Alston & Bird Consumer Finance Blog

Privacy and Cybersecurity

Ginnie Mae Imposes Cybersecurity Incident Notification Obligation

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What Happened?

On March 4, 2024, Ginnie Mae issued All Participant Memorandum (APM) 24-02 to impose a new cybersecurity incident notification requirement. Ginnie Mae has also amended its Mortgage-Backed Securities Guide to reflect this new requirement.

Effective immediately, all Issuers, including subservicers, of Ginnie Mae Mortgage-Backed Securities (Issuers) are required to notify Ginnie Mae within 48 hours of detection that a “Significant Cybersecurity Incident” may have occurred.

Issuers must provide email notification to Ginnie Mae with the following information:

  • the date/time of the incident,
  • a summary of in the incident based on what is known at the time of notification, and
  • designated point(s) of contact who will be responsible for coordinating any follow-up activities on behalf of the notifying party.

For purposes of this reporting obligation, a “Significant Cybersecurity Incident” is “an event that actually or potentially jeopardizes, without lawful authority, the confidentiality, integrity of information or an information system; or constitutes a violation of imminent threat of violation of security policies, security procedures, or acceptable use policies or has the potential to directly or indirectly impact the issuer’s ability to meet its obligations under the terms of the Guaranty Agreement.”

Once Ginnie Mae receives notification, it may contact the designated point of contact to obtain further information and establish the appropriate level of engagement needed, depending on the scope and nature of the incident.

Ginnie Mae also previewed that it is reviewing its information security requirements with the intent of further refining its information security, business continuity and reporting requirements.

Why Is It Important?

Under the Ginnie Mae Guarantee Agreement, Issuers are required to furnish reports or information as requested by Ginnie Mae.  Any failure of the Issuer to comply with the terms of the Guaranty Agreement constitutes an event of default if it has not been corrected to Ginnie Mae’s satisfaction within 30 days.  Moreover, Ginnie Mae reserves the right to declare immediate default if an Issuer receives three or more notices for failure to comply with the Guarantee Agreement.  It is worth noting that an immediate default also occurs if certain acts or conditions occur, including the “submission of false reports, statements or data or any act of dishonestly or breach of fiduciary duty to Ginnie Mae related to the MBS program.”

Ginnie Mae’s notification requirement adds to the list of data breach notification obligations with which mortgage servicers must comply. For example, according to the Federal Trade Commission, all states, the District of Columbia, Puerto Rico, and the Virgin Islands have enacted legislation requiring notification of security breaches involving personal information. In addition, depending on the types of information involved in the breach, there may be other laws or regulations that apply. For example, with respect to mortgage servicing, both Fannie Mae and Freddie Mac impose notification obligations similar to that of Ginnie Mae.

What Do I Need to Do?

If you are an Issuer and facing a cybersecurity incident, please take note of this reporting obligation. For Issuers who have not yet faced a cybersecurity incident, now is the time to ensure you are prepared as your company could become the next victim of a cybersecurity incident given the rise in cybersecurity attacks against financial services companies.

As regulated entities, mortgage companies must ensure compliance with all the applicable reporting obligations, and the list is growing.  Our Cybersecurity & Risk Management Team can assist.

NYDFS Finalizes Second Amendment to Its Cybersecurity Regulation

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On November 1, 2023, the New York Department of Financial Services (NYDFS) published the finalized Second Amendment to its Cybersecurity Regulation (23 NYCRR Part 500), which includes a number of significant and, for many covered entities, onerous changes to its original regulation. The finalized Second Amendment is much like the June 2023 proposed draft (which made certain revisions to the November 2022 draft). Covered entities should take note of these now-final changes that will require covered entities to review and revamp major components of their cybersecurity programs, policies, procedures, and controls to ensure they are in compliance. This is particularly important as the NYDFS continues to take on an active enforcement role following cyber events, marking itself as a leading cyber regulator in the United States.

Covered entities must notify the NYDFS of certain cybersecurity incidents, including providing notice within: (1) 72 hours after determining a cybersecurity event resulting in the “deployment of ransomware within a material part of the covered entity’s information system” occurred; and (2) 24 hours of making an extortion payment in connection with a cybersecurity event.

