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The rule covers traditional prepaid products like general purpose reloadable cards, as well as mobile wallets, person-to-person payment products, electronic prepaid accounts, payroll cards, and certain federal, state and local government benefit cards. The rule itself is 1,689 pages and responds to the 65,000 comments received on the proposed rule. Highlights include the “Know Before You Owe” disclosures, general consumer protections that mirror those imposed under the Electronic Fund Transfer Act for checking account consumers, and credit-like protections when prepaid issuers extend credit to cover transactions that prepaid products would not fully cover.

“Know Before You Owe” Disclosures

The final rule requires two forms of disclosures: (1) a short form disclosure provided before a consumer acquires a prepaid account that includes information about periodic fees, per purchase fees, ATM withdrawal fees, cash reload fees, and balance inquiry fees, amongst others; and (2) a long form disclosure that includes a comprehensive list of fees and other information associated with the account. The CFPB provided examples of each disclosure type, which are available here.

Additionally, the rule requires prepaid account issuers to post on their websites prepaid account agreements that are offered to the general public to facilitate comparison shopping. Issuers must also submit all of their prepaid account agreements, including those not publicly posted, to the Bureau.

Prepaid Protections

The final rule requires issuers to provide a number of consumer protections similar to those imposed under the Electronic Fund Transfer Act and Regulation E, such as:

• Access to account information. Rather than require periodic statements as required under Regulation E for checking accounts, the final rule permits institutions to make available to consumers certain methods of accessing information about their prepaid accounts, such as free by telephone, online, or in writing upon request. Financial institutions are also required to provide summary totals of fees assessed to the consumer on a monthly and annual basis.
• Limited liability and error resolution. The final rule extends Regulation E’s protections related to limited liability and error resolution to prepaid accounts. As to limited liability, the rule limits a consumer’s responsibility for unauthorized changes to $50 so long as the consumer promptly notifies the financial institution of potentially fraudulent conduct. As to error resolution, the rule requires financial institutions to promptly investigate and resolve incidents, including by restoring missing funds and provisionally crediting the disputed amount while it finishes its investigation. The requirements generally apply regardless of whether the financial institution has successfully identified and verified the consumer holding the account, except that financial institutions are not required to provisionally credit disputed amounts until the consumer’s identity has been verified.

The final rule also revises Regulations E and Z to regulate how prepaid accounts offer overdraft credit features.

• Separate accounts. For so called “hybrid prepaid-credit card” accounts where the consumer can access both a prepaid account and an overdraft credit feature, the issuer must treat the credit features as distinct from the asset account. The issuer cannot allow a negative balance directly on the prepaid account except for specified limited circumstances (e.g., where the credit is incidental and de minimis and the issuer does not charge credit-related fees).
• Ability to pay. The rule requires prepaid companies to consider the consumer’s ability to pay the balance before opening a separate credit account linked to the consumer’s prepaid account. Issuers must also wait at least 30 days after a prepaid account is registered before soliciting a consumer to link a covered credit feature to the prepaid account.
• Limitations on fees. The rule also extends certain protections under Regulation Z related to fee restrictions, such as limits on fees charged in the first year after account opening and limits on penalty fees. For example, total fees for credit features cannot exceed 25 percent of the credit limit during the first year a credit account is open. Moreover, issuers are only permitted to raise interest rates on existing balances if a cardholder misses back-to-back payments and, for new purchases, must provide at least 45 days advance notice of the change in interest rate and allow the consumer to close their account during that time.

We expect that the Bureau will issue additional materials to facilitate compliance with the prepaid rule in the coming months and will continue to monitor and post about developments here.

Responding to questions regarding whether the Qualified Mortgage Rule will have a deterrent effect on mortgage lenders, Director Cordray reprised his position that the rule would not because lenders could rely on exceptions to continue lending to borrowers who do not meet the 43 percent debt-to-income ratio referenced in the rule. For instance, Cordray noted that the rule also permits loans to be considered qualified if they are purchased or guaranteed by a government-sponsored enterprise such as Fannie Mae or Freddie Mac . Committee members, on the other hand, argued that lenders would be unlikely to make certain loans that were not considered qualified under the Rule because such loans would no longer receive the same sort of legal protections as qualified mortgages.

