By: David L. Beam
The gift card provisions of the Electronic Funds Transfer Act (“EFTA”) and Regulation E (which implements the EFTA) do not allow funds on most gift cards to expire sooner than five years after issuance (or, if the card is reloadable, five years after the last load). But the unclaimed property laws in some states require gift card issuers to turn over the funds on dormant gift cards sooner than five years after the last activity. The state unclaimed property laws generally relieve the issuer of the obligation to honor a card after it has turned the funds over to the state. Instead, the owner of the card must apply to the state treasurer to recover the funds. (If the card issuer decides to honor the card anyway—and many do for customer service reasons—then the issuer may apply to the state for reimbursement.)
The question is whether the issuer has violated the federal expiration date rule if the issuer invokes its right under state law not to honor a card for which the issuer has escheated the funds to the state.
On Tuesday, August 21, 2012, the Bureau published in the Federal Register a notice that it intends to answer this question. See Electronic Fund Transfers; Intent to Make Determination of Effect on State Laws (Maine and Tennessee), 77 Fed. Reg. 50404 (August 21, 2012). The Bureau is now seeking comments from interested parties on what the answer should be.
The EFTA’s preemption provision says that the EFTA “does not preempt the laws of any State relating to electronic fund transfers, dormancy fees, inactivity charges or fees, service fees, or expiration dates of . . . gift cards . . . except to the extent that those laws are inconsistent with the provisions of [the EFTA], and then only to the extent of the inconsistency.” 15 U.S.C. § 1693r. It goes on to say that a “State law is not inconsistent with [the EFTA] if the protection such law affords any consumer is greater than the protection afforded by the” EFTA. Id. However, Regulation E provides that a state law is inconsistent with the EFTA if the state law “requires or permits a practice or act prohibited by the federal law.” 12 C.F.R. § 1005.12(b)(1).
Section 922 of the EFTA also authorizes the Bureau, upon its own motion or upon request, to “determine whether a State requirement is inconsistent or affords greater protection.” 15 U.S.C. § 1693r. If the Bureau declares that a state law is inconsistent, financial institutions that rely on the Bureau determination are insulated from liability under that law even if a court later overturns the Bureau’s determination. Id.
In the notice published on Tuesday, the Bureau said that it intends to determine whether and to what extent the EFTA preempts the unclaimed property laws in Maine and Tennessee. The Bureau appears to be considering several possibilities:
• It might determine that the unclaimed property laws of Maine and Tennessee are preempted to the extent that those laws require escheat of gift card funds sooner than five years after the last load. This would be the best result for gift card issuers.
• The Bureau might also decide that the unclaimed property laws are more protective of consumers by ensuring that unclaimed funds are held by a reliable custodian. Although the Bureau does not quite say this, it appears that it would conclude that the federal expiration date restrictions do not override the provisions in state unclaimed property laws that relieve the issuer of the obligation to honor a card after turning over the funds to the state. In other words, the Bureau would clarify that requiring the consumer to apply to the state treasurer to recover the funds does not constitute an “expiration” of the funds for purposes of federal law. This would be the second best result for gift card issuers.
• The Bureau asks potential commenters “whether and how gift card issuers cam comply with both Federal and State law, for example by honoring unclaimed cards and requesting reimbursement from Maine or Tennessee.” This suggests that the Bureau is contemplating a determination that the EFTA preempts only the provisions in unclaimed property laws that relieve the issuer of the obligation to honor a card after the issuer has turned the funds over to the state. This would be the worst result for gift card issuers.
The comment period is open until October 22, 2012. The K&L Gates Consumer Financial Services Group has extensive experience preparing comment letters for clients to federal agencies, including the CFPB. Please contact us if you would like assistance preparing a letter to the Bureau.