Regulation E, Gift Card Final Rule Analysis

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1 Regulation E, Gift Card Final Rule Analysis CARD Act Passed: May 22, 2009 Reg E, Gift Card Rule Proposed for Comment November 20, 2009 Comments Due: December 21, 2009 Final Rule Released: March 23, 2010 Effective Date: August 22, 2010 Link to Final Rule: On March 23, 2010 the Board of Governors of the Federal Reserve (Board) issued a Final Rule amending Regulation E to implement the statutory requirements set forth in the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act). The CARD Act was enacted into law on May 22, 2009, the proposed rule on the gift card provisions was issued for comment on November 20, 2009 and the Final Rule will be effective on August 22, The final rule reflects some changes that will be benefit card issuers by clarifying certain types of cards as excluded from coverage, allowing card issuers discretion regarding providing replacing cards or sending checks to consumers, and mitigating the risk to card issuers when retailers market general purpose reloadable cards as gift cards in error. However, the final rule did not make any substantive changes in the sections related to disclosures or price restrictions and no changes were made in response to comments on its conflict with state escheatment laws. Issue Proposed Rule (ABA Comments) Final Rule Maintain statutory Exclusions The intent of the statute is focused on gift cards and the final rule should remain clear. Cards that are not marketed or labeled as gift cards including cards for payroll, public benefit assistance, loyalty programs or awards or promotions should remain exempt. The final rule provides some clarification regarding excluding cards that are not marketed or labeled as gift cards. The preamble discussion notes that payroll cards are not intended to be considered covered cards. The final rule revises the disclosure requirements that must be met in order for a card to meet the definition of loyalty, awards, and promotions card. Such cards must clearly disclose on the card itself that they are a loyalty, award or promotions card. An expiration date must also be disclosed on the card 1

2 Avoid gift card definition creep Distinguish between temporary non-reloadable, non-gift cards that transition to reloadable cards Clarifications of exclusions of certain card products: Reloadable Not marketed to the general public Tax refund Paragraph 20(b)(2) is not precise enough to clarify that cards that are not marketed or labeled gift cards by the issuer should be excluded from the rule s coverage. Issuers that provide general use gift cards, excluded from the rule, need protection from having those same cards covered by the rule later due to actions by retailers such as improperly marketing or labeling the general use cards or recommending they can be used as a gift. These cards are intended to be an interim step towards a consumer acquiring a reloadable general-use card that would be excluded from coverage. These temporary cards are not marketed or labeled as gift cards and are not reloadable. The scope of excluded cards should be clarified to include: Reloadable cards such as payroll cards, HSA cards, insurance cards, disaster relief cards, employersponsored benefit cards, etc should be excluded because they are reloadable and not labeled as gift cards. Cards that are used to access loan lender 2 although it does not have to meet the five year requirement of other covered cards. The final rule does not provide a blanket exemption from liability to issuers if retailers improperly label or market general use reloadable cards as gift cards. However, the final rule s official staff interpretation 20(b)(2) provides examples of how the involved parties may maintain the exclusion if they enact reasonable policies and procedures to avoid marketing the product as a gift card. This could include incorporating restrictive language into a contract between an issuer and program manager or program manager and retailer regarding the marketing of the product. In a significant clarification, section (b)(2) of the final rule provides an exclusion for cards, codes or other devices that are reloadable and not marketed or labeled as gift cards applies to temporary cards issued solely in connection with a general purpose reloadable card, even if that temporary card is not reloadable. In the preamble to the final rule, the Board noted the comments regarding products such as payroll and HSA cards stating that they were not intended to be categorized as covered cards, even if they are reloadable by someone other than the cardholder. Official Staff Interpretation 20(b)(4) provides examples of several circumstances where a card would be excluded, but it

3 Statutory language on periodic fees Expiration date based on funds availability funded loan proceeds because they are not purchased and the customer must pass underwriting criteria and qualify for an underlying loan. Cards that are funded by tax refunds because they are not available to the public, but only to clients of the tax preparer and the cards are utilized to provide faster access to funds suggesting that inactivity is not characteristic The proposed rule would prohibit dormancy, inactivity, or service fees from being charged except where there has been 12 months of inactivity, only one fee could be charged per month, and that fee must be disclosed. The proposed rule extends the definition of service fee to include on-time or irregular nontransaction fees. Fees for monthly maintenance, balance inquiries, transactions, reloads, or card replacement would now fall under the service fee category and no more than one per month could be charged. The proposed rule would require that the funds underlying each covered card be available for five years from the date of issuance or when the card was last reloaded. Alternative A places the burden on retailers to prevent cards with less than five years until the 3 does not directly address the loan scenario. In general, a card is excluded if it is not advertised to the general public. Official staff interpretation 20(b)(4) clarifies that if a tax preparer does not advertise the ability to receive tax refunds by prepaid card the exclusion applies. But, if the use of the prepaid card is advertised, the exclusion does not apply. No substantive changes made to section. The Board noted its continued belief that its interpretation of period fees as they apply to service fees is correct. This discussion is outlined in the preamble and the official staff interpretation in section 20(a)(6). Service fees will continue to include periodic fees including monthly maintenance fees, transaction fees, ATM fees, reload fees, foreign currency fees, or balance inquiry fees. None of these fees may be charged if there has been any activity in the account for the prior 12 months. The final rule allows card issuers to meet the requirement based on proposed Alternative B by establishing reasonable policies and procedures to prevent a card from being sold with an expiration date of less than five years. The final rule requires that a disclosure must be provided to consumers on the

