FFIEC Weighs In on Cyber Insurance

Last week, the Federal Financial Institutions Examination Council (FFIEC) issued a joint statement regarding cyber insurance from its member agencies: the Board of Governors of the Federal Reserve System (FED), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), and the Consumer Financial Protection Bureau (CFPB). The FFIEC indicated that the purpose of the statement was “to provide awareness of the potential role of cyber insurance in financial institutions’ risk management programs.”

Why Now

While the statement specifically states that it does not contain “any new regulatory expectations” and that cyber insurance is not required by any member agencies, it also describes various factors in the existing environment that call for broader awareness, and the possible acquisition, of cyber insurance:

  • The ever-growing threat of cyber attack: Symantec’s Internet Security Threat Report of March 2018 provides additional context for this factor: “With each passing year, not only has the sheer volume of threats increased, but the threat landscape has become more diverse, with attackers working harder to discover new avenues of attack and cover their tracks while doing so.”
  • Possible inadequacy of general insurance policies: The FFIEC notes that, “traditional insurance policies for general liability or basic business interruption coverage may not fully cover cyber risk exposures without special endorsement or by exclusion not cover them at all.” In addition, “coverage may also be limited and not cover incidents caused by or tracked to outside vendors.”
  • Evolution of cyber insurance marketplace: As cyber attacks grow and evolve, so too does this particular segment of the insurance marketplace.
  • And everything is at risk: The FFIEC warns that nearly every aspect of a financial institution can be harmed by cyber attacks: its financial footing, operational status, legal posture, compliance adherence, strategic plan, and reputation.

First-party Coverage Versus Third-party Coverage

The FFIEC notes that cyber insurance can be structure multiple ways, from a stand-alone policy to a specific cybersecurity endorsement added to an existing policy. It also explains the difference between first-party and third-party coverage:

  • First-party coverage: “Insures direct expenses incurred by the insured party and may address costs related to customer notification, event management, business interruption, and cyber extortions” (i.e., ransomware attacks).
  • Third-party coverage: “Protects against the claims made by financial institutions’ customers, partners, or vendors as a result of cyber incidents at financial institutions.”

Analyzing the Need for Cyber Insurance

For institutions trying to determine whether or not they need cyber insurance, the FFIEC recommends the following actions:

  • Ensure all key parties are involved in the decision-making process: This includes representatives–with expertise and authority–from legal, risk management, finance, information technology, and information security.
  • Conduct appropriate due diligence: This covers both internal due diligence (i.e., compare what you currently have with what you need to fill any insurance gaps) and external due diligence (i.e., examine and analyze possible cyber insurance vendors as you would other third-party vendors).
  • Review cyber insurance needs periodically: The FFIEC recommends including cyber insurance in your annual insurance review and budgeting process.

The Final Word

The FFIEC makes it clear that while cyber insurance can help protect financial institutions, it does not relieve them of their information security obligations. “Purchasing cyber insurance does not remove the need for a sound control environment,” which “may be a component of a broader risk management strategy.”

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Inside the CFPB Semi-annual Report: Enforcement Actions

cfpb_seal_blog_270x270.originalThe CFPB’s most recent Semi-annual Report detailed the enforcement actions it was involved in from October 1, 2016 through September 30, 2017. Although, the current CFPB leadership under Acting Director Mick Mulvaney is very different from that of former Director Richard Cordray, whose tenure includes the period above, an examination of these enforcement actions can still provide valuable insight about the CFPB to financial institutions and their risk and compliance management.

Length, Status of CFPB Enforcement Action Proceedings

Of the 54 enforcement action proceedings summarized in its April 2, 2018 Semi-annual Report, the majority (27) were originated by the CFPB in 2017. Another 20 were leftover from work begun in 2016 (12) and 2015 (8). Seven total actions lingered from 2014 (4), 2013 (2), and 2012 (1).

In 31 of the 54 actions, the result was an Order and/or Final Judgement against the defendant(s), while 20 cases are still pending and three were dismissed.

