Federal Reserve would cut fees, lengthen expiration dates
WASHINGTON - The Federal Reserve is proposing new rules for the $50 billion gift-card industry, including limits on fees for not using the card and requiring that gift cards expire no earlier than five years after purchase.
Many gift card issuers currently charge fees to recipients of gift cards that haven't been used for an extended period of time by deducting funds from the cards.
"The rules would protect consumers from certain unexpected costs and would require that gift card terms and conditions be clearly stated," the Federal Reserve said on Monday.
The proposed rules come after the Federal Reserve came under fire for not doing more to protect consumers during the credit bubble. Responding to a series of actions by a dozen states, national retailers have already moved to limit fees and expiration dates for gift cards that haven't been used quickly.
However, large credit card companies are in many cases still charging a $2 to $5 monthly so-called dormancy fee starting sometimes as quickly as six months after cards were issued, according to Consumers Union senior attorney Gail Hillebrand. She said that in most cases these so-called service fees begin a year after the card has been issued to a consumer.
The credit-card-issuer gift cards, also known as general-purpose gift cards, are a small, but growing part of the $50 billion gift card and certificate industry, according to a study released in October by the Consumer Federation of America. CFA reports that general-purpose gift cards, which can be used at most stores, represent nearly $4 billion of the industry.
New limitations on gift card fees and expiration date are part of a larger effort in recent months by the Federal Reserve to step up consumer protection.
Last week, the Federal Reserve adopted strong rules limiting bank profits on overdraft fees. Bank customers won't be charged overdraft fees on cash withdrawals or one-time debit-card purchases that exceed their account balance unless they've agreed to such fees.
The proposed rule would prohibit a gift-card issuer from imposing a service fee for gift certificates, store gift cards or prepaid cards in certain situations such as when there has been a year of inactivity on the certificate or card.
Any dormancy fees that are charged would have to be disclosed properly to consumers and it could only be a monthly fee, rather than more frequent charges.
The rule also prohibits issuers from offering cards that expire earlier than five years after being issued.
The proposal is based on broad credit card legislation approved by Congress earlier this year that requires the Federal Reserve to approve rules on gift cards by Feb. 22, 2010. Interested consumers and companies can comment on the proposal for 30 days.
The central bank is expected to approve the statute shortly after the comment period is finished, but the new rules would not take effect until Aug. 22, giving companies a transitional period to implement the regulations.
Gift cards sold before the effective date would not be subject to the new rules.