United States: Consumer Financial Protection Bureau Brings Its First Data Security Enforcement Action

On March 2, the Consumer Financial Protection Bureau ("CFPB") issued its first ever consent order in a data security matter. According to the order, Dwolla, Inc. settled allegations that it misrepresented that the company had reasonable and appropriate data security practices when, according to the CFPB, its practices failed to employ reasonable and appropriate measures to protect user data from unauthorized access. While Dwolla did not admit or deny any allegation, the consent order requires Dwolla to pay a $100,000 civil penalty and take other specified actions for a five-year period, such as conducting semi-annual data security risk assessments and developing, with direct input from the board of directors, a compliance plan. 

The CFPB began operating in 2011 after the Dodd–Frank Wall Street Reform and Consumer Protection Act gave the agency authority to regulate consumer financial products and services under the federal consumer financial laws. The action against Dwolla demonstrates that this relatively new agency is going to take a strong position in the cybersecurity realm and pursue companies within its jurisdiction for allegedly making deceptive statements about data security, even without an actual compromise of consumer information. The agency's decision to proceed against a start-up payment processor also underscores the wide variety of consumer financial companies that could face an enforcement action by the CFPB. 

According to the consent order, Dwolla is a payment processing company that transfers as much as $5 million per day for its 650,000 members. Members transfer money from either a Dwolla account or a personal bank account linked to the member's Dwolla account. The consent order states that, when a customer establishes a Dwolla account, Dwolla stores the customer's name, address, date of birth, telephone number, and social security number, and if the customer links the account to a personal bank account, Dwolla also stores a bank account number, routing number, and a username, password, and pin. 

The CFPB alleges that Dwolla made representations that its data security practices "exceed[ed]" and "surpass[ed]" industry standards, allegedly claiming, for example, that the company "sets a new precedent for the industry for safety and security." Dwolla also allegedly made multiple statements related to its encryption technology, including stating that the company encrypts "all sensitive information that exists on its servers" and is compliant with Payment Card Industry ("PCI") standards.

The CFPB concluded that these statements constituted deceptive acts or practices in violation of the Consumer Financial Protection Act ("CFPA"). According to the CFPB, these statements were false or misleading because Dwolla "failed to employ reasonable and appropriate measures to protect data obtained from consumers from unauthorized access." In particular, the order asserts that Dwolla:

  • stored, transmitted, or caused to be transmitted personal information such as names, social security numbers, and bank account information without encrypting that data;
  • was not PCI compliant;
  • did not have reasonable and appropriate data security policies and procedures;
  • until 2014, did not conduct comprehensive risk assessments and inadequately trained its employees;
  • had an inadequate software development operation; and
  • stored sensitive customer information on applications that were not tested for security before being released to the public. 

Notably, however, the CFPB does not allege that any third parties gained unauthorized access (or even attempted to gain unauthorized access) to any of the personal information that it claims Dwolla failed to adequately protect.

The negotiated consent order, which will be effective for five years, requires that Dwolla refrain from further misrepresentations regarding data security, adopt a comprehensive data security plan, and implement related policies and procedures, including designating an employee to be accountable for the data security program. These requirements resemble those typically imposed by consent orders entered into by the Federal Trade Commission ("FTC"), which has thus far been the federal agency most active in the data security space. But the CFPB order also imposes several requirements that go above and beyond what the FTC typically imposes. For example, while the FTC frequently requires companies to conduct data security risk assessments, the CFPB order requires that Dwolla conduct such assessments twice annually. Likewise, while the FTC frequently requires third-party data security audits, it typically requires only that they be conducted biennially; the CFPB order requires that such audits be completed once per year. Even more notably, the CFPB order imposes specific requirements on Dwolla's board of directors. It requires that the report generated by the third-party data security audit be provided to the board of directors, that the board of directors develop a compliance plan to correct identified deficiencies and implement recommendations, and that the audit report and the board's plan be submitted to the CFPB. It further provides that the CFPB can accept or revise the plan. Additionally, pursuant to the consent order, the board must review and assume ultimate responsibility for all submissions made to the CFPB. Finally, as noted above, the order requires Dwolla to pay a $100,000 civil penalty. 

While many of the requirements imposed under the consent order will require significant attention by Dwolla and its board of directors, it is important to note that, unlike FTC consent orders, which are typically for a period of twenty years, this order will be in force for only five years. Whether the CFPB believes that immediate, intense data security measures are the best remedy for alleged data security violations remains to be seen. But what is clear is that this relatively new agency believes it need not wait for a data security incident to occur before bringing an enforcement action against a company within its jurisdiction – even a start-up – that it believes is making deceptive, material representations about its data security practices.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.