Covered entities must implement additional cybersecurity controls, including expanding their use of multifactor authentication and maintaining a comprehensive asset inventory. Covered entities are also required to maintain additional (or more prescriptive) cybersecurity policies and procedures, including ensuring that their incident response plans address specific delineated issues (outlined in the Second Amendment) and maintaining business continuity and disaster recovery plan requirements (both of which must be tested annually).

The most senior levels of the covered entity (senior governing body) must have sufficient knowledge to oversee the cybersecurity program. Additionally, the highest-ranking executive and the CISO are required to sign the covered entity’s annual certification of material compliance.

A material failure (which could be a single act) to comply with any portion of the Cybersecurity Regulation for a 24-hour period is considered a violation.

The Second Amendment became effective on November 1, 2023, and covered entities generally have 180 days to come into compliance with the new requirements. There are certain requirements, however, that will be phased in over the next two years. We have outlined the material changes and the effective dates below.

NYDFS Finalizes Second Amendment to Its Cybersecurity Regulation Chart

The NYDFS is providing a number of resources for covered entities, including a helpful visual overview of the implementation timeline for covered entities, Class A companies, and small businesses (NYDFS-licensed individual producers, mortgage loan originators, and other businesses that qualify for exemptions under Sections 500.19 (a), (c), and (d)). The NYDFS is also hosting a series of webinars to provide an overview of the Second Amendment; individuals can register for the webinars on the NYDFS’s website.

 

 

 

FTC Approves New Data Breach Notification Requirement for Non-Banking Financial Institutions

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On October 27, 2023, the FTC approved an amendment to the Safeguards Rule (the “Amendment”) requiring that non-banking financial institutions notify the FTC in the event of a defined “Notification Event” where customer information of 500 or more individuals was subject to unauthorized acquisition.  The Amendment becomes effective 180 days after publication in the Federal Register.  Importantly, the amendment requires notification only to the Commission – which will post the information publicly – and not to the potentially impacted individuals.

Financial institutions subject to the Safeguards Rule are those not otherwise subject to enforcement by another financial regulator under Section 505 of the Gramm-Leach-Bliley Act, 15 U.S.C. 6805 (“GLBA”). The Safeguards Rule within the FTC’s jurisdiction include mortgage brokers, “payday” lenders, auto dealers, non-bank lenders, credit counselors and other financial advisors and collection agencies, among others.  The FTC made clear that one primary reason for adopting these new breach notification requirements is so the FTC could monitor emerging data security threats affecting non-banking financial institutions and facilitate prompt investigations following major security breaches – yet another clear indication the FTC intends to continue focusing on cybersecurity and breach notification procedures.

Notification to the FTC

Under the Amendment, notification to the FTC is required upon a “Notification Event,” which is defined as the acquisition of unencrypted customer information without authorization that involves at least 500 consumers. As a new twist, the Amendment specifies that unauthorized acquisition will be presumed to include unauthorized access to unencrypted customer information, unless the financial institution has evidence that the unauthorized party only accessed, but did not acquire the information.  The presumption of unauthorized acquisition based on unauthorized access is consistent with the FTC’s Health Breach Notification Rule and HIPAA, but not state data breach notification laws or the GLBA’s Interagency Guidelines Establishing Information Security Standards (“Interagency Guidelines”).

As mentioned above, individual notification requirements for non-banking financial institutions will continue to be governed by state data breach notification statutes and are not otherwise included in the Amendment. The inclusion of a federal regulatory notification requirement and not an individual notification requirement in the Amendment is a key departure from other federal financial regulators, as articulated in the Interagency Guidelines which applies to banking financial institutions, and the SEC’s proposed rules that would require individual and regulatory reporting by registered investment advisers and broker-dealers.

Expansive Definition of Triggering Customer Information

Again departing from pre-existing notification triggers of “sensitive customer information” in the Interagency Guidelines or “personal information” under state data breach reporting laws, the FTC’s rule requires notification to the Commission if “customer information” is subject to unauthorized acquisition. “Customer information” is defined as “non-public personal information,” (see 16 C.F.R. 314.2(d)) which is further defined to be “personally identifiable financial information” (see 16 C.F.R. 314.2(n)).

