Andrea M. Roberts and Diana M. Eng

In March 2017, New York State’s Department of Financial Services (“DFS”) implemented the nation’s first cybersecurity rules requiring all regulated entities, such as banks, insurers, financial businesses, and regulated virtual currency operators, to fortify their cybersecurity protocols by implementing and maintaining cybersecurity policies (the “Cybersecurity Regulation”). These protocols and policies include, among other things, establishing a detailed security plan, increasing the monitoring of third-party vendors, appointing chief information security officers, and reporting breaches to the Superintendent of the Department of Finance within 72 hours of identifying a Cybersecurity Event.[1] The Cybersecurity Regulation is codified at 23 NYCRR 500.

For the second time, DFS has fined a regulated entity for failure to comply with the Cybersecurity Regulation. In March 2020, DFS commenced an examination of Residential Mortgage Services, Inc. (“Residential”), a Mortgage Banker (as defined in the Banking Law) based in Maine and licensed in New York. The examination encompassed a general compliance, safety, and soundness review, as well as compliance with the Cybersecurity Regulation. During the review, Residential disclosed for the first time a Cybersecurity Event, which had occurred nearly 18 months earlier. Specifically, an employee, who handles sensitive personal data, received a phishing e-mail and clicked on a hyperlink to a malicious website. DFS determined that although Residential’s technical support staff was alerted to the suspicious activity, Residential’s internal investigation was inadequate since it did not conduct any further inquiry after concluding the unauthorized access was limited to the employee’s e-mail account. Further, DFS determined Residential failed to satisfy the notification requirements of the Cybersecurity Regulation, as Residential failed to (i) identify whether the employee’s mailbox contained private consumer data during the breach and which consumers were impacted; and (ii) notify the Department of Finance within 72 hours of identifying a Cybersecurity Event. Finally, DFS determined that Residential was missing a comprehensive cybersecurity risk assessment, which should have led to the periodic evaluation of controls designed to protect nonpublic information and information systems.