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New data breach bill hits House and Senate

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WASHINGTON (6/11/08)— U.S. Senators John Kerry (D-Mass.) and Olympia Snowe (R-Maine) and U.S. Reps. Michael Michaud (D-Maine) and Donald Manzullo (R-Ill.) introduced a data security bill this week aimed at protecting small businesses. In 2006 and 2007, staunching the hemorrhage of data breach incidents and creating tools to deal with their aftermath was a stated priority issue among committees in the U.S. Congress that have jurisdiction over such issues. In fact, during those years there was a bottleneck in the legislative process caused by a plethora of bills with different legislative approaches vying for attention in at least six different committees. However, in recent months the issue had been all but supplanted by such things as the country’s focus on the housing crisis, the ensuing credit crunch, and economic downturn The new data security bill, called the Small Business Information Security Act of 2008 (S. 3102 and H.R. 6206), would establish a Small Business Information Security Task Force within the Small Business Administration (SBA) to help small firms understand and effectively respond to the information security challenges they face. The task force would:
* Identify information security concerns and the services that address those concerns; * Make recommendations to the SBA regarding how it can better assist small businesses to both understand cyber-security issues and identify resources to help meet those complex challenges; and * Promote current programs and services that will help small businesses protect their customers' valuable information.
In a release, bill-sponsor Snowe noted a 2005 Small Business Technology Institute survey, which reported that more than half of all small businesses in the United States experienced a security breach in the previous year. Snowe, who is ranking member of the Senate Committee on Small Business and Entrepreneurship, said, "Given that the study concludes that nearly one-fifth of small businesses do not use virus-scanning for e-mail, over 60% do not protect their wireless networks with encryption, and two-thirds do not have an information security plan, it is clear that we must get serious about helping firms to protect themselves from cyber predators.” On the House side, Manzullo said, “"America's 27 million small businesses are the job creators of our economy and we must do everything we can to help protect them from computer hackers and data thieves. This legislation will help them identify potential information security breaches and protect them and their customers from these cyber criminals.” The bill’s authors, in announcing their initiative, noted the recent breach at the supermarket chain, Hannaford Bros., which exposed 4.2 million credit and debit card numbers to fraudulent use (see related News Now story: “Hannaford breach lawsuits consolidated under one judge). The lawmakers said that breach indicates "the ease with which sensitive information can be obtained, regardless of the level of protection that might be in place.” Moreover, they added, as more small businesses seek to compete internationally, they must be provided with the tools to protect their information systems from countries with less stringent security laws. Ryan Donovan, vice president of legislative affairs for the Credit Union National Association (CUNA) said, "This bill would be a step in the right direction, and we applaud the sponsors for recognizing that data security is a problem. But, we continue to urge Congress to look at the issue of data security in a comprehensive manner that recognizes that credit unions and their members are often not notified of data breaches until well after they have occurred, and are not reimbursed for the cost of the breaches." On the issue of data security on a broader level, the CUNA supports legislation prohibiting the retention of sensitive, identifying information by merchants and certain non-financial companies from plastic card magnetic strips that could be obtained in connection with financial transactions. CUNA would like to see initiatives pursued that would require the major credit card companies to notify financial institutions when a breach has occurred, and for financial institutions to be able to disclose the source of the breach to the consumer. CUNA also supports a requirement that the breaching party, such as a merchant, reimburse the consumer or financial institution for any losses incurred and believes a uniform standard should be set.

CUNA commends effort to honor Americas CUs

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WASHINGTON (6/11/08)—Dan Mica, president/CEO of the Credit Union National Association (CUNA), commended Reps. Carol Shea-Porter and Paul Hodes on their successful efforts to mark the 100-year anniversary of credit unions in America with a House resolution. The two New Hampshire Democrats witnessed their resolution, H.RES.1145, pass the House Tuesday by voice vote. The action honors the 100th anniversary of the founding of the first state-chartered credit union, St. Mary's Cooperative Credit Association of Manchester, N.H., and calls that event "the birth of the American credit union." Thanking Shea-Porter and Hodes for their effort on behalf of the country’s credit unions, CUNA’s Mica said, “The credit union movement is proud of its history and will continue to provide low-cost, convenient service to its member-owners.” The establishment of St. Mary’s Cooperative, Mica added, is “a very significant event in the history of credit unions and our nation’s financial system.” He noted the credit union difference: that as cooperative financial institutions, credit unions are owned and controlled by the people who use its services.

Inside Washington (06/10/2008)

