Bill Proposes a New Consumer Financial Services Agency with Considerable Privacy Responsibilities
With President Obama scheduled to sign the Dodd-Frank Wall Street Reform and Consumer Protection Act this week, the financial services industry faces a rapidly changing regulatory environment. While a great deal of attention has been paid to the significant restructuring of the financial services regulatory regime, little focus has been placed on the proposed changes to the oversight of consumer privacy issues, data security and data stewardship. These issues may not only affect banks, but all types of businesses servicing the financial industry as well.
The New Consumer Financial Protection Bureau ("CFPB")
Most noteworthy, in the privacy and data security context, is the establishment of the new CFPB, to be led by an independent director appointed by the president and confirmed by the Senate.1 The new financial regulatory reform bill, known as the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), creates a new consumer financial protection watchdog that comes armed with significant powers and rulemaking authority. Elizabeth Warren, Chair of the Nonpartisan Congressional Oversight Panel, a consumer advocacy organization, said, "They created a strong, independent consumer agency that will have the tools to rein in industry tricks and traps and to cut out the fine print. For the first time, there will be a financial regulator in Washington watching out for families instead of banks."2
CFPB Examination & Enforcement Authority
The CFPB will have authority to examine and enforce regulations for banks and credit unions with assets in excess of $10 billion. CFPB will also govern mortgage-related businesses (lenders, servicers, mortgage brokers, and foreclosure operators), payday lenders, and student lenders, as well as other larger, non-bank financial companies, such as debt collectors and consumer reporting agencies, as will be determined by the CFBP in its regulations. Companies should closely evaluate Dodd-Frank and any implementing regulations adopted by the CFPB to determine whether and to what extent they are governed.3 Companies that operate in a "grey area" of the proposed CFPB authority should consider whether advocacy during the implementing regulation rulemaking process would be advisable.
The CFPB has significant reach generally over businesses that provide "financial products or services," including service providers.4 It will consolidate and strengthen consumer protection responsibilities currently handled by the Office of the Comptroller of the Currency, Office of Thrift Supervision, Federal Deposit Insurance Corporation, Federal Reserve Board, National Credit Union Administration, Department of Housing and Urban Development, and, to a lesser extent, Federal Trade Commission.
CFPB Rulemaking Authority
This new agency will be able autonomously to write rules for consumer protections governing many, if not most, businesses offering consumer financial services or products. The CFPB "may prescribe rules identifying as unlawful unfair, deceptive, or abusive acts or practices in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service."5 Rules prescribed by the CFPB may include requirements for the purpose of preventing such unfair, deceptive, or abusive acts or practices.6 The "unfair and deceptive" standard has been used by regulators in the privacy context before. For example, the Federal Trade Commission has used this authority to file actions against companies who have suffered a security breach, and companies whose privacy policies and information security practices were deemed inadequate.7 With the added and undeveloped "abusive acts or practices" standard, the CFPB will have even broader authority to focus on privacy, data access rights, usage, disclosures, and information security issues.
While discussions are still ongoing, it appears that the CFPB will have rulemaking authority over specific enumerated laws pertaining to privacy issues, such as the Fair Credit Reporting Act and Gramm-Leach-Bliley, as well as laws that have been amended to permit CFPB jurisdiction, such as the Right to Financial Privacy Act of 1978 and the Privacy Act of 1974.8 This means, for example, that the Safeguards Rule9 and the Privacy Rule10 are likely to be subject to CFPB oversight, and new rules could be promulgated in those areas. As another example, under the Fair Credit Reporting Act, the CFPB is required to "identify patterns, practices, and specific forms of activity that can compromise the accuracy and integrity of information furnished to consumer reporting agencies," which could result in new rules regarding the data transfer or security.11 A determination of the extent of authority over these issues that the CFPB will have, compared with other existing agencies, is just one of the issues that will likely develop over time; but in some cases the responsibility is clearer. For example, the Federal Trade Commission does not appear to be losing authority over items such as the Red Flags Rule and the Document Disposal Rule.12
CFPB Privacy Responsibilities
While the new legislation still contains many unknowns, what is clear is that the CFPB will be deeply entrenched in privacy and data security issues. For example, covered persons must make available to consumers, upon request, "information in the control or possession of the covered person concerning the consumer financial product or service that the consumer obtained from such covered person, including information relating to any transaction, series of transactions, or to the account including costs, charges and usage data."13 This information must be made available, unless exceptions apply, in an electronic form usable by consumers, so privacy and security concerns will be paramount.14 Putting aside the broad rulemaking authority and explicit sections dealing with privacy rights and data access, there are also more nuanced privacy implications. For example, there are provisions governing the collection and disclosure of personally identifiable information that deserve close examination and will likely develop over time.15
Privacy and Security Bills Percolating in Congress
In addition to the formation of this new agency, it is worth revisiting the several other bills that have been making their way around Congress, and worth highlighting other efforts that focus on privacy and data security issues. The Data Breach Notification Act (S. 139), introduced by Sen. Dianne Feinstein (D Cal.) in early 2009, provides for a federal breach notification standard. Soon after the introduction of this bill, Rep. Bobby Rush (D-Ill.) introduced the Data Accountability and Trust Act (H.R. 2221) and Sen. Patrick Leahy (D-Vt.) reintroduced the Personal Data Privacy and Security Act (S. 1490). Rush's bill calls for information security policies, including requiring a process for disposing obsolete data. Leahy's bill also calls for a federal breach notification standard, but would also provide for making it a crime to intentionally or willfully conceal a security breach involving personal data.
A few months ago, Rep. Rick Boucher (D-Va.) introduced a privacy bill providing for a generally applicable privacy structure (as opposed to the existing U.S. sector-specific privacy legislation). Boucher's legislation calls for a high degree of privacy protection and transparency for the collection, use and sharing of information about consumers. The goal of the bill is to give consumers control over that collection, use and sharing, both online and offline. Then in June of this year, Howard A. Schmidt, the Cybersecurity Coordinator and Special Assistant to the President, introduced the draft National Strategy for Trusted Identities in Cyberspace, developed by the National Security Staff (NSS), and released it for public comment and input. The Strategy contains guiding principles and goals and objectives, including the goal to strengthen privacy protections for end-users and increase awareness of risks. The NSS is currently considering requiring identity-providers to abide by Fair Information Practice Principles, so this effort could result in best practices or legislative recommendations. The Department of Homeland Security (DHS), a key partner in the development of the strategy, has posted the draft NSTIC at www.nstic.ideascale.com.
A few days ago, Sens. Tom Carper (D-Del.) and Bob Bennett (R-Utah) reintroduced legislation aimed at protecting consumers and businesses from identity theft and account fraud. The legislation, entitled the Data Security Act of 2010, applies to financial institutions, retailers and government agencies, and would require these entities to: safeguard sensitive information, investigate security breaches, and notify consumers when there is a substantial risk of identity theft or account fraud. The proposed bill would also permit regulators to "levy fines, require corrective measures or even bar individuals from working in their respective industries" if they fail to disclose breaches adequately, according to the Senate's news release accompanying the bill.
Stay Tuned: Legislative & Regulatory Kettles are Still Boiling
While uncertainty is in the air, especially as the CFPB gets up and running, privacy and data security and stewardship issues no doubt will be front and center for some time, and new laws and rules surely are on the horizon. With more than 200 rulemakings still to be issued as a result of the Dodd-Frank bill (24 of which will be issued by the CFPB), and a large number of research studies to be conducted, it is important to pay close attention to this rapidly developing area.