Committee members also questioned certain CFPB data collection practices, including its collection of aggregate data from credit card companies, complaint data generally, and plans to create the National Mortgage Database in conjunction with the Federal Housing Finance Agency (FHFA). Cordray responded that much of the data collected by the CFPB cannot be linked to any particular consumer because of the lack of personally identifiable information (PII) collected. He also noted that the CFPB complies with all laws governing privacy and data security.

Committee members questioned Cordray on a variety of other topics, including regulation of auto lenders and manufactured housing, and expected forthcoming regulations governing debt collection and general purpose reloadable cards. We will continue to monitor CFPB developments and post updates here.

http://www.consumerfinancelawblog.com/

Under the proposed settlement, class members who purchased Groupon vouchers between November 2008 and December 1, 2011 will be able to redeem expired vouchers, and if they are unable to do so, obtain a refund from an $8.5 million settlement fund. If a merchant refuses to redeem a settlement voucher, the class member will be entitled to receive a refund of the purchase price plus 20% of the promotional value.

Groupon also agreed to make changes to how it structures and advertises its deals. For example, Groupon agreed to clearly and conspicuously that any expiration dates apply only to the promotional value of the deal, and that the purchase price portion of the deal does not expire until the voucher is redeemed or refunded. And they agreed to limit the number of its annual Daily Deals that expire less than 30 days from the date of issuance.

Gift cards and deal vouchers may be subject to a patchwork of laws that are spread out across all states and the federal level, and it’s not always easy to figure out which laws apply or how to comply with them. Plaintiff’s lawyers are taking advantage of this confusion and filing lawsuits against these types of deals. Accordingly, companies should take a close look at any offers that combine pre-payment with an expiration date in order to evaluate their risk of being a target of these types of suits.

Approximately half the states have laws that either restrict or prohibit expiration dates, and a federal law mandates that gift cards must be valid for at least five years. As we’ve noted before (click here, for example), consumers and plaintiffs' lawyers are taking a close look at how gift cards are marketed and sold and have been quick to file lawsuits against perceived violations. Companies should examine their gift card offers in order to evaluate their risk of being a target of these types of suits.

Approximately half the states have laws that either restrict or prohibit expiration dates. In addition, a recent federal law requires gift certificates to be valid for at least 5 years. The plaintiffs in these cases are arguing that the Groupon and LivingSocial deals constitute gift certificates and that the expiration on the deals violate federal and state laws. In addition, the plaintiffs in the LivingSocial lawsuit are arguing that the no cash back provision on the company’s deals violates a Washington law that requires issuers to give cash back, under certain circumstances.

These lawsuits demonstrate that plaintiff’s lawyers are attempting to stretch gift certificate laws to cover various types of offers that don’t fit the traditional mold of gift certificates. Companies should take a close look at any offers that combine pre-payment with an expiration date in order to evaluate their risk of being a target of these types of suits.

(B) Store Gift Cards – these types of cards are commonly known as “closed-loop cards”, and are essentially the same as Gift Certificates, but are reloadable or may be increased in value. The CARD Act specifically defines these cards as electronic promises, plastic cards, or other payment codes or devices that are: (i) redeemable at a single merchant or an affiliated group of merchants that share the same name, mark, or logo; (ii) issued in a specified amount, whether or not that amount may be increased in value or reloaded at the request of the holder; (iii) purchased on a prepaid basis in exchange for payment; and (iv) honored upon presentation by such single merchant or affiliated group of merchants for goods or services.

(C) General-Use Prepaid Cards – commonly referred to as “open-loop cards”, are defined in the CARD Act as cards or other payment codes or devices issued by any person that are: (i) redeemable at multiple, unaffiliated merchants or service providers, or automated teller machines; (ii) issued in a requested amount, whether or not that amount may, at the option of the issuer, be increased in value or reloaded if requested by the holder; (iii) purchased or loaded on a prepaid basis; and (iv) honored, upon presentation, by merchants for goods or services or at automated teller machines.

Exclusions

Gift Certificates, Store Gift Cards, and General-Use Prepaid Cards, do not include an electronic promise, plastic card, or payment code or device that is: (i) used solely for telephone services; (ii) reloadable and not marketed or labeled as a gift card or gift certificate; (iii) a loyalty, award, or promotional gift card, as defined by the Federal Reserve Board; (iv) not marketed to the general public; (v) issued in paper form only (including for tickets and events); or (vi) redeemable solely for admission to events or venues at a particular location or group of affiliated locations, including services or goods obtainable at the event/venue after admission or in conjunction with admission to such events/venues.

