Consumer Groups Call On Fed to Adopt Stricter Gift Card Rules

In comments filed with the Federal Reserve Board today, consumer groups urged regulators to rein in gift card fees and related terms and conditions that can quickly diminish their value. The Fed is considering a set of proposed gift card regulations that are required under the Credit CARD Act of 2009 and will go into effect on February 22, 2010. A copy of the consumer group letter to the Fed can be found at:

"Banks earn billions every year from gift card fees just because consumers don't always get around to using their cards right away," said Michelle Jun, staff attorney with Consumers Union. "Congress passed limits on gift card fees earlier this year and now it's up to the Fed to make sure consumers are fully protected. The Fed should impose reasonable limits on fees so consumers stand a better chance of enjoying the full value of the gifts they receive."

Many consumers end up losing money on their gift cards because they don't redeem them right away. A recent Consumer Reports poll found that one quarter of those given gift cards last holiday season still have at least one card they haven't used and 11 percent of recipients have four or more. The TowerGroup estimated that about $8 billion remained unredeemed on gift cards in 2006.

In a letter to the Fed today, Consumers Union, Consumer Action, Consumer Federation of America, and the National Consumer Law Center urged regulators to:

* Cap the amount that gift card issuers can charge for inactivity fees. The Credit Card Act of 2009 prohibits card issuers from charging inactivity fees on cards if they have been used within the past 12 months. After twelve months of inactivity, card issuers will be allowed to charge a monthly inactivity fee. Consumers Union urged the Fed to protect consumers more fully by limiting the amount that that can be charged for inactivity to no more than the actual cost incurred by card issuers for maintaining the card.

* Limit fees on low value cards. Consumers Union urged the Fed to follow the lead of states like California, Oklahoma and Washington which have limited fees that can be charged for inactivity when the balance on the card is $5 or less. These states limit card issuers to charging a $1 per month fee.

* Limit when inactivity fees can be charged. Many consumers report that they face difficulties using their gift cards because merchants often will not accept their cards when they don't cover the full cost of the purchase or when they cannot determine the remaining amount on the card. Consumers Union urged the Fed to count such transactions as "activity" on the card so that consumers don't start incurring inactivity fees when they've attempted to use them.

* Make sure consumers are protected from early expiration of gift cards. Under the Credit Card Act of 2009, gift cards cannot expire less than five years from the date the card was purchased or money was last added to the card, whichever is later. However, many gift cards are stamped with a "valid thru" date," which is the estimated lifespan of the card's magnetic stripe and could be less than five years from the time the card was purchased. Consumers Union urged the Fed to require card issuers to select expiration periods long enough that the card will have at least five years of remaining life when it is purchased. Card issuers should be required to disclose on the card that the card may be valid beyond the date imprinted on it and to provide an 800 phone number on the card that consumers can use to easily find out when their cards actually expire.

* Protect consumers from losing funds on lost or stolen prepaid cards. Prepaid cards are reloadable cards that can be used to make payments similar to debit cards and are becoming increasingly popular. But consumers using prepaid cards don't enjoy the same safeguards as debit cards if their cards are lost or stolen and could end up losing all of their funds. Consumers Union urged the Fed to ensure that prepaid cards come with the same protections as debit cards so the consumer's liability is limited to $50 and he or she can recover missing money.

The new gift card regulations will cover both retailer gift cards and prepaid general use gift cards (the ones that often are branded as Visa, American Express, MasterCard, or Discover). The law does not cover rewards, loyalty, telephone or promotional cards and does not cover paper gift cards or paper gift certificates.