The New Kid on the Block: CFPB Fines Dwolla Over its Data Security Practices

The Consumer Financial Protection Bureau is the latest agency to take administration action against a private company over its data protection practices.

On March 2, 2016, the CFPB announced in a press release that it has taken administrative action against Dwolla, an online payment company, for deceiving its customers about its data security practices. The Dodd-Frank Wall Street Reform and Consumer Protection Act authorizes the CFPB to take against institutions that engage in unfair, deceptive, or abusive acts. The CFPB determined that Dwolla’s claims constituted deceptive acts in violation of Sections 1031(a) and 1036(a)(1) of 12 U.S.C. §§ 5531(a), 5536(a)(1).

The CFPB found Dwolla, from December 2010 to 2014, caused or represented, expressly or by implication, to consumers that it employs reasonable and appropriate measures to protect data obtained from consumers from unauthorized access when it:

1. Claimed its data security practices “exceed” or “surpass” industry standard practices when in fact it did not employ reasonable and appropriate measures to protect consumer data;
2. Falsely claimed that its “information is securely encrypted and stored when in fact it did not encrypt some sensitive consumer information, and actually released application to the public before testing whether the applications were secure.

The Order requires Dwolla to:

1. Pay a $100,000 fine;
2. Adopt and implement reasonable and appropriate data security measures to protect consumers’ personal information on its computer networks and applications;
3. Retain an independent third-party to conduct annual audits of its data security practices;
4. Submit plans, reports, programs, policies, and procedures to the CFPB.

The Order specifically outlines measures Dwolla is required to implement to improve the safety and security of its operations and the consumer information stored therein, or transmitted through, including:

1. Establish, implement, and maintain a written, comprehensive data security plan reasonably designed to protect confidentiality, integrity, and availability of sensitive consumer data;
2. Adopt and implement reasonable and appropriate data security policies and procedures;
3. Designate a qualified person to coordinate and be accountable for the data security program;
4. Conduct data security risk assessments twice annually to identify internal and external risks to the security of its networks;
5. Evaluate and adjust the data security program in light of the results of the risk assessments;
6. Conduct regular, mandatory employee training;
7. Develop, implement, and update security patches to fix any security vulnerabilities identified;
8. Develop, implement, and maintain an appropriate method of customer identity authentication at the registration phase as well as before funds transfers;
9. Develop, implement, and maintain reasonable procedures for the selection and retention of service providers capable of maintaining security practices consistent with the requirements of the Order.

With one successful adjudication under its belt, the CFPB will likely continue to pursue administrative actions for data protection practices in the future. The CFPB is the newest member of  the not-so-exclusive group of regulatory agencies that are currently adjudicating data protection cases, which includes the FTC, SEC, and FCC. With more and more agencies trying to get in on the action, is it time to centralize data protection enforcement?