Fees

Under the rules to the CARD Act, no person may impose a dormancy, inactivity, or service fee with respect to Gift Certificates, Store Gift Cards, or General-Use Prepaid Cards unless all of the following occur:

1. No Activity for 1 Year – fees are only imposed if there has been no activity for 1 year prior to imposing the fee; and
   
2. 1 Fee Per Month – only 1 fee is imposed per calendar month; and
   
3. Disclosures – disclosures regarding fees must be clearly and conspicuously stated on gift cards, and disclosures must be provided to purchasers before issuance.

The rules additionally prohibit fees for replacing or reissuing an expired Gift Certificate, Store Gift Card, or General-Use Prepaid Card if the remaining funds remain valid. This is to ensure consumers may access and use the underlying funds for a full 5-year period.

Expiration

Expiration dates are also prohibited for Gift Certificates, Store Gift Cards, or General-Use Prepaid Cards except if:

1. Expiration of Funds from Date of Issuance – the expiration date of the funds underlying the Gift Certificate is 5 years or more from the Gift Certificate’s issuance date, or
   
2. Expiration of Funds from Date of Last Load – for Store Gift Cards or General- Use Prepaid Cards, the expiration date of the funds underlying the gift card is 5 years or more after the date of the last load of funds.

Disclosure Requirements

The rules to the CARD Act also require the disclosure of permitted expiration dates and of all other fees, such as initial issuance fees and cash-out fees. These disclosures must be provided on or with the Gift Certificate, Store Gift Card, or General-Use Prepaid Card prior to purchase. Additionally, a toll-free number and, if available, a web site – that a consumer may use to obtain fee information or to order a replacement – must be disclosed on the Gift Certificate, Store Gift Card, or General-Use Prepaid Card.

Information

Check back for future posts on further details of the rules, including posts specific to loyalty, award or promotional gift cards and preemption analysis for state gift cards laws.

Recaps of the long day and night of negotiations and the final bill are available from Poltico, the Wall Street Journal, and American Banker, among many others.

With regard to certain of the issues we have been following closely here, in the end, auto dealers will be exempt from the purview of the new Consumer Financial Protection Bureau, but payday lenders and other non-bank financial service providers will be subject to the new regulator. In addition, the Federal Reserve will be permitted to cap interchange fees, except for those on cards issued by governments.

The bill includes myriad other important provisions related to mortgage lending, the activities of banks, insurance regulation, corporate governance, and more. The Wall Street Journal provides an overview of some of the “major” provisions. Over the coming weeks and months we will be taking a closer look at certain aspects of the final bill and their implications, for example, increased litigation risk for financial service providers, including merchants and retailers.

Under this law, “gift card” is defined as a prefunded tangible or electronic record of a specific monetary value evidencing an issuer’s agreement to provide goods, services, credit, money, or anything of value. A gift card includes a tangible card, electronic card, stored-value card, or certificate or similar instrument, card, or tangible record, all of which contain a microprocessor chip, magnetic chip, or other means for the storage of information and for which the value is decremented upon each use.

A gift card does not include a prefunded tangible or electronic record issued by, or on behalf of, any government agency, a gift certificate that is issued only on paper, a prepaid telecommunications or technology card, or a card that is donated or sold below face value at a volume discount to an employer or charitable organization for fundraising purposes. Likewise, a card or certificate issued to a consumer pursuant to an awards, loyalty, or promotional program for which no money or other item of monetary value was exchanged is expressly excluded from the definition of a gift card.

In addition, this new law does not apply to gift cards that are usable with multiple sellers of goods or services, but expressly applies to a gift card usable only with affiliated sellers of goods or services.

A violation of this new law will be deemed a violation of Colorado’s deceptive trade practice law.

Once the law is effective, Colorado will join a handful of other states with laws requiring redemption of gift cards with less than a certain cash value. Under California law, as just one example, any gift certificate with a cash value of less than $10 is redeemable in cash for its cash value.

Scope

Generally, the rules restrict fees, expiration dates, and impose certain disclosure requirements for (1) gift certificates, (2) store gift cards, and (3) general-use prepaid cards, as these terms (collectively, “gift cards”) are defined in the CARD Act. The rules state that the CARD Act’s scope is intended to extend to gift cards that are sold or issued to consumers primarily for personal, family, or household purposes. Gift cards which qualify under the rules as loyalty, award, or promotional gift cards are exempt from the fee and expiration date rules but must still follow strict disclosure requirements.