Make-up of Defendants in CFPB Enforcement Actions

The majority of actions described by the CFPB involve traditional financial institutions, however, other less traditional financial institutions (as per the USA PATRIOT Act) as well as other types of entities were caught up by the CFPB’s broad reach. These include debt relief firms (2), debt collectors (2), payday lenders (5), title companies (2), lead aggregators (2), laws firms (5), credit reporting agencies (3), and pawn brokers (3).

Alleged Violations in CFPB Enforcement Actions

Overwhelmingly, the enforcement actions, either specifically (11) or generally (30), described alleged violations of Unfair, Deceptive and Abusive Acts or Practices (UDAAP) as per the Consumer Financial Protection Act (CFPA). At least under Cordray, UDAAP was clearly a go-to violation for the CFPB, as its broad definitions provide the Bureau with signficant leeway. Only time will tell if the CFPB under Mulvaney continues this trend.

Other allegations include, but were not limited to, violations of the Real Estate Settlement Procedures Act (RESPA) (4), the Home Mortgage Disclosure Act (HMDA) (1), the Electronic Funds Transfer Act (EFTA) and Regulation E (3), and the Financial Credit Reporting Act (FCRA) (3).

CMPs and Other Fines in CFPB Enforcement Actions

Perhaps the most telling statistics in regard to the CFPB’s enforcement actions are the monetary ones.

  • The CFPB meted out 37 civil money penalties (CMPs) totalling $117.85 million.
  • The largest CMP was $40 million, followed by a $20 million CMP.
  • Out of the 37 CMPs, 16 were over $1 million.
  • The CFPB ordered defendants to pay restitution/redress/refunds/compensation to victims in the total amount of $279.65 million.
  • The largest redress demand was $107 million, followed by $95 million.
  • One defendant had to forgive or reduce loan amounts totaling $183.3 million.
  • The CFPB ordered disgorgement, the repayment of ill-gotten gains, in the amount of $1.35 million.

This concludes Bank Risk and Compliance Writer’s inside look at the CFPB’s Semi-Annual Report, which also included explanations of the CFPB’s upcoming proposed rules and its upcoming final rules.

 

 

Inside CFPB Semi-annual Report: Final Rules Expected

This week Bank Risk and Compliance Writer has been analyzing the CFPB’s Semi-annual Report, which was published on April 2. Monday’s post discussed the CFPB Acting Director’s call for remodeling the Bureau, which includes changing how it is funded and its level of independence. Tuesday’s post covered the CFPB’s plans for upcoming proposed rules, which leads us to today’s post–Final Rules Expected from the CFPB.

Upcoming Final Rules Per CFPB’s Semi-Annual Report

According to its report, there are three proposed rules that the CFPB anticipates finalizing in the near term.

  1. Proposed Rule to Amend the Gramm-Leach-Bliley Act (GLBA): This rule was originally proposed by the CFPB on July 1, 2016 to correspond to Congress’ amended changes to GLBA in connection with passage of Fixing America’s Surface Transportation Act (FAST Act) in December 2015. As proposed, it would mirror the FAST Act in exempting financial institutions meeting certain conditions from sending annual privacy notices to customers as per GLBA. Financial institutions “can use the annual notice exemption if it limits its sharing of customer information so that the customer does not have the right to opt out and has not changed its privacy notice from the one previously delivered to its customers.” When finalized, this should provide some compliance relief for institutions that meet the exempting criteria.
  2. Amendments Relating to Disclosure of Records and Information: Originally published in the Federal Register on August 24, 2016, this rule was proposed by the CFPB to revise its original 2011 rule protecting the confidentiality and disclosure of information. The CFPB’s stated purpose for the revision was “to clarify, correct, and amend certain provisions based on its experience over the last several years.” As proposed, the rule would revise and/or clarify these items: 1) rule’s definitions; 2) practices related to the Freedom of Information Act; 3) procedures for requests for information; 4) protection and disclosure of confidential information generated or received by the CFPB in its work; and 5) the Chief Privacy Officer’s authority.
  3. Amendment to the Federal Mortgage Disclosure Requirements under TILA (Reg Z): The CFPB published this proposed amending rule on August 11, 2017. According to the proposal’s summary, this rule relates “to when a creditor may compare charges paid by or imposed on a consumer to amounts disclosed on a Closing Disclosure, instead of a Loan Estimate, to determine if an estimated closing cost was disclosed in good faith.” It goes on to indicate, “Specifically, the proposed amendments would permit creditors to do so regardless of when the Closing Disclosure is provided relative to consummation.” In its comment letter of October 10, 2017 the American Bankers Association expressed its general support of the amendment relieving unintended consequences of the TILA-RESPA Rule. It also summarized its understanding of the amendment for further clarification.