Under the FTC’s rule, “personally identifiable financial information” is broadly defined to be (i) information provided by a consumer to obtain a service or product from the reporting entity; (ii) information obtained about a consumer resulting from any transaction involving a financial product or service from the non-banking financial institution; or (iii) information the non-banking financial institution obtains about a consumer in connection with providing a financial product or service to the consumer. Unlike the Interagency Guidelines which defines “sensitive customer information” as a specific subset of data elements (“customer’s name, address, or telephone number, in conjunction with the customer’s social security number, driver’s license number, account number, credit or debit card number, or a personal identification number or password that would permit access to the customer’s account”) (see 12 CFR Appendix F to Part 225 (III)(A)(1)), the FTC’s definition of “personally identifiable financial information” is much broader.

For example, “personally identifiable financial information” could include information a consumer provides on a loan or credit card application, account balance information, overdraft history, the fact that an individual has been one of your customers, and any information collected through a cookie. As a result of this broad definition, notification obligations may be triggered for a wider variety of data events, as compared to data breach notifications for banking financial institutions under the Interagency Guidelines or state data breach notification laws. As a result, non-banking financial institutions should consider reviewing and revising their incident response procedures so that they can be prepared to conduct a separate analysis of FTC notification requirements under the Amendment, as distinct from state law notification requirements.

No Risk of Harm Provision

Although the FTC considered whether to include a “risk of harm” standard for notifying the Commission, it ultimately decided against including one to avoid any ambiguity or the potential for non-banking financial institutions to underestimate the likelihood of misuse. However, numerous state data breach reporting statutes contain risk of harm provisions that excuse notice to individuals and/or state regulators where the unauthorized acquisition and/or access of personal information is unlikely to cause substantial harm (such as fraud or identify theft) to the individual.  This divergence between FTC notifications and state law has set the stage for the possibility that a reporting non-banking financial institution could be required to report to the FTC, but not to potentially affected individuals and/or state attorneys general pursuant to state law.

Timing and Content for Notice to FTC

Non-banking financial institutions must notify the Commission as soon as possible, and no later than 30 days after discovery of the Notification Event. Discovery of the event is deemed to be the “first day on which such event is known…to any person other than the person committing the breach, who is [the reporting entity’s] employee, officer, or other agent.” The FTC’s timeline is similar to the timeline dictated for notifying state Attorney Generals under most state data breach notification laws (either explicitly or implicitly), but a key difference from the Interagency Guidelines, which requires notification to the bank’s primary federal regulator as soon as possible.

The notification must be submitted electronically on a form located on the FTC’s website (https://www.ftc.gov), and include the following information, which will be available to the public: (i) the name and contact information of the reporting financial institution, (ii) a description of the types of information involved in the Notification Event, (iii) the date or date range of the Notification Event (if available), (iv) the number of consumers affected or potentially affected; (v) a general description of the Notification Event; and (vi) whether law enforcement official (including the official’s contact information) has provided a written determination that notifying the pu of the breach would impede a criminal investigation or cause damage to national security.  Making this type of information regarding a data security incident available to the public is not part of any current U.S. regulatory notification structure.

Law Enforcement Delays Public Disclosure by FTC, Not FTC Reporting

A law enforcement delay may preclude public posting of the Notification Event by the FTC for up to 30 days but does not excuse timely notification to the FTC.  A law enforcement official may seek another 60 days’ extension, which the Commission may grant if it determines that public disclosure of the Notification Event “continues to impede a criminal investigation or cause damage to national security.”

NY DFS Releases Revised Proposed Second Amendment of its Cybersecurity Regulation

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The New York Department of Financial Services (“NY DFS”) published an updated proposed Second Amendment to its Cybersecurity Regulation (23 NYCRR Part 500) in the New York State Register on June 28, 2023, updating its previous proposed Second Amendment, which was published November 9, 2022. While the language proposed is largely similar to the previous draft, which we previously summarized, NY DFS incorporated a number of changes as a result of the 60-day comment period.

