Final Rule on Gift Cards

The following is an article reprinted with permission from the upcoming Fall 2010 edition of The WWR Letter:

By: Matthew G. Burg, Associate

Gift cards are popular gift items because they take some of the guesswork out of selecting the perfect gift. According to one survey, over 95% of Americans have received or purchased a gift card.* Despite the relative ease gift cards provide to a recipient, in the past, they have had some pitfalls. When gift cards were not immediately used (or, not used at all, which included approximately 10% of all gift cards purchased in 2007**) recipients were exposed to hidden fees and short expiration dates.

In response to consumers who were upset that gift cards could unexpectedly lose value or expire, the Federal Reserve Board intervened and recently announced the final rules on gift cards, which went into effect on August 22, 2010.

The final rule on gift cards amends Regulation E to implement the gift card provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (“Credit CARD Act”). The final rule applies to gift certificates, store gift cards, and general-use prepaid cards. Specifically, those gift card products covered include retail gift cards, which can be used to buy goods or services at a single merchant or affiliated group of merchants, and network-branded gift cards, which are redeemable at any merchant that accepts the card brand. The final rule does not apply to other types of prepaid cards, including reloadable prepaid cards that are not marketed or labeled as a gift card or gift certificate, and prepaid cards received through a loyalty, award or promotional program. Also, the scope of the final rule is generally limited to gift card products sold or issued to consumers primarily for personal, family, or household purposes, and not those where the end use is for business purposes. Finally, the rules may not protect consumers if an issuer files for bankruptcy protection or goes out of business.

So what do the final rules cover? Two main issues have been addressed:

1: Restrictions on dormancy, inactivity, or service fees. The final rule restricts dormancy, inactivity, or service fees with respect to a gift certificate, store gift card, or general-use prepaid card.

 > Dormancy, inactivity, and service fees may only be assessed for a certificate or card if:

– There has been at least one year of inactivity on the certificate or card;
– No more than one such fee is charged per month; and
– The consumer is given clear and conspicuous disclosures about the fees.

> Fees subject to the restrictions would include monthly maintenance or service fees, balance inquiry fees, and transaction-based fees, such as reload fees, ATM fees, and point-of-sale fees.

2: Restrictions on expiration dates. The final rule prohibits the sale or issuance of a gift certificate, store gift card, or general-use prepaid card that has an expiration date of less than five years after the date a certificate or card is issued or the date funds are last loaded.

> The expiration date restrictions apply to a consumer’s funds, and not to the certificate or card itself. The final rule also includes provisions intended to give consumers a reasonable opportunity to purchase a certificate or card with at least five years before the certificate or card expiration date.

> The final rule prohibits any fees for replacing an expired certificate or card, or for refunding the remaining balance, if the underlying funds remain valid.

The final rule should sustain the popularity of gift cards because recipients are now better protected from gift card pitfalls.

Matthew G. Burg is an Associate in Litigation & Defense; Consumer Finance Litigation, Real Estate Default and Federal Court Litigation Groups and is based in the Cleveland office. Matthew can be reached at (216) 685-1111 or mburg@weltman.com.

* Comdata, 2007 Adult Gift Card Study
** www.creditcardchaser.com

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