On November 20, 2009, the Federal Reserve Board published proposed amendments to Regulation E designed to implement CARD Act provisions amending the Electronic Funds Transfer Act to address electronic gift certificates, store gift cards, and general-use prepaid cards marketed as gift cards (collectively, "Gift Cards").

The Gift Card provisions become effective on  August 22, 2010, and require the Fed to adopt a final rule by February 22, 2010. Comments on the proposal are due by December 21, 2009. The Fed has expressly requested comment on transition issues, such as how to handle Gift Cards placed into store inventory or purchased before the effective date.

Highlights of the proposed rule include the following:

  • Marketing Restrictions on Certain Prepaid Cards Excluded From Gift Card Requirements:  Issuers of prepaid cards that can be used to purchase goods or services from multiple unaffiliated merchants can avoid application of the fee limitations and disclosure requirements of the proposed rule by not marketing the cards as Gift Cards. Under the proposed rule, the 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. We expect most issuers of general-use cards to seek to avoid application of the rule. The Fed has requested comment on the specific policies and procedures that would be "reasonable" here.

  • Treatment of Temporary Cards Provided Prior to Delivery of Personalized Cards Excluded From Gift Card Requirements:  The Fed has suggested that temporary non-personalized cards, designed to be replaced by personalized plastic cards, likely fall outside the foregoing exception. As described below, this would preclude issuers from charging activity fees on transactions effected with the temporary card. We think this position is unnecessary and unduly restrictive. Fortunately, the Fed has specifically requested comment on the treatment of temporary cards.

  • "Service Fee" Definition:  The CARD Act specifies 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. Although the CARD Act narrowly defines the term "service fee" to mean a "periodic fee" and separately requires disclosure that a covered fee may be assessed for inactivity, the Fed has tentatively concluded that Congress meant for transaction fees, reload fees, and balance inquiry fees to be treated as "periodic fees" subject to the limits applicable to "service fees." We believe that the Fed proposal would inappropriately expand the fee limits in the CARD Act well beyond their intended scope and the plain language of the Act.
     
  • Disclosures Required on Face of Gift Card:  The CARD Act specifies that its disclosure requirements concerning dormancy, inactivity, and service fees are met if the Gift Card clearly and conspicuously discloses that such fees may be imposed for inactivity and the amount and frequency of such fees. The Fed has proposed that, in specified circumstances, the Gift Card must also disclose information about the relationship between the Gift Card expiration date and the expiration date of Gift Card funds, as well as the issuer’s phone number and Web address, if any. The proposal expressly states that disclosures made on accompanying contract documents do not comply with the foregoing requirements. The Fed recognizes that the proposed requirements may present "implementation challenges."
     
  • 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 a fee may be charged to replace a lost or stolen Gift Card.

  • General Application of Regulation E to Gift Cards:  The CARD Act directed the Fed to determine the extent to which Regulation E should apply to Gift Cards. The Fed has indicated that it does not plan to apply Regulation E (including its periodic statements and error resolution rules) in general to Gift Cards at this time. Instead, the Fed plans to address this issue as part of a broader rulemaking on prepaid cards.

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs).  For more information, please contact group Chair Alan S. Kaplinsky, 215.864.8544 or kaplinsky@ballardspahr.com; Vice Chair Jeremy T. Rosenblum, 215.864.8505 or rosenblum@ballardspahr.com; John L. Culhane, Jr., 215.864.8535 or culhane@ballardspahr.com; Barbara S. Mishkin, 215.864.8528 or mishkinb@ballardspahr.com; or Mark J. Furletti, 215.864.8138 or furlettim@ballardspahr.com.


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