October 1, 2012
Authored by: Bryan Cave
The Consumer Financial Protection Bureau (CFPB) is considering requests that it make a determination on whether certain provisions of the Maine and Tennessee abandoned property laws are inconsistent with the CARD Act provisions of the Electronic Fund Transfer Act (EFTA) and Reg. E and are thus preempted.
Under the EFTA, the bureau must evaluate whether state law is inconsistent with federal law. One way for a state law to be inconsistent is by “requir[ing] or permit[ing] a practice or act prohibited by the federal law.” An inconsistent state law is preempted by federal law only to the extent of the inconsistency. State law cannot be preempted, however, if the state law provides consumers greater protection than federal law.
The gift card provisions of Reg. E prohibit expiration dates of less than five years. The abandoned property laws of Maine and Tennessee, however, generally require escheatment to the state of unused balances on certain types of gift cards after two years of card inactivity. A bank or retail gift card issuer that has escheated funds to the state may subsequently honor the card if it’s presented for payment and file a request for reimbursement with the state. However, such issuer may also elect to decline to honor the card, in which case, the consumer will have to attempt to reclaim card funds directly from the state (although it may not be obvious to the consumer which state to contact).
The consumer protection issue is that by deeming gift cards abandoned after two years, Maine and Tennessee’s laws release bank and retail gift card issuers from their obligation to honor these cards after that time, even though the CARD Act gives consumers several more years to use their gift cards.
The bureau is requesting comments on all aspects of its notice, including:
- Whether there is any inconsistency between these provisions of state law and the expiration date provisions of the EFTA and Regulation E and, if so, the nature of the inconsistency.
- Whether and how banks and retail gift card issuers can comply with both federal and state law—for example, by honoring unclaimed cards and requesting reimbursement from Maine or Tennessee.
- Whether Maine and Tennessee’s unclaimed property statutes as applied to gift cards afford consumers greater protection than federal law.
- With respect to the last item above, the bureau states that once gift card funds are escheated to the state, those funds “presumably are protected from the risk of loss in the event that an issuer later files for bankruptcy” as well as from any inactivity fees that might otherwise be assessed on an unused card. In addition, “a consumer would have an indefinite opportunity to attempt to reclaim his or her unclaimed gift card funds from the State and, if successful, might be entitled to receive cash from the state, rather than the right to obtain merchandise.”
The bureau also recognizes that it might be difficult for a gift card holder to determine the state to contact to recover escheated funds. To do so, “a consumer first would need to determine that the card should still have been usable, and then would need to determine which State to contact to reclaim funds corresponding to the unclaimed gift card.” Where the bank or retail gift card issuer does not have a record of the gift card owner’s name and address, unclaimed funds are escheated to the issuer’s state of incorporation. In addition, it would cost the consumer time and possibly money to complete and submit claim forms, and the consumer may have to wait weeks or months to receive funds back from the state.
Finally, the bureau states that because Maine and Tennessee’s existing processes for returning unclaimed funds rely on property owners’ names and addresses, “[i]t may be difficult for gift card owners to locate and successfully claim their property under those processes, particularly if gift card issuers do not know, and thus do not report to the State, the names of the consumers who own the unclaimed cards (i.e., the gift card recipients).”
The request about Maine’s law was submitted by Maine’s own Office of the Treasurer to the Federal Reserve Board (FRB) in November 2010 and inherited by the CFPB in July 2011. The Tennessee request was submitted in May by payment card industry representatives. The bureau also received a request regarding New Jersey, but determined that issue was moot because of the June amendments to that state’s escheat law.
The bureau notes that the U.S. Court of Appeals for the Third Circuit (as well as the U.S. District Court for the District of New Jersey) considered this issue during the course of litigation over New Jersey’s escheat law in N.J. Retail Merchants Ass’n v. Sidamon-Eristoff. The district court in that case determined that the plaintiffs were unlikely to prove that New Jersey’s unclaimed property law was preempted by federal law, and the appellate court agreed, pointing out several factors supporting a conclusion that the state law provided more protections for consumers. The bureau noted that the court’s decision was made without any specific guidance or determination from either the FRB or the CFPB.
Comments must be submitted by October 22, 2012. For a copy of the notice, please click here .