Below we outline some of the key revisions to the proposed Second Amendment of NY DFS’s Cybersecurity Regulation compared to the previously issued version from November 9, 2022:

  • Risk Assessment (§§ 500.01 & 500.09). NY DFS previously proposed (in the November 2022 draft) to revise the definition of “Risk Assessment,” which NY DFS has repeatedly emphasized is a core and gating requirement for compliance with the Cybersecurity Regulation, permitting covered entities to “take into account the specific circumstances of the covered entity, including but not limited to its size, staffing, governance, businesses, services, products, operations, customers, counterparties, service providers, vendors, other relations and their locations, as well as the geographies and locations of its operations and business relations.” By contrast, the newly proposed definition more formally defines the components of and inputs to the risk assessment: “Risk assessment means the process of identifying, estimating and prioritizing cybersecurity risks to organizational operations (including mission, functions, image and reputation), organizational assets, individuals, customers, consumers, other organizations and critical infrastructure resulting from the operation of an information system. Risk assessments incorporate threat and vulnerability analyses, and consider mitigations provided by security controls planned or in place.” The revised definition omits the explicit reference to tailoring and customization currently found in § 500.09.  The removal of this language and codification of the risk assessment’s general parameters suggests that although risk assessments can and should be customized to some extent, NY DFS may expect risk assessments to address a more standard set of components that as a general framework is not open to customization.
    • In addition, NY DFS removed the requirement that Class A companies (which are generally large entities with at least $20M in gross annual revenue in each of the last two fiscal years from business operations in New York, and over 2,000 employees, on average over the last two years, or over or over $1B in gross annual revenue in each of the last two fiscal years from all business operations) use external experts to conduct a risk assessment once every three years.
  • Multi-factor Authentication (“MFA”) (§ 500.12). NY DFS continues to stress the importance of MFA in the newly revised draft of the proposed Second Amendment by broadening the requirement (relative to the current MFA requirements and proposed draft from November 2022) and bringing it in alignment with the FTC’s amended Safeguards Rule. In the revised language, MFA is explicitly required to “be utilized for any individual accessing any of the covered entity’s information systems,” (with limited exceptions, outlined below); NY DFS removed from § 500.12(a), (1) the pre-requisite that MFA be implemented based on the covered entity’s risk assessment, and (2) the option of implementing other effective controls, such as risk-based authentication. By doing so, NY DFS appears to strongly recommend MFA implementation across the board, despite retaining the limited exception if the CISO approves in writing a reasonably equivalent or more secure compensating controls (and such controls must be reviewed periodically, and at least annually).
    • For covered entities that fall under the limited exemption set forth in § 500.19(a), which are generally smaller covered entities (based on number of employees and/or annual revenue), MFA must at least be utilized for (1) remote access to the covered entity’s information systems, (2) remote access to third-party applications that are cloud-based, from which nonpublic information is accessible, and (3) all privileged accounts other than service accounts that prohibit interactive logins. As with all other covered entities, the CISO may approve, in writing, reasonably equivalent or more secure compensating controls, but such controls must be reviewed periodically, and at least annually.
  • Incident Response Plan (“IRP”) and Business Continuity and Disaster Recovery Plan (“BCDR”) (§ 500.16). NY DFS added an additional requirement that a covered entity’s IRP include requirements to address the root cause analysis of a cybersecurity event, describing how the cybersecurity event occurred, the business impact from the cybersecurity event, and remediation steps to prevent reoccurrence. NY DFS clarified that the IRP and BCDR must be tested at least annually, and must include the ability to restore the covered entities “critical data” and information systems from backup (but NY DFS does not define “critical data”). As noted in our previous summary, the concept of BCDR is new as of the Second Amendment and not currently in effect in the existing regulation.
  • Annual Certification of Compliance (§ 500.17(b)). NY DFS maintains its current requirement of an annual certification of compliance by a covered entity, but has adjusted the standard for certification from “in compliance” to a certification that the covered entity “materially complied” with the Cybersecurity Regulation during the prior calendar year.  Although NY DFS does not define material compliance, this revision should provide some flexibility for covered entities to complete the certification.  Going forward, covered entities would be presented with two options: (i) submit a written certification that it “materially complied” with the regulation (§ 500.17(b)(1)(i)(a)); or (ii) a written acknowledgment that it did not “fully comply” with the regulation (§ 500.17(b)(1)(ii)(a)), while also identifying “all sections…that the entity has not materially complied with” (§ 500.17(b)(1)(ii)(b)).  It is unclear how NY DFS intends for covered entities to parse the distinction between material compliance and a lack of full compliance, but the requirement for the covered entity to list each section with which it was not in material compliance suggests that it may expect a section-by-section analysis of material compliance for purposes of completing the certification process.
  • Penalties (§ 500.20). Interestingly, NY DFS added that it would take into consideration the extent to which the covered entity’s relevant policies and procedures are consistent with nationally-recognized cybersecurity frameworks, such as NIST, in assessing the appropriate penalty for non-compliance with the Cybersecurity Regulation.  DFS maintains its proposed amendment that a “violation” is: (1) the failure to secure or prevent unauthorized access to an individual’s or entity’s NPI due to non-compliance or (2) the “material failure to comply for any 24-hour period” with any section of the regulation.

