The Federal Reserve Board has issued a final rule that imposes new fee limitations and disclosure requirements for electronic gift certificates, store gift cards, and general-use prepaid cards marketed as gift cards (Gift Cards). The rule, issued on March 23, 2010, implements amendments to the Electronic Funds Transfer Act made by the CARD Act.
The final rule, which applies to Gift Cards sold on or after August 22, 2010, includes the following highlights:
- Exclusion of Certain Prepaid Cards. Issuers of reloadable prepaid cards that can be used to purchase goods or services from multiple, unaffiliated merchants can avoid the fee limitations and disclosure requirements by not marketing the cards as Gift Cards. A card issuer can take advantage of this exception if it adopts policies and procedures reasonably designed to ensure that no party (including the issuer, card retailers, program managers, and payment networks) promotes the card as a Gift Card. Such policies and procedures can include contractual provisions prohibiting such promotion, guidelines for retail displays, and monitoring controls. The final rule includes examples to illustrate how retailers can satisfy the marketing restriction when displaying both Gift Cards and excluded cards. Issuers of general-use cards seeking to take advantage of the exclusion should consider steps to reduce their legal risk. In its background discussion accompanying the final rule, the Fed noted that although parties can contractually allocate compliance responsibilities among themselves, each party has potential liability if another party fails to satisfy its responsibilities.
- Exclusion of Temporary Cards To Be Replaced by Personalized Cards. Temporary non-reloadable cards designed to be replaced by personalized reloadable cards are included in the above exception for cards not marketed as Gift Cards. This is welcome news as it allows issuers to charge activity fees on transactions effected with such temporary cards. In its proposal, the Fed had suggested it might treat all non-reloadable temporary cards as Gift Cards.
- "Service Fee" Definition. The CARD Act specified that dormancy, inactivity, and service fees on Gift Cards may be assessed only if (1) they are disclosed in accordance with the CARD Act, (2) the cardholder has not used the Gift Card for at least one year before assessment of the fee, and (3) the cardholder has not incurred another dormancy, inactivity, or service fee during the same calendar month. The CARD Act narrowly defined the term "service fee" to mean a "periodic fee" and separately required disclosure that a covered fee may be assessed for inactivity. Nevertheless, consistent with its proposal, the Fed has adopted in the final rule a definition of "service fee" that includes as a "periodic fee" any fee for "using" a Gift Card. This has the effect of working a tremendous expansion over the statutory limits by subjecting balance inquiry fees, reload fees, and other transaction-based fees to the CARD Act limits on "service fees."
- Restriction on Funds Expiration. Gift Card funds must remain available until the later of (1) five years from the date the Gift Card was issued or funds were last loaded or (2) the Gift Card expiration date. No fee may be charged to replace an expired Gift Card, but the remaining funds may be remitted at no charge instead and a fee may be charged to replace a lost or stolen Gift Card.
- Disclosures Required on Card. All Gift Card fees must be disclosed clearly and conspicuously before purchase. For dormancy, inactivity, or service fees, a disclosure that such fees may be imposed for inactivity and the amount and frequency of such fees must appear on the Gift Card. Also required to appear on the Gift Card are a toll-free telephone number and Web address, if any, to obtain fee information. If a Gift Card has an expiration date, the expiration date of the underlying funds or, if applicable, a disclosure that such funds do not expire must appear on the card. If underlying funds may be available after any Gift Card expiration date, the card must also contain a toll-free number and Web address to obtain replacement cards; the contact information may be the same as that used for fee information. The final rule retains the proposed requirement that a disclosure must appear on the Gift Card to alert the consumer of the difference between any Gift Card expiration date and the expiration date of Gift Card funds. However, unlike the proposal, the final rule contains a "safe harbor" that provides relief from this requirement for any non-reloadable Gift Card with an expiration date that is at least seven years from the date of manufacture. Stickers affixed to a Gift Card cannot be used to provide the disclosures that must appear on a card.
- Preemption. The Fed can determine on its own motion or upon request of a state, financial institution, or other interested party whether a state law relating to dormancy, inactivity or service fees, or expiration dates for Gift Cards is preempted. Although urged by the industry to generally preempt state escheat laws that could require Gift Card funds to be remitted to the state sooner than when such funds may expire under the final rule, the Fed concluded that it was not feasible or prudent to make a generally applicable preemption determination. Instead, the Fed indicated in its background discussion that it would make a preemption determination only as to a particular state’s escheat law upon request.