The Federal Reserve Board recently announced the final rules that amend the gift card provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (“Card Act”). The Card Act provides certain rules and restrictions for both issuers of credit cards and gift cards.
The Applicability of the Card Act to Credit Cards
The Card Act requires credit card issuers to comply with certain restrictions, including rules that restrict rates and fees on credit cards and requires issuers to make specific disclosures. These rules have been effective as of February 22, 2010.
Some of the more notable components of the Card Act are as follows:
(1) Notice of Increase in Rates or Fees. The issuer must inform consumers when it plans to increase its rates or other fees. Specifically, the issuer must send consumers a notice 45 days before it can increase an interest rate; change certain fees (such as annual fees, cash advance fees, and late fees) or before making other significant changes to the terms of the credit card.
If the issuer is going to make changes to the terms of a card, it must give the consumer the option to cancel the card before certain fee increases take effect. If the consumer chooses to cancel the card, however, the issuer may close the consumer’s account and increase the monthly payment, subject to certain limitations.
(2) No Interest Rate Increases for the First Year. The credit card issuer cannot increase the rate for the first 12 months after the consumer opens an account. There are, however, some exceptions to this requirement:
- If a card has a variable interest rate tied to an index; the rate can go up whenever the index goes up.
- If there is an introductory rate, it must be in place for at least 6 months; after that the rate can revert to the "go-to" rate the issuer disclosed when the consumer got the card.
- If a consumer is more than 60 days late in paying the bill, the rate can go up.
- If a consumer is in a workout agreement and doesn’t make the payments as agreed, the rate can go up.
(3) Increase in Rate Only Applies to New Balance. If the issuer does raise interest rate after the first year, the new rate must apply only to new charges. If the card has a balance, the old interest rate will apply to that balance.
(4) Standard Payment Dates and Times. The issuer must mail or deliver the credit card bill at least 21 days before payment is due. In addition, the due date should be the same date each month and the payment cut-off time cannot be earlier than 5:00 p.m. on the due date.
The Applicability of the Card Act to Gift Cards
The Card Act also applies to gift cards that are sold on or after August 22, 2010. The amendment to the rule clarifies the applicability of the Card Act to such cards, explaining that the Act is intended to extend to gift cards that are sold or issued to consumers primarily for personal, family, or household purposes. Specifically, the Card Act applies to (1) store bought gift cards, which can be used only at a particular store or group of stores, (2) gift certificates, or (3) gift cards with a MasterCard, Visa, American Express or Discover brand logo.
The recent amendment provides rules restricting fees and expiration dates on the covered cards, and requiring sellers and issuers to make specific disclosures, including the following:
(1) Limits on Expiration Dates. The consumer must be able to redeem the money on the gift card for at least five years from the date the card is purchased. Any money that might be added to the card at a later date must also be good for at least five years.
(2) Replacement Cards. If the gift card has an expiration date, a consumer still must be able to use the unspent money that is left on the card after the card expires. For example, the card may expire in five years but the money may not expire for seven years. If a card expires and there is unspent money, a consumer must be able to request a replacement card at no charge.
(3) Fees Disclosed. All fees must be clearly disclosed on the gift card or its packaging.
(4) Limits on Fees. Gift card fees typically are subtracted from the money on the card. Generally, under the new rules, fees can be charged if a consumer has not used the card for at least one year, and the consumer may only be charged one fee per month. These restrictions apply to fees such as dormancy or inactivity fees for not using the card, usage fees, fees for adding money to the card, and maintenance fees. However, a card issuer may still charge a fee to purchase the card and certain other fees, such as a fee to replace a lost or stolen card.
These new rules also clarify that they do not cover other types of prepaid cards, such as reloadable prepaid cards that are not intended for gift-giving purposes. For example, a reloadable prepaid card with a MasterCard, Visa, American Express, or Discover brand logo that is intended to be used like a checking account substitute is not covered. This also means that the rules do not apply to gift cards used solely for telephone services or cards redeemable solely for admission to specific events or venues.
The rules also do not apply to cards that are given as a reward or as part of a promotion. For example, a free $15 gift card given to a consumer by a retailer to customers who purchase more than $50 of goods may have fees or an expiration date of 60 days, rather than five years. However, these restrictions must clearly be provided by the issuer on the applicable card.
The rules also address the remaining issue of how the CARD Act should be treated when considering the patch-work of state gift card laws that regulate certain fees, expiration dates, or escheatment. The rule does not preempt state laws that provide greater protection for consumers than the CARD Act. Because the term “greater protection” is still unclear, however, the rules provide a mechanism by which parties may request a preemption determination by the Federal Reserve Board with respect to a particular state’s escheat law.