NAFCU Letter to Senate and House leaders urging congressional action on data security standards

WASHINGTON, DC (April 18, 2014) —

The Honorable Harry Reid
Majority Leader
United States Senate
Washington, D.C. 20510

The Honorable Mitch McConnell
Minority Leader
United States Senate
Washington, D.C. 20510

The Honorable John Boehner
U.S. House of Representatives
Washington, D.C. 20515

The Honorable Nancy Pelosi
Minority Leader
U.S. House of Representatives
Washington, D.C. 20515

Re:  Congressional Action Needed on Data Security

Dear Leader Reid, Leader McConnell, Speaker Boehner, and Leader Pelosi:

On behalf of the National Association of Federal Credit Unions (NAFCU), the only trade association exclusively representing our nation’s federal credit unions, I write today to once again urge Congress to act on federal data security and breach notification standards. As new details of the Michaels Stores breach emerge, we are once again reminded that without federal data security standards for merchants, American consumers’ financial information remains under threat.

Just yesterday, Michaels Stores Inc. confirmed that as many as 2.6 million customers had their credit card information compromised at Michaels between May 8, 2013 and January 27, 2014, and 400,000 consumers’ credit cards were compromised at their Aaron Brothers stores between June 26, 2013 and February 27, 2014.  In light of this and the numerous other large scale data breaches occurring on the heels of major breaches at Target and Neiman Marcus over the holidays, it is clear that Congress must take action to protect consumers’ financial information.

As we first wrote to Congress in February 2013, as part of NAFCU’s five-point plan on regulatory relief, these incidents must be addressed by lawmakers. Every time consumers choose to use plastic cards for payments at a register or make online payments from their accounts, they unwittingly put themselves at risk.  Many are not aware that their financial and personal identities could be stolen or that fraudulent charges could appear on their accounts, in turn damaging their credit scores and reputations. Consumers trust that entities collecting this type of information will, at the very least, make a minimal effort to protect them from such risks. Unfortunately, this is not always true.

Financial institutions, including credit unions, have been subject to standards on data security since the passage of Gramm-Leach-Bliley. However, retailers and many other entities that handle sensitive personal financial data are not subject to these same standards, and they become victims of data breaches and data theft all too often. While these entities still get paid, financial institutions bear a significant burden as the issuers of payment cards used by millions of consumers. Credit unions suffer steep losses in re-establishing member safety after a data breach occurs. They are often forced to charge off fraud-related losses, many of which stem from a negligent entity’s failure to protect sensitive financial and personal information or the illegal maintenance of such information in their systems. Moreover, as many cases of identity theft have been attributed to data breaches, and as identity theft continues to rise, any entity that stores financial or personally identifiable information should be held to minimum standards for protecting such data.

Recent estimates indicate that one-third of the American public has been adversely impacted by the breaches disclosed over the last few months. While these breaches have drawn national attention, the reality is that data breaches are happening all the time, often on a smaller scale that does not make the nightly news. When taken together, these smaller breaches impact just as many consumers.  According to the Identity Theft Resource Center, there were more than 600 reported data breaches in 2013 – a 30 percent increase over 2012. The business sector accounted for almost 82 percent of the breached records while the financial sector accounted for less than 2 percent of all breached records in 2013.

A recent Javelin Strategy & Research report (December 2013) found that financial institutions are doing a much better job than retailers when it comes to credit card security.  “Retailers, common targets for data breach crimes, scored the lowest in prevention and among the lowest overall,” said Al Pascual, the senior analyst who co-authored the report. Furthermore, according to the Verizon 2013 Data Breach Investigation Report, a breakdown of incidents across various industries actually resulting from network intrusions, the retail industry was far and away the number one target, with nearly 22 percent of network intrusions occurring at retailers.

While some argue for financial institutions to expedite the switch to “chip and PIN” technology, the reality is that it is no panacea for data security and preventing merchant data breaches.  Many “chip and PIN” cards were compromised in the Target data breach because the terminals at the point of sale only accepted magnetic stripe technology. Additionally, “chip and PIN” technology does not protect against online fraud, as the technology is designed to hinder in-person fraud and card duplication. This is yet another fact highlighting the need for greater national data security standards as the way to truly help protect consumer financial information.

NAFCU continues to recommend that Congress make it a priority to craft legislation and act on the following issues related to data security:

  • Payment of Breach Costs by Breached Entities: NAFCU asks that credit union expenditures for breaches resulting from card use be reduced. A reasonable and equitable way of addressing this concern would be to require entities to be accountable for costs of data breaches that result on their end, especially when their own negligence is to blame.
  • National Standards for Safekeeping Information: It is critical that sensitive personal information be safeguarded at all stages of transmission. Under Gramm-Leach-Bliley, credit unions and other financial institutions are required to meet certain criteria for safekeeping consumers’ personal information. Unfortunately, there is no comprehensive regulatory structure akin to Gramm-Leach-Bliley that covers retailers, merchants and others who collect and hold sensitive information. NAFCU strongly supports the passage of legislation requiring any entity responsible for the storage of consumer data to meet standards similar to those imposed on financial institutions under the Gramm-Leach-Bliley Act.
  • Data Security Policy Disclosure: Many consumers are unaware of the risks they are exposed to when they provide their personal information. NAFCU believes this problem can be alleviated by simply requiring merchants to post their data security policies at the point of sale if they take sensitive financial data. Such a disclosure requirement would come at little or no cost to the merchant but would provide an important benefit to the public at large.
  • Notification of the Account Servicer: The account servicer or owner is in the unique position of being able to monitor for suspicious activity and prevent fraudulent transactions before they occur. NAFCU believes that it would make sense to include entities such as financial institutions on the list of those to be informed of any compromised personally identifiable information when associated accounts are involved.
  • Disclosure of Breached Entity: NAFCU believes that consumers should have the right to know which business entities have been breached. We urge Congress to mandate the disclosure of identities of companies and merchants whose data systems have been violated so consumers are aware of the ones that place their personal information at risk.
  • Enforcement of Prohibition on Data Retention: NAFCU believes it is imperative to address the violation of existing agreements and law by merchants and retailers who retain payment card information electronically. Many entities do not respect this prohibition and store sensitive personal data in their systems, which can be breached easily in many cases.
  • Burden of Proof in Data Breach Cases: In line with the responsibility for making consumers whole after they are harmed by a data breach, NAFCU believes that the evidentiary burden of proving a lack of fault should rest with the merchant or retailer who incurred the breach. These parties should have the duty to demonstrate that they took all necessary precautions to guard consumers’ personal information but sustained a violation nonetheless. The law is currently vague on this issue, and NAFCU asks that this burden of proof be clarified in statute.

On behalf of our nation’s credit unions and their 97 million members we thank you for your attention to this important matter, and again urge you to hold retailers to the same strict standards of data security and breach notification that financial institutions must adhere to. If my staff or I can be of assistance to you, or if you have any questions regarding this issue, please feel free to contact myself, or NAFCU’s Vice President of Legislative Affairs, Brad Thaler, at (703) 842-2204.


B. Dan Berger
President & CEO

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