On March 2, 2016, the Consumer Financial Protection Bureau (CFPB) entered into a consent order with online payment systems operator Dwolla, Inc., based on allegations that Dwolla deceived consumers about its data security practices and the safety of its online payment system. The CFPB brought this action under its authority in Sections 1031(a) and 1036(a)(1) of the Consumer Financial Protection Act of 2010 to prohibit deceptive acts or practices.

The CFPB’s consent order alleged that, between January 2011 and March 2014, Dwolla falsely represented through its website and communications with consumers that, among other things, its data security practices “exceed[ed]” or “surpass[ed]” industry data security standards, including Payment Card Industry (PCI) data security standards, and that “all information” Dwolla obtained from consumers “is securely encrypted and stored” both in transit and at rest.  The CFPB found these and similar representations false and misleading because Dwolla failed to:

  • Adopt or implement reasonable and appropriate data security policies and procedures until at least September 2012;
  • Adopt or implement a written data security plan to govern the collection, maintenance, or storage of consumers’ personal information until at least October 2013;
  • Conduct adequate, regular risk assessments to identify reasonably foreseeable internal and external risks to consumers’ personal information, or to assess the safeguards in place to control those risks;
  • Use encryption technologies to properly safeguard sensitive consumer information, including names, addresses, Social Security numbers, bank account information, digital images of driver’s licenses, Social Security cards and utility bills, and Dwolla-issued PINs;
  • Practice secure software development for consumer-facing applications developed at an affiliated website, Dwollalabs; or
  • Provide adequate or mandatory employee training on data security.

The CFPB ordered Dwolla to pay a $100,000 civil money penalty, although the Bureau made no finding of any data breach or other compromise of consumer data.  The CFPB also ordered Dwolla to take a substantial number of steps to fix its security practices, including:

  • Establishing a written, comprehensive data security plan;
  • Implementing reasonable and appropriate data security policies and procedures;
  • Conducting data security risk assessments twice annually and evaluating and adjusting the data security program in light of the results of the risk assessments;
  • Designating a qualified person to coordinate and be accountable for the data security program;
  • Implementing, and updating security patches to fix security vulnerabilities, as required;
  • Developing and implementing an appropriate method of customer identity authentication at the registration and before effecting a funds transfer;
  • Adopting reasonable procedures for the selection and retention of service providers capable of maintaining security practices consistent with the consent order;
  • Conducting regular, mandatory employee data security training; and
  • Obtaining an annual data security audit from an independent, qualified third party acceptable to the CFPB’s Enforcement Director, develop a compliance plan to address audit findings and recommendations, and provide the compliance plan and the audit report to the CFPB for non-objection by the Enforcement Director.

The consent order, and its associated reporting requirements, will remain in effect for a period of five years from the order’s effective date.

This action is the CFPB’s first enforcement action related to data security and represents a noteworthy expansion of the CFPB’s jurisdiction into the data security area.  Data security historically has been considered a safety and soundness issue for financial institutions, not a consumer financial protection issue.  When Congress adopted the Dodd-Frank Act, it kept responsibility for data security, including the information security provisions of the Gramm-Leach-Bliley Act, with the federal banking agencies and the Federal Trade Commission (FTC), rather than transferring responsibility for those provisions to the CFPB.  The CFPB’s action blurs the line between safety and soundness regulation and consumer financial protection regulation.

In the CFPB’s press release, Director Richard Cordray stated:  “Consumers entrust digital payment companies with significant amounts of sensitive personal information. With data breaches becoming commonplace and more consumers using these online payment systems, the risk to consumers is growing.  It is crucial that companies put systems in place to protect this information and accurately inform consumers about their data security practices.”  Director Cordray’s statement signals that additional CFPB enforcement actions involving data security may be forthcoming. This action also represents the first time the CFPB has brought an enforcement action against a financial technology company engaged principally in developing payments innovations.

Finally, the CFPB’s action is significant because Dwolla is a participating provider of digital wallet services through Pay.gov, the Treasury Department’s electronic payment portal for individuals, businesses, and states to make non-tax payments to the federal government.  As a result of this action, Treasury and other federal and state agencies may scrutinize emerging payment providers more closely for data security compliance both before accepting them as partners or service providers and after onboarding them.

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Photo of David Stein David Stein

David Stein advises clients on credit reporting, financial privacy, financial technology, payments, retail financial services, and fair lending issues. He assists a broad range of financial services firms, consumer reporting agencies, financial technology companies, and their vendors with regulatory, compliance, supervision, enforcement, and…

David Stein advises clients on credit reporting, financial privacy, financial technology, payments, retail financial services, and fair lending issues. He assists a broad range of financial services firms, consumer reporting agencies, financial technology companies, and their vendors with regulatory, compliance, supervision, enforcement, and transactional matters.

Mr. Stein has significant experience advising clients on compliance with the FCRA, GLBA, ECOA, EFTA, E-Sign Act, TILA, TISA, FDCPA, Dodd-Frank Wall Street Reform and Consumer Protection Act, and FTC Act, as well as state financial privacy laws. Mr. Stein is a member of the firm’s fintech and artificial intelligence initiatives and works with clients on issues related to cutting edge technologies, such as blockchain, virtual currencies, big data and data analytics, artificial intelligence, online lending, and payments technology.

Mr. Stein previously served in senior regulatory, policy-making, and management positions at the Consumer Financial Protection Bureau (CFPB) and the Federal Reserve Board (FRB). He played a significant role in developing regulations and policy on credit reporting, financial privacy, retail payments systems, consumer credit, fair lending, overdraft services, debit interchange, unfair or deceptive acts or practices, and mortgage origination and servicing. Mr. Stein draws upon his government experience in representing clients before the CFPB, the FRB, and other regulatory agencies and leverages his insights into the regulatory process to provide clients with practical, actionable advice.

Photo of Caleb Skeath Caleb Skeath

Caleb Skeath advises clients on a broad range of privacy and data security issues, including regulatory inquiries from the Federal Trade Commission, data breach notification obligations, compliance with consumer protection laws, and state and federal laws regarding educational and financial privacy.