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* WASHINGTON (6/11/08)--A provision in the federal farm bill would allow lenders to make loans to businesses and individuals through the Small Business Administration’s (SBA) disaster program (American Banker June 10). The maximum loan limit is $2 million, and the SBA would guarantee 85%. The SBA previously had allowed only itself to make disaster loans, and had hired temporary employees to process the loans. After Hurricane Katrina in 2005, the SBA was able to process only a few thousand of the 200,000 applications it received ... * WASHINGTON (6/11/08)--The Federal Housing Administration (FHA) is solvent but cannot continue to suffer losses, said Brian Montgomery, FHA commissioner, in a speech Monday at the National Press Club. The FHA has a reserve of $21 billion, but it had to book an additional reserve of $4.6 billion after unanticipated long-term losses increased in certain types of seller-funded loans in the FHA portfolio, he said. “No insurance company can sustain that amount of additional costs year after year and still survive,” Montgomery said. “Unless we take action to mitigate these losses, FHA will soon either have to shut down or rely on appropriations to operate.” He noted that some proposed congressional actions could weaken the FHA by making it less stable. The FHA is pushing new regulations to reform the Real Estate Settlement Procedures Act (RESPA) to require mortgage lenders and brokers to display an estimate of settlement services, fees and charges ... * WASHINGTON (6/11/08)--Rep. Carolyn Maloney (D-N.Y.) is seeking support from congressional colleagues for her proposed legislation to crack down on credit card practices (American Banker June 10). She is the lead sponsor of card legislation before the House Financial Services committee. In a draft letter, she said she plans to address universal default, double-cycle billing and other issues in her legislation ... * WASHINGTON (6/11/08)--The Federal Deposit Insurance Corp. (FDIC) will launch a national advertising campaign to broaden public awareness of deposit insurance and the FDIC’s mission, Chairman Sheila Bair said in a speech Monday in Chicago. The campaign is a part of the agency’s 75th anniversary activities. It will address the increased public interest in deposit insurance issues. Four events in four cities across the country to share ideas about financial education and leadership also are planned ... * WASHINGTON (6/11/08)--On Monday, the Federal Reserve Board decided to scrutinize derivatives trading, which would prevent the failure of a major bank from creating a systemic threat as the collapse of Bear Stearns did (The Wall Street Journal June 10). Timothy Geithner, president of the Federal Reserve Bank of New York, met with 17 major financial institutions to create a system to oversee settlement and trading of credit derivatives. Meeting attendees also agreed to use a computerized system to register their trades for instant recording. Geithner has said that regulatory policy should go beyond supervision of firms and oversight should be extended beyond banks (The Wall Street Journal June 9) ...

FDIC seeks 200 million in cardholder restitution

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WASHINGTON (6/11/08)—The Federal Deposit Insurance Corp. (FDIC) Tuesday announced it is seeking more than $200 million in restitution from a credit card company and two FDIC-supervised banks to repay card holders for deceptive marketing practices. The FDIC said is has issued enforcement actions against CompuCredit Corporation, Atlanta, Ga. and two banks for allegedly marketing subprime credit cards in violation of the Federal Trade Commission Act (FTC Act) The FDIC said it settled with a third bank, Columbus Bank and Trust, Columbus, Ga., also involved with CompuCredit. The restitution is being sought against CompuCredit, First Bank of Delaware, Wilmington, Del., and First Bank & Trust, Brookings, S.D. The FDIC is also seeking civil money penalties (CMPs) of $6.2 million against CompuCredit, and a total of $431,000 against the two banks. The enforcements are in connection with CompuCredit's credit card solicitations for three general categories of Visa and MasterCard branded credit card products:
* A fee-based credit card that was marketed to consumers with low credit scores. The FDIC alleges that the solicitations failed to adequately disclose significant upfront fees and misrepresented the consumer's initial available credit. The solicitations appeared to offer credit cards with a $300 credit limit; however, consumers were immediately charged as much as $185 in inadequately disclosed fees, leaving them with as little as $115 in available credit, according to the bank regulator; * A card that offered "up to $3,250" in available credit to consumers with slightly higher credit scores. The FDIC alleges that CompuCredit failed to adequately disclose that only half of the consumer's credit limit would be available for the first 90 days. Additionally, the agency claims, CompuCredit failed to disclose that it would monitor consumers' purchases, and potentially reduce their credit limits based on undisclosed "behavioral" scoring models; and * A debt transfer Visa credit card marketed to consumers with charged-off debt. The FDIC alleges that the solicitations represented that the consumer's prior charged-off debt would be immediately transferred to the card and reported to consumer reporting agencies as paid in full. However, the FDIC charges, consumers who accepted the offer were actually enrolled in a debt repayment plan and did not receive a Visa card unless they paid 25% to 50% of their charged off debt over a 12-month period and for the few consumers who did so, the credit card they received had nominal available credit.
Separately, the FTC filed a parallel federal court action against CompuCredit. That lawsuit also names Jefferson Capital Systems, a subsidiary of CompuCredit, as a defendant for violations of the FTC Act and the Fair Debt Collection Practices Act (FDCPA), according to the FDIC announcement. Use the resouerce link below for more details.

Cost outlook for Senate housing legislation

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WASHINGTON (6/11/08)—A Senate housing bill to allow the Federal Housing Administration (FHA) to insure up to $300 billion in subprime mortgages would benefit about 400,000 of the country’s 2.2 million borrowers expected to face the threat of foreclosure on their homes over the next few years. That estimate was unveiled Tuesday by the Congressional Budget Office (CBO) as part of a cost estimate of the legislation, an evaluation ordered reported by the Senate Banking Committee on May 20. According to an article in CongressDaily PM (June 10), the CBO also said the measure, introduced by Senate Banking Chairman Christopher Dodd (D-Conn.) and ranking member Richard Shelby (R-Al.), ultimately would cost FHA $729 million over a 10-year period to help guarantee new mortgages for those troubled loans at risk of default. The CBO estimated that beyond the bill's ceiling of $300 billion in new guarantees, the FHA would also provide $68 billion in new loan commitments. The article pointed out that the Senate bill varies from a companion bill in the House in a few ways, including the fact that it has a narrower eligibility than the House version. That bill, sponsored by Rep. Barney Frank (D-Mass.), head of the financial services panel, is expected to cost $1.7 billion and help an estimated 500,000 borrowers. The FHA refinancing program is part of a broader housing package that both the House and Senate are working to reach agreement on before July.