The CARD Act amended the Electronic Funds Transfer Act (“EFTA”) to bring gift cards under federal law for the first time. The Federal Reserve proposed extending Regulation E, which implements the EFTA, to certain stored value cards as far back as 1996, but never adopted final rules. The Federal Reserve did extend Regulation E to encompass payroll cards, effective July 2007. Regulation E is now being amended to implement the gift card requirements of the Card Act, effective August 22, 2010.
Amended Regulation E will preempt a significant number of pre-existing state gift card laws, i.e. those that are inconsistent with the federal standard. There is an exception for those state gift card laws that are more protective than the federal standard. Setting a minimum level of federal consumer protection that the states can exceed is a common to much federal consumer protection legislation, and is acknowledgment of the traditional responsibility of states for consumer protection under this nation’s system of federalism. In practice this sort of federalism can be messy.
In many cases it is easy to determine if a state gift card requirement is more protective. For instance if a state requires that cards cannot expire before 2 years, this is shorter than the federal standard of 5 years and is preempted by the federal requirement. A state standard requiring a longer expiration date than the federal standard (or as in some states, a total ban on expiration dates) will take precedence over the federal standard. Similarly, if a state bans service fees altogether, as several do, or impose limits on the amount of total fees as others do, those requirements will survive. A state law that permits service fees before 12 months of inactivity will be superseded by the federal standard, but one requiring a greater period of inactivity will survive.
It is more difficult to gauge the effect of the Card Act disclosure requirements on certain existing state disclosure requirements. The federal standard requires “clear and conspicuous” disclosure of expiration dates and fees and circumstances in which they will apply. The Federal Reserve states in its Proposal to amend Regulation E that disclosures are clear and conspicuous if they are “readily understandable” and the location and type size of the disclosures are “readily noticeable to consumers”. The Federal Reserve did not require a specific font size for disclosures in its Proposal, reasoning that it would not be workable in all disclosure contexts (but did request comment from the public whether a minimum font size nonetheless should be imposed). Several states with disclosure requirements for service fees do impose minimum font requirements, typically 10-point type. If a disclosure in 8-point type is clear and conspicuous satisfying the federal standard it is not entirely clear whether state requirement that it be in 10-point type is inconsistent with the federal requirement or more protective. On the one had, one could argue that if 8-point is good, 10-point is better. On the other hand, if 10-point type causes overcrowding of the disclosures required by the Card Act to be on the card, maybe it is worse. This seems too subjective, and will have to be clarified by the Federal Reserve at some point.
Copyright Broox Peterson 2010. The author is a payments legal specialist with over 25 years in the industry providing legal consulting and transactional support services. www.bwplawyer.com and http://blog.bwplawyer.com