The revised proposed Second Amendment are subject to a 45-day comment period, ending August 14, 2023.

CSBS Releases Cybersecurity Programs to Help Nonbank Financial Services Institutions Improve Cybersecurity Posture

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A&B ABstract

On August 9, 2022, the Conference of State Bank Supervisors (CSBS) released two cybersecurity tools for nonbank financial services institutions to help them prepare for state cybersecurity examinations and, ultimately, improve cybersecurity maturity and protect financial institution infrastructure. These tools are designed to address key aspects of the Uniform Rating System for Information Technology; namely, Audit, Management, Development and Acquisition, and Support and Delivery. The CSBS also outlined the key documents that state examiners are likely request during examinations to help ensure nonbank financial services institutions are prepared to respond to examination questions.

CSBS Cybersecurity Tools

Developed by a multi-state team of cybersecurity examination experts, the Baseline Nonbank Cybersecurity Exam Program and the Enhanced Nonbank Cybersecurity Exam Program (the “Programs”) are a set of cybersecurity questions used by state examiners to assess the ability of nonbank financial services companies to comply with applicable cybersecurity and data protection requirements. While these Programs are optional resources, the CSBS encourages nonbank financial services institutions to leverage these Programs as prescriptive guidance in implementing and maintaining a compliant cybersecurity program.

The Baseline Nonbank Cybersecurity Exam Program is intended for small nonbank financial services institutions, whereas the Enhanced version is used by state examiners evaluating larger more complex nonbank financial services institutions (the distinction between which institutions fall under the Baseline vs the Enhanced Program are not specified). Both Programs cover four overarching areas of the Uniform Rating System for Information Technology (URSIT) – (1) Audit, (2) Management, (3) Development and Acquisition, and (4) Support and Delivery. Specifically, the examination covers a wide range of topics, such as executive oversight of the cybersecurity program, details on the institution’s network security, vendor management, cyber insurance, malware protection controls, patch management procedures, asset inventory, business continuity management and incident response plan.  The examination questions, where relevant, cite to the FTC Safeguards Rule, as amended (16 CFR § 314) which became effective January 10, 2022 (with the exception of a limited number of sections that are not enforceable until December 9, 2022).

The CSBS also provides a Document Request List, outlining key artifacts that state examiners may request (and have requested during past examinations) to help support the institutions’ response to the examination questions. Key artifacts include core policies and procedures, written information security programs, risk assessment(s), materials presented to the board/senior management discussing cybersecurity, vulnerability assessments, and patch deployment confirmation.

These Programs, according to CSBS’s Senior Vice President of Nonbank Supervision, Chuck Cross, are intended to streamline supervisory clarity and create a more resilient financial system. These Programs are a part of CSBS’ larger initiative to equip the industry with the necessary tools to protect the critical infrastructure of financial institutions; for example, it previously provided nonbanks with a Ransomware Self-Assessment Tool and a Cybersecurity 101 Guide for executives.

Takeaway

Through the Programs, CSBS has provided nonbank financial services institutions the ability to more adequately prepare for regulatory examinations by outlining core questions and artifacts. However, the cybersecurity regulations applicable to financial institutions continue to evolve, both on the federal and state level, requiring additional resources and expertise. It is also unclear how widely adopted these Programs will be by state regulators, particularly state regulators that have developed their own comprehensive cybersecurity examination questions (such as the New York Department of Financial Services), and there will likely continue to be differences across state regulatory examinations.

We will continue monitoring the guidance issued by CSBS and other financial industry participants and regulators with respect to the evolving cybersecurity compliance landscape.