Exclusions

The rules also provide specific exclusions, meaning none of its provisions apply to gift cards used solely for telephone services, cards that are reloadable and not marketed or labeled as a gift card or certificate, cards not marketed to the general public, cards issued in paper form only, or cards redeemable solely for admission to specific events or venues. Although the rules exclude several categories of gift cards, the exclusions should be interpreted narrowly to ensure that consumers receive the full protection contemplated by the CARD Act.

Preemption

The lingering issue of how the CARD Act should be treated along with the patch-work of state gift card laws that regulate dormancy fees, inactivity charges or fees, service fees, expiration dates, or escheatment is addressed in the rules as well. State laws that provide greater protection for consumers than the CARD Act, are not preempted according to the rules. Because the question of what is meant by “greater protection” is still unclear, the rules provide a mechanism by which parties may request a preemption determination by the Board with respect to a particular state’s escheat law. Due to the ambiguity surrounding state gift card law preemption, gift card issuers and sellers should continue to track or consult legal counsel regarding current state gift card laws and pending legislation in all states.

Information

Check back for future posts on the details of the rules, including posts specific to loyalty, award or promotional gift cards, fee and expiration date restrictions, disclosure requirements, and preemption analysis for state gift cards laws.

Kelley Drye Partner David Ervin contributed to this post. Click here for a post from the Kelley Drye Advertising Group's "Ad Law Access Blog" for further information regarding the Federal Reserve gift card rules.

The rules apply to gift certificates, store gift cards, and general-use prepaid cards, as those terms are defined in the Credit CARD Act. Covered products 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 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.

The rules prohibit imposition of dormancy, inactivity, or service fees unless (1) there has been at least one year of inactivity on the certificate or card, (2) no more than one such fee is charged per month, and (3) the consumer is given clear and conspicuous disclosures about the fees. The rules also prohibit 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.

Keep in mind that in addition to the new federal rules, gift cards are subject to a patchwork of state laws. Indeed, the new rules provide that a state law is not preempted due to inconsistency with federal law if the state law is more protective of consumers. Unfortunately, then, issuers still need to make sure that any cards that are marketed across the country comply with all of the relevant state laws.

The Act directed the Federal Reserve to develop implementation guidance and requirements, which were finalized on January 12, 2010. While most credit card issuers have been working for several months to comply with the Act, the Fed rules provide further detailed guidance. For example, the rules outline factors issuers should consider when determining a consumer’s ability to repay.

Notably, the Fed rules impact Regulation Z and, therefore, do not relate to debit card overdraft fees. Those fees fall under Regulation E, which is subject to a separate ongoing rulemaking process.

Nor do the portions of the CARD Act that take effect today relate to gift cards. Another Fed rulemaking to provide guidance related to gift cards is underway. Those Fed rules should be finalized soon, and together with the gift card provisions of the Act will take effect in August 2010. We will keep you posted on further developments.

If your company sells credits for your services, check with your legal counsel before imposing expiration dates on the credits or using any mechanism that could deplete the number of credits in a consumer’s account. Gift card laws in certain states may be broad enough to apply to your credits and could restrict your ability to deplete or expire the credits.

For example, in Michaelson v. Staples, Inc., Case No. 37-2009-00083487 (Cal. Super. Ct., San Diego Cty.), plaintiff alleges that an expiration date on a Staples gift card, mailed to the plaintiff as part of a promotion, was in less than 10-point font. Plaintiff alleges the card expired before he noticed the expiration date. In Robert Loiseau v. Visa U.S.A. Inc., Case No. 37-2009-00085443 (Cal. Super. Ct., San Diego Cty.), plaintiff alleges that a gift card, purchased for its face value, improperly contained an obscured expiration date, charged a processing fee, and required other allegedly unreasonable terms and conditions.

Gift cards are a tricky business when it comes to complying with the patchwork quilt of state-by-state regulations (as well as FTC oversight) over them. The permissibility of expiration dates, redemption in cash once a minimum balance has been reached, disclosures of terms and conditions, and escheatment of remaining balances are just some of the issues that businesses must confront and address. This new wave of lawsuits serves as a reminder to merchants and gift card issuers of the need to monitor state and federal regulations, as well as to periodically evaluate their gift card programs with counsel.