4 expiration date from being sold but the card issuer may be liable if the retailers were not diligent in their card inventory control and sold cards with shorter expiration periods. Alternative B would allow a card issuer to meet the five year requirement if it developed reasonable policies to prevent cards with shorter expiration periods from being provided to consumers. The proposed rule provides an example where no card with an expiration date shorter than five and one half years could be delivered to a retailer. card itself alerting them to the difference between a card expiration date and funds availability and that the consumer may contact the issuer for a replacement card. Upon card expiration, a consumer may request a replacement card at no cost if the underlying funds have not expired. However, the card issuer has the option of remitting the balance to the customer, instead of a new card, at no cost to the consumer. Enable flexibility in providing new disclosure requirements Allow card replacement discretion Additional disclosures of account terms and fees would be required on the external packaging and the card itself. Due to the limited space on the card and packaging, clarifications on the requirement that these disclosures be clear and conspicuous and a sample of model language were requested. The proposal would require lost cards be replaced by issuers. This expense may not be practical if the card balance was low and the card holder would be charged a fee to receive a replacement card. A request was made to allow card issuers the discretion to issue a check for the available funds in low value accounts rather than reissue a replacement card. 4 The final rule continues to require clear and conspicuous disclosure, but does not provide examples of how this would be achieved on packaging materials or the card itself. In a significant clarification, the final rule allows a card issuer the discretion of remitting a payment for the available funds in the account in lieu of a replacement card if it is past the expiration date. The card issuer may not charge a fee for sending the payment or for replacing the card if it has expired prior to the funds expiration date. If a card is lost or stolen prior to the funds expiration date, the card issuer may charge a fee to replace the card or remit the balance to the consumer in some

5 Preempt state abandoned property laws Facilitate transition of card inventory The extension of gift card expiration dates to a minimum of five years puts it in conflict with many state escheat laws that have a three year threshold. If a card is inactive after three years, funds would be remitted to the state, but the consumer would still be entitled to the funds from the issuer for two more years. The issuer would be required to provide the consumer with the funds and then seek an administrative refund from the state for the funds previously remitted. This is an expensive process that creates a conflict between federal and state law. This conflict can be eliminated by the Board by preempting state laws applicable to covered cards so that escheatment dates would be no sooner than the expiration date of the underlying funds on the card. The proposed rule did not clearly address what rules would apply to cards that were created and sold prior to the August 22, 2010 effective date of the final rule. The Board should allow cards created and sold prior to August 22, 2010, under existing rules, should not be subject to any new requirements of the final rule that become effective on August 22, The proposed rule discussed the treatment of card stock that was created and compliant with the pre-august 22, 2010 rules, but had not been sold by that date. The Board proposed that card products sold through retailers 5 other way. See (c)(4)(B). The Board will not preempt state escheat laws through this final rule. If a party would believes there is a conflict between the federal and state law then the request for a ruling should be sent to the Board. The Board s subsequent analysis would then be published for comment. The final rule requires that all covered cards sold after August 22, 2010 comply with the new requirements, including both the fee restrictions and the disclosure requirements. It was noted in the discussion of the final rule that it would be difficult for a card issuer, even if they could convert the pricing on existing card stock in inventory, to provide adequate disclosure for the card products describing their new qualities. The final rule is not retroactive and does not apply to cards sold prior to August 22, 2010.

6 New requirements for loyalty, award, or promotional gift cards. be allowed to be sold if they were retrofitted to meet the new rule s requirements regarding terms and fees and if a scheme were developed to provide disclosure of these new terms to consumers. Cards in this category distributed directly by card issues would not be allowed to be sold. This retrofit solution was not deemed practical for most issuers. The Board was requested to allow card issuers the option to sell down their existing card inventory through all channels if they could make the retroactive changes. The proposed rule did not apply substantive restrictions on loyalty, award, or promotional gift cards with regard to dormancy, inactivity, or service fees or no expiration dates. The final rule requires certain disclosures be made in order for a card to meet the definition of loyalty, award, or promotional gift card including: Disclose on the front of the card that it was issued for loyalty, award, or promotional purposes. Disclose the expiration date of the underlying funds on the front of the card. 6