The Credit Card Accountability, Responsibility and Disclosure Act – or CARD Act – that President Obama signed on May 22, 2009, includes provisions that significantly affect many gift cards and gift certificates and raises thorny legal issues.

Provisions in Title IV of the CARD Act amend the Electronic Fund Transfer Act (EFTA). Title IV will require retailers, banks, and card vendors to substantially change how they advertise, design, market, distribute, and price gift cards and electronic gift certificates before it takes effect on August 22, 2010.

The provisions apply to certain "general-use prepaid cards," including gift cards that bear the Visa, MasterCard, Discover, and American Express logos, as well as those that are valid at a particular merchant or an affiliated group of merchants and electronic gift certificates. Cards and certificates excluded from the scope of the law include prepaid telephone cards, reloadable prepaid cards that are not marketed as gift cards, gifts cards used for award or promotional purposes, prepaid cards that are not marketed to the general public, and gift certificates issued only in paper form.

Title IV imposes new restrictions on fees and expiration dates on covered gift cards and gift certificates. Dormancy, inactivity, and service fees on gift cards and electronic gift certificates will be prohibited unless they are (i) conspicuously disclosed on the card or certificate, (ii) brought to the attention of the purchaser of the card or certificate, and (iii) assessed only after 12 consecutive months of inactivity. Title IV also prohibits the issuance of gift cards or electronic gift certificates that expire in less than five years from the date they are issued.

Perhaps the most far-reaching provision of Title IV directs the Federal Reserve to determine if these gift cards and electronic gift certificates should be subject to other provisions of the EFTA designed to protect consumers (e.g., provisions that limit consumer liability for unauthorized transactions and/or provisions that require monthly statements). At present, the only prepaid cards afforded (partial) EFTA protection are some so-called payroll cards, i.e., cards onto which employers load their employees' wages. The directive to the Federal Reserve, particularly when viewed in light of a recent FDIC opinion extending deposit insurance protection to certain prepaid card balances, may portend more deposit-account-like protections for prepaid cards. 

The Federal Reserve has until February 22, 2010, to adopt regulations implementing Title IV. In addition, Title IV raises a number of thorny legal issues that should be discussed with counsel, such as how (if at all) the new law’s five-year expiration requirement can be harmonized with state abandoned property laws, which sometimes require the escheat of card balances in a shorter period of time; whether the new law will apply retroactively to already issued cards; and whether it will preempt any state and local gift card laws.

Ballard Spahr's Consumer Financial Services Group has significant experience in assisting retailers, banks, and other prepaid-card issuers with complying with federal and state laws and regulations.

For further information, please contact:

Alan S. Kaplinsky            215.864.8544

Jeremy T. Rosenblum      215.864.8505

John L. Culhane, Jr.         215.864.8535

Barbara Mishkin              215.864.8528

Mark J. Furletti                 215.864.8138

Copyright © 2009 by Ballard Spahr LLP.
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This newsletter is a periodic publication of Ballard Spahr LLP and is intended to alert the recipients to new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your situation and specific legal questions you have.