CFPB weighs imposition into state gift card practices

The Consumer Financial Protection Bureau is considering whether to impose its regulatory authority on states with gift card laws that are inconsistent with federal gift card laws. Specifically at issue are regulations in Maine and Tennessee that allow the states to seize funds on unused gift cards two years after the cards have been inactive, compared to federal law which generally imposes an expiration date of five years on cards, according to the CFPB.

The bureau said if state law is inconsistent with federal law, then federal law preempts state law. However, federal law does not preempt state law if it is determined that state law offers greater consumer protection than federal law. The CFPB said it is obligated by the Electronic Fund Transfer Act to evaluate whether state law is inconsistent with federal law and which legal jurisdiction affords consumers more protection.

In its public notice asking for comment on the issue, the CFPB said Maine's and Tennessee's shorter expiration date periods may benefit consumers. Once gift cards pass the expiration dates and the states claim the funds off the cards, the funds are presumably protected by the state from risk of loss. The scenario follows that even if issuers of the cards file for bankruptcy sometime in the future, cardholders will not be out of luck if they seek to claim those funds, since the state is holding them.

Additionally, by seizing the funds, the states eliminate inactivity fees from draining card balances and hold those funds indefinitely, in case consumers seek to claim them. If consumers do claim funds, they may be entitled to receive the balances in cash from the states, rather than obtain merchandise from retailers that issued the cards, the CFPB said.

The bureau supplied the counter argument as well. To claim unused funds from the state, consumers may have to jump through bureaucratic hoops, including determining which state to contact. The CFPB said, "[A] consumer who purchases and uses in New York a gift card that was issued by a company incorporated in Maine or Tennessee may be required to contact Maine or Tennessee, rather than New York, to attempt to claim funds that have transferred to the state. It is not clear, however, how the consumer would know to do this."

The CFPB said it received three requests (from a party or parties not named in the notice) to determine the federal-state preemption issue in the two states mentioned above, as well as in New Jersey. The issue was settled in the Garden State to the CFPB's satisfaction by the June 2012 passage of a state gift card compromise bill. The bureau noted it is treading carefully into the regulations of the other two states.

"We are committed to gathering input before we make these kinds of decisions," said CFPB Director Richard Cordray. "This notice gives the public an opportunity to comment on a decision that could affect how consumers use their gift cards."

Prepaid card companies have until Oct. 16, 2012, to comment. The CFPB's public notice can be accessed at files.consumerfinance.gov/f/201208_CFPB_Intent_to_make_preemption_determination.pdf.

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