-bank financial service providers; the federal government has essentially taken no responsibility for financial supervision of these entities.  However, historically, allocation of regulatory resources has predominantly been directed at depository institutions.  This is not to suggest that there is a diminished need for supervisory oversight of depository institutions; in fact, they have become generally more complex in their operations and business activities.  But the Department regulates such entities in partnership with the Federal Reserve System and the Federal Deposit Insurance Corporation and supervisory responsibilities and resources are shared.

Non-depository institutions, which tend to specialize in one or two financial services, are the responsibilities of the State alone.  Yet these entities typically do not posses the managerial capability, nor maintain the level of capital and internal operational controls comparable to that found in depository institutions. Yet, as CashPoint well illustrates, some of these entities have complex business models, operate nationwide, and hold large sums of customer funds.  This suggests the need for greater and more sophisticated regulatory resources than state financial regulators have allocated in the past.

The corollary of this development is that non-depository entities must be willing to pay for their regulation as banking institutions have been doing for more than one hundred and fifty years.  Prior to the CashPoint incident, the Banking Department, as you know, began to reallocate resources and refocus the mission of the Department along the lines here suggested.  And we intend to proceed, in keeping with the Executive Budget recommendations for 2004-05, with extending the Department's general assessment for the cost of its regulatory operations to all the entities, both depository and non-depository, that it regulates.  To help prevent future CashPoints, the Department needs to establish appropriate supervisory standards and allocate sufficient regulatory resources to supervise the non-banking entities it regulates.  I know that Superintendent Taylor intends to see to it that this goal is achieved during her tenure as Banking Superintendent.