CFPB Uses Novel Interpretation, Increases Compliance Burden for Gift Card Issuers Through its First Preemption Determination

CFPB Uses Novel Interpretation, Increases Compliance Burden for Gift Card Issuers Through its First Preemption Determination

 by Rick Fischer, Obrea Poindexter, Leonard Chanin, and Matt Janiga

On April 19, 2013, the Consumer Financial Protection Bureau ("CFPB") announced it was making a determination to preempt a provision of Tennessee unclaimed property law that it deemed inconsistent with the federal Electronic Fund Transfer Act ("EFTA"), as implemented by Regulation E. The Tennessee interpretation, which has the potential to create operational and compliance issues for gift card issuers, was issued jointly with analysis that concluded Maine law is not inconsistent with the EFTA or Regulation E and, therefore, not preempted ("Determination"). The Determination marks the first time the CFPB has used its statutory authority to issue a Determination about the consistency of state and federal law.

OVERVIEW OF FEDERAL GIFT CARD PROTECTIONS FOR CONSUMERS

The EFTA and its implementing Regulation E require gift card issuers to provide consumers with specific protections and disclosures relating to when gift card funds may expire. Section 1005.20(e)(2) of Regulation E provides that "[t]he expiration date for the underlying funds" on a prepaid card must be the later of "[f]ive years after the date the gift certificate was initially issued, or the date on which the funds were last loaded to a store gift card or general-use prepaid card." Section 1005.20(e)(3) of Regulation E also requires an issuer to disclose: (1) the expiration date for the underlying funds or, if the underlying funds do not expire, that fact, and (2) a toll-free telephone number and, if one is maintained, a Web site that a consumer may use to obtain a replacement card after the card expires if the underlying funds may be available.

DETERMINATION TO PREEMPT TENNESSEE ABANDONED PROPERTY LAW

Tennessee law provides, among other things, that a gift card "is presumed abandoned if it remains unclaimed by the owner upon the earlier of: (1) the expiration date of the certificate; or (2) two (2) years from the date the certificate was issued." Tennessee law requires that such funds then be transferred to the state, and permits issuers the choice of honoring gift cards where funds have been transferred to the state or directing the consumer to the state to reclaim the abandoned funds.

The Determination acknowledges that Tennessee law and the protections of the EFTA and Regulation E are inconsistent. However, rather than focus on the conflict between a gift card issuer's state law obligation to transfer funds to the state and federal law obligation to preserve funds for the customer as required by Regulation E, the CFPB decided instead to focus on whether the state and federal laws provide consumers with the ability to use their gift cards at the point of sale. [footnotes omitted]

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