CFPB Rules (Almost) No Preemption: Issuers Required to Honor Cards after Funds Escheat to Maine, Tenn. (April 22, 2013)

The industry has been waiting for a possible preemption ruling from the Consumer Financial Protection Bureau (CFPB) since last summer when the agency requested comments on whether certain state laws with a two-year escheat period conflict with federal law that requires no expiration prior to five years. The CFPB has determined that escheat laws in Maine and Tennessee—except for one aspect of Tennessee’s law—do not conflict with federal law. For issuers, that means honoring cards consumers present as payment even after funds have escheated to the states.

The CFPB received comments from 20ift card issuers, trade associations and consumer groups, all of whom noted that the laws in those two states were inconsistent with—and thus should be preempted by—federal law. Federal law requires gift cards with expiration dates to be redeemable for a minimum of five years from the date of issuance or the date of last load, whichever is later. In Maine and Tennessee, however, issuers must transfer, or escheat, unused card balances to the states as early as two years after issuance.

The CFPB ruled that no aspect of Maine’s law was inconsