By Valerie Y. Moss
This spring, the Federal Reserve Board amended Regulation E (electronic fund transfers) to implement the gift card provisions
of the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009.
The new regulation will restrict fees and expiration dates that apply to gift cards, certificates, and general-use prepaid cards sold or issued to consumers primarily for personal, family, or household purposes.
The mandatory compliance date is Aug. 22, 2010, which means gift cards sold to consumers on or after that date must fully comply. Credit unions should keep in mind that state laws providing greater protection for consumers regarding fees or expiration dates on gift cards won’t be pre-empted by these new rules.
The regulation defines the term “gift card” as a card, code, or other device that is:
• Issued on a prepaid basis primarily for personal, family, or household purposes to a consumer in a specified amount that may not be increased or reloaded in exchange for payment; and
• Redeemable upon presentation at a single merchant or an affiliated group of merchants for goods and services.
The term includes store gift cards as well as network-branded (e.g., Visa, MasterCard), general-use prepaid cards that are redeemable at any merchant that accepts the card brand. The regulation also applies when a physical card isn’t issued if the device or means of access otherwise acts as a gift card, such as when funds are accessible via an account number, code, or embedded computer chip.
The rule doesn’t apply to cards where the end use is a business purpose, such as travel expenses or office supplies. The rules will apply, however, if a business purchases cards and resells or distributes them to consumers primarily for personal, family, or household purposes.
The regulation excludes certain prepaid products, for example:
• Prepaid cards received through loyalty, award, or promotional programs aren’t subject to the rule’s restrictions on imposing dormancy, inactivity, or service fees; or expiration dates. To avoid consumer confusion, however, the card must state on the front any funds-expiration date and that it’s issued for loyalty, award, or promotional purposes. In addition, all fees must be disclosed on or with the card or certificate.
• Reloadable cards that aren’t marketed or labeled as gift cards. These include cards provided to the “unbanked” as a substitute for a traditional account, as well as cards that substitute for traveler’s checks.
• Certificates issued solely in paper form where only the paper itself may be used to purchase goods and services. This exclusion doesn’t apply if the certificate has a bar code or certificate number that may be used to purchase goods and services, or if it’s sent electronically and then reproduced on paper.
• Cards not marketed to the general public, prepaid telephone service cards, and cards redeemable for admission to certain events or venues.
Restrictions on dormancy, inactivity, or service fees
Under the new regulation, no “person” may impose a dormancy, inactivity, or “service fee” with respect to a gift certificate, store gift card, or general-use prepaid card, unless three conditions are satisfied:
“Service fees” are defined as periodic fees assessed in connection with the card, as opposed to a one-time fee
(e.g., a replacement card fee). The issuer/seller may not retroactively assess dormancy, inactivity, or service fees after
the one-year period for prior time periods.
Expiration date restrictions
The regulation also restricts expiration dates. Gift cards or certificates may not be sold or issued unless the expiration date of the funds underlying the certificate or card is no less than five years after the date of issuance (in the case of a gift certificate); or five years after the date of the last load of funds (in the case of a store gift card or general- use prepaid card), which would be the date when the card and funds were activated. The gift card issuer/seller won’t have to restart the five-year period if it issues or activates a replacement card.
Prior to purchase, the issuer/seller must clearly and conspicuously disclose on the card or certificate:
• Whether the funds underlying the card or certificate may expire;
• Any difference between the expiration date of the actual card/certificate and that of the underlying funds; and
• That the consumer may contact the issuer/seller for a replacement card.
If the expiration date of the card is different from the expiration date of the underlying funds, the issuer or seller must establish policies and procedures to ensure that a consumer has a reasonable opportunity to purchase a card with an expiration date that is at least five years from the date of purchase.
No fees are allowed for replacement cards when the expiration date of the card occurs before the expiration of the underlying funds. However, fees may be charged to replace lost or stolen cards if otherwise permitted by law.
The regulation doesn’t require the replacement of lost, stolen, or expired cards. The issuer/seller may send the remaining balance to the consumer instead. No fee may be charged for sending the remaining balance, however, unless the card was lost or stolen.
Additional disclosure requirements
In addition to the restriction on dormancy, inactivity, and service fees, the regulation requires the disclosure of all other fees imposed in connection with a gift certificate, store gift card, or general-use prepaid card. Disclosures include the type of fee, the amount and how it’s determined, and the conditions in which the fee may be imposed. Such fees must be “clearly and conspicuously” disclosed on or with the card or certificate prior to purchase. The regulation also requires the disclosure of a toll-fee telephone number and Web site if one is maintained that consumers may use to obtain information on fees or replacement cards.
The required disclosures must be provided in writing or electronically, and in a retainable or printable form. For electronic disclosures, the consent and other requirements under the Electronic Signatures in Global and National Commerce Act (ESIGN) won’t apply. The disclosures still must be provided prior to purchase, however. Consumers shouldn’t be able to bypass electronic disclosures provided via hyperlink.
This article is only a snapshot of the rule’s basic requirements. For more information, visit cuna.org, and select “compliance.”
VALERIE Y. MOSS is director of compliance information for the Credit Union National Association. Send compliance questions to firstname.lastname@example.org.