Tomorrow, in the final post of this series, look for an analysis of recent CFPB enforcement actions outlined in the Semi-annual Report.

One Month to Legal Entity Customer Due Diligence Requirements Taking Effect

DepositoryBank Risk and Compliance Writer is taking a brief break today from its series on the CFPB’s Semi-annual Report to remind banks that there is one month remaining before FinCEN’s Customer Due Diligence Requirements for Financial Institutions takes effect.

On May 11, 2018, financial institutions will be required to complete customer due diligence tasks on any legal entity customer opening a new account. This includes identifying and verifying the identity of any person or entity with 25 percent ownership (ownership prong of the rule), as well as one person in a significant role, such as CEO or CFO (control prong of the rule).

To help financial institutions understand the rule, FinCEN originally published a CDD Frequently Asked Questions (FAQ) bulletin in July 2016 that covered 26 questions. With the deadline looming, FinCEN added a second CDD FAQ last week, this time covering 37 questions.

A Quick Glimpse at Latest FAQ’s First 10 Questions

Here is a quick recap of the topics covered in the first 10 questions in FinCEN’s most recent FAQ, along with a summary of some of its answers:

  1. Beneficial Ownership Threshold: FinCEN indicates that financial institutions may use a lower ownership threshold than the rule’s stated 25 percent if it deems that appropriate for its risk profile. In other words, institutions can choose to be more stringent than the rule.
  2. Beneficial Ownership and other AML requirements
  3. Complex Ownership Structures: According to the FAQ, “Covered financial institutions must obtain from their legal entity customers the identifications of individuals who satisfy the definition, either directly or indirectly through multiple corporate structures.” FinCEN provides a written and graphic example of this that is helpful for explaining the rule to employees who will be responsible for this task.
  4. Methods for Identification and Verification: FinCEN notes that, “Covered financial institutions must verify the identity of each beneficial owner according to risk-based procedures that contain, at a minimum, the same elements financial institutions are required to use to verify the identification of individual customers under applicable customer identification program (CIP) requirements.”
  5. Beneficial Owner Address: Banks may gather either a residential or business address for beneficial owners.
  6. Legal Entity Representative
  7. Existing Customer as Beneficial Owner of New Legal Entity Customer Account: Per the rule, financial institutions must identify and verify the beneficial owners at the time the new account is opened. The FAQ provides some additional nuance to this requirement, stating that, “If the individual identified as the beneficial owner is an existing customer of the financial institution and is subject to the financial institution’s CIP, a financial institution may rely on its possession to fulfill the identification and verification requirements, provided the existing information is up-to-date, accurate, and the legal entity customer’s representative certifies or confirms (verbally or in writing) the accuracy of the pre-existing CIP information.”
  8. Use of Certification Form: FinCEN clarifies in the FAQ that banks are not required to use its Certification Form, which is available in a Word format and a fillable format. If choosing not to use FinCEN’s form, just make sure to capture all the information it does.
  9. Multiple Sets of Beneficial Ownership Certification Documents
  10. Single Entity Customer Opening Multiple Accounts

As you prepare for next month’s implementation date, make sure to review FinCEN’s most recent FAQ and include it in your employee training on the rule.

Tomorrow, Bank Risk and Compliance Writer will return to discussing the CFPB’s Semi-annual Report, specifically the anticipated Final Rules expected from the Bureau in the near term.

Inside CFPB Semi-annual Report: Proposed Rules in the Pipeline

cfpb_seal_blog_270x270.originalIn dissecting the CFPB’s recently published Semi-annual Report, which included Acting Director Mick Mulvaney’s recommended changes for imposing “meaningful accountability” on the regulatory agency, one of the most critical pieces of information for bank risk and compliance management is the list of proposed and final rules the CFPB anticipates working on in the near term.

Upcoming Proposed Rules Per CFPB Semi-annual Report

The report highlighted four regulatory areas in which the CFPB plans to issue proposed rules:

  1. Payday, Vehicle Title, and Certain High-Cost Installment Loans Rule: This rule, also known as the Payday Lending Rule, was issued under former CFPB Director Richard Cordray on October 5, 2017 and published in the Federal Register on November 11, 2017. On the final rule’s effective date of January 16, 2018, the CFPB, under Acting Director Mulvaney, announced plans to begin the rulemaking process to reconsider the Payday Lending Final Rule. On March 27, Democratic Senators sent Mulvaney a letter opposing this action. The compliance date for most provisions in the Payday Lending Final Rule is August 19, 2019, giving covered financial institutions a reprieve from taking any further action to implement the rule until the CFPB specifies its exact plans for it.
  2. The Expedited Funds Availability Act (Reg CC): According to the Semi-annual Report, “The Bureau will work with the Board of Governors of the Federal Reserve System to issue jointly a rule that includes provisions within the Bureau’s authority.”
  3. Debt Collection: This issue has been on the CFPB’s radar for some time. The Bureau has conducted surveys and analyzed comments regarding the communication and disclosure practices of debt collectors. In its Spring 2017 Rulemaking Agenda, the CFPB noted plans to propose a debt collection rule in late 2017. While that did not happen prior to Cordray’s resignation, the Semi-annual Report makes clear that this issue remains a priority for the CFPB under Mulvaney, albeit the extent to which any proposed rule goes is still uncertain.
  4. Home Mortgage Disclosure Act (Reg C): The HMDA Final Rule of October 2015 went into effect on January 1, 2018, however, on December 21, 2017, the CFPB announced plans to “open a rulemaking to reconsider various aspects of the 2015 HMDA rule.” The Semi-annual report reiterates this intention, indicating that the institutional and transactional coverage tests along with the rule’s discretionary data points will be a part of this reconsideration process. While financial institutions likely welcome possible changes to the coverage tests, covered institutions have already invested heavily to enable themselves to gather the HMDA Final Rule’s new slate of data points, making fuzzy the potential benefit of changes to this aspect of the rule.

In the next post in this Series, Inside CFPB’s Semi-annual Report, I’ll tackle the upcoming Final Rules indicated by the CFPB.

Inside CFPB’s Semi-Annual Report – Part 1

cfpb_seal_blog_270x270.originalOn April 2, 2018, Mick Mulvaney issued the Consumer Financial Protection Bureau’s (CFPB) Semi-annual Report, his first such report since being named the CFPB’s Acting Director by President Trump on November 24, 2017. The report covers the period of April 1, 2017 to September 30, 2017.

It begins with an unsurprising recommendation from Mulvaney to rein in the power of the CFPB, an agenda which has been evident since the start of his tenure as acting director and is in accordance with the Trump administration’s deregulation stance and in line with the philosophy of many majority members of Congress.

“As has been evident since the enactment of the Dodd-Frank Act, the Bureau is far too powerful, and with precious little oversight of its activities.” 

Mick Mulvaney, Acting Director of the Consumer Financial Protection Bureau

In his message, Mulvaney also outlined his recommendation for recalibrating the CFPB:

  1. Fund the CFPB through Congressional appropriations – This is an idea that has been advocated by other critics of the Dodd-Frank Act. For comparison, some other federal financial regulators are not funded this way, including the Office of the Comptroller of the Currency (OCC), which is funded primarily by assessments on the institutions it supervises.
  2. Require legislative approval of CFPB major rules – Again, by comparison, the OCC does not require such approval. According to the OCC’s mission statement, it “has the power to” among other things “issues rules and regulations.”
  3. Ensure that the CFPB Director answers to the President in exercising and executing executive authority.
  4. Create an independent Inspector General for the CFPB.

Stay tuned for Part 2 of this series to learn about what the CFPB’s Semi-annual report says about its upcoming rule proposals and final rules.

 

 

Recent Bank and Fintech Disclosures Deemed Unfair and Deceptive by Federal Regulators

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By Mary Crotty, freelance writer for banks and third-party service providers

Over the course of the last nine days, two financial institutions have settled allegations by federal regulators that their disclosures consisted of unfair and deceptive acts or practices, otherwise known as UDAP.

FDIC Settles with The Bancorp Bank

On March 7, the Federal Deposit Insurance Corporation (FDIC) published a settlement agreement with The Bancorp Bank, an issuer of prepaid cards to non-bank entities. In addition to a $2 million civil money penalty, the institution must also pay almost $1.3 million in restitution to approximately 243,000 impacted consumers.

The alleged violations of unfair and deceptive practices, which the bank neither admits nor denies as part of the settlement agreement, involve multiple laws and regulations.

First and foremost is the violation of “Section 5 of the Federal Trade Commission (FTC) Act as a result of practices regarding the disclosure and assessment of transaction fees for point-of-sale signature-based transactions without a personal identification number” for debit and other reloadable cards. Specifically, “transactions assessed on behalf of the Bank by the Bank’s third party payment processor for PINless transactions were greater than the Bank disclosed to consumers for such transactions.”

In addition, the settlement order claims that the alleged unfair and deceptive practices violated the Electronic Funds Transfer Act, Regulation E, the Truth in Savings Act, Regulation DD, and the Electronic Signatures in Global and National Commerce Act.

This case also underscores the importance of financial institutions implementing and maintaining adequate vendor management risk programs. The FDIC noted the bank’s ultimate responsibility for compliance in its press release, saying that, “As the issuing bank for these various prepaid cards, The Bancorp Bank was responsible for ensuring that these programs were operating in compliance with all applicable laws.”

FTC Proposes Settlement with Paypal

On February 27, the Federal Trade Commission (FTC) issued a press release announcing its Consent Order against fintech Paypal in regard to consumer disclosures related to its peer-to-peer payment service known as Venmo. The order, published in the Federal Register on March 5, requests comment from the public through March 29. Based on the comments collected, the FTC will either move forward with the Consent Order or “withdraw it and take appropriate action.”

As published within the Federal Register, the order outlines five key areas where the alleged unfair and deceptive practices violated Section 5 of the FTC Act and the Gramm-Leach-Bliley Act (GLBA).

  1. Timing of Credited Funds: The FTC alleges that Venmo “represented to consumers that money is credited to their Venmo account and can be transferred to an external bank account after other Venmo users have sent funds to those consumers but failed to disclose, or failed to disclose adequately, that funds could be frozen or removed because Venmo has not yet approved the underlying transaction.”
  2. Privacy Settings: The order asserts that the Fintech “failed to disclose material information to consumers about the operation of Venmo’s privacy settings.”
  3. Security Systems: “Venmo represented until approximately March 2015 that it protected consumers’ financial information with ‘bank grade security systems’ but in fact failed to implement basic safeguards necessary to secure consumer accounts from unauthorized transactions and did not provide ‘bank grade security’.”
  4. Privacy Notice: Among other things, Venmo failed “to provide users with a clear and conspicuous initial privacy notice” in violation of the GLBA Privacy Rule and Regulation P.
  5. Information Security: Finally, the FTC claims that Venmo “violated GLBA’s Safeguards Rule by failing to have a comprehensive written information security program before August 2014,” and by “failing to identify reasonably foreseeable internal and external risks to the security, confidentiality, and integrity of consumer information.”

The FTC order requires that Paypal implement various measures within Venmo to remediate the alleged violations going forward. These include the prohibition of further disclosure misrepresentations and violations of the GLBA’s Privacy and Safeguards rules. It also requires Venmo to provide “clear and conspicuous” disclosures about the availability of funds and consumer privacy, as well “obtain biennial data security assessments for 10 years.” The order is to remain in effect for 20 years.

UDAP and UDAAP Violations Frequently Intersect with Those of Other Regulations

In both of these cases, the underlying violation of UDAP within consumer disclosures coincided with violations of several other laws. This is not unusual with UDAP or it’s Dodd-Frank mandated cousin–Unfair, Deceptive and Abusive Acts or Practices (UDAAP). Ultimately, UDAP and UDAAP provide federal regulators an additional vehicle through which they can impose monetary and/or reputational punishments for alleged unfair and misleading actions toward consumers.