Federal Reserve Board Delivers Early Holiday Gift to Gift Card Issuers

On Oct. 19, 2010, the Board of Governors of the Federal Reserve (the “Board”) issued a final rule to delay the effective date of certain gift card disclosure requirements until Jan. 31, 2011. The rule gives card issuers the holiday shopping season to use up existing stocks of card plastics that fail to comply with new rules otherwise applicable after Aug. 22, 2010.

This final rule is of high importance to all in-store management, inventory control, customer service, and advertising review teams for gift card issuers, program managers, and plastics producers. To take advantage of the delayed effective date, a certificate or card issuer must meet certain conditions, including complying with the substantive rules of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (“Credit CARD Act”) and providing specific disclosures on websites, during customer service calls, through in-store disclosures, and in general advertising.

Background

The Credit CARD Act was enacted on May 22, 2009.¹  Section 401 of the Credit CARD Act amended the Electronic Fund Transfer Act to (among other things) prohibit the issuance or sale of gift certificates, store gift cards, or general-use prepaid cards if they expire earlier than five years from the date of issuance of a gift certificate or the date on which funds were last loaded to a store gift card or general-use prepaid card. The Board subsequently issued rules amending Regulation E to implement these requirements, including obligations for issuers to disclose fees and expiration dates on the cards they issue.

Initially, Section 403 of the Credit CARD Act required that the gift card and related provisions become effective 15 months after enactment—on Aug. 22, 2010. However, in response to concerns raised by industry regarding the resulting waste of existing plastic stocks, Congress amended Section 403 on July 27, 2010, to delay the effective date of mandatory disclosures of fees and expiration dates on certificates or cards produced before April 1, 2010 (the “Gift Card Amendment”).²  The Gift Card Amendment delays the effective date of these provisions to permit the sale of noncomplying card stock through Jan. 31, 2011, so long as certain conditions are met.

On Aug. 17, 2010, the Board issued an interim final rule implementing the Gift Card Amendment by further amending Regulation E. The Board adopted a final rule in substantially the same form as the interim final rule on Oct. 19, 2010, which will become effective Nov. 29, 2010.³ 

Key provisions

Which disclosure requirements have a delayed effective date to Jan. 31, 2011?

For cards or certificates produced before April 1, 2010, the final rule defers the effective date of the following disclosures otherwise required to be disclosed prior to purchase and included on the card or certificate (unless otherwise noted):

• The amount and frequency of any service, inactivity or dormancy fees;
• The expiration date or the fact that the card or certificate does not expire;
• A toll-free number to obtain replacement card and the location of a web site (if one is maintained) for the same purpose;
• Except for nonreloadable cards or certificates bearing an expiration date of seven years or longer from manufacture, the fact that funds do not expire or expire later than the card expiration and that the purchaser can obtain a replacement card; and
• With or on the card or certificate, the type, amount, and conditions under which fees may be imposed.

What does the final rule say about the form of disclosures?

Although generally disclosures under Regulation E must be provided in a written or electronic form that the consumer can retain, the final rule relaxes these requirements. For the new disclosures listed below and imposed as a condition to qualifying for the Jan. 31, 2011, effective date, the final rule allows disclosures to be oral and in a nonretainable form. The final rule also allows the prepurchase disclosure of the key features of the device (fees, expiration) to be made in oral and hence nonretainable form.

What do issuers need to do to qualify for the delayed effective date?

Issuers must meet the following conditions to qualify for the delayed Jan. 31, 2011 effective date:

• Comply with Regulation E’s substantive restrictions on service, inactivity and dormancy fees, i.e., no fees permitted until after a full year of inactivity and no more than one fee per month;⁴
• Do not impose an expiration date for underlying funds, even if the certificate or card itself expires;
• At the consumer’s request, replace a certificate or card if it has funds remaining at no cost to the consumer and include the packaging and materials typically associated with such a certificate or card; and
• Disclose to customers the terms and rights listed above through in-store signage, messages during customer service calls, websites, and general advertising.

The additional disclosures for in-store signage and general advertising are no longer required after Jan. 31, 2011, but do remain in effect for websites and messages during customer service calls through Jan. 31, 2013.

Does the final rule affect loyalty, award, or promotional cards?

Loyalty, award, and promotional gift cards and certificates are not subject to the rules on fees and expiration dates that apply to the other types of gift certificates, store gift cards, and general-use prepaid cards.  However, loyalty, award, and promotional gift cards and certificates have their own disclosure requirements under Regulation E, which include the obligation to disclose the nature of the card, the expiration date, and a toll-free number to obtain fee information on the front of the card.  The Gift Card Amendment did not mandate a change in the effective date for these rules, which the Board had previously established as applying only to “any card, code, or other device provided to a consumer in connection with a loyalty, award, or promotional program if the period of eligibility for such program began on or after August 22, 2010.”⁵

Notably, therefore, the final rule leaves this “grandfathering” of loyalty, award, and promotional programs undisturbed. Devices issued under such a program that commenced prior to Aug. 22, 2010, need not comply with any of the otherwise applicable provisions of Regulation E.

What happens after Jan. 31, 2011?

Looking ahead, after Jan. 31, 2011, all gift card provisions of the Credit CARD Act will become effective for all gift certificates or cards, whenever produced. These provisions generally provide that a certificate or card must contain a disclosure regarding dormancy, inactivity, or service fees. The certificate or card must also disclose the expiration date for the underlying funds or the fact that such funds do not expire. In addition, issuers must establish policies and procedures ensuring that a customer will have a reasonable opportunity to purchase a certificate or card with at least five years remaining until the expiration date.

FOOTNOTES

¹ Public Law 111-24, 123 Stat. 1734 (May 22, 2009).

² Public Law 111-209, 124 Stat. 2254 (Jul. 27, 2010).

³ 75 Fed. Reg. 66644 (Oct. 29, 2010).

⁴ 12 C.F.R. § 205.20(d) (2010).

⁵ 12 C.F.R. § 205.20(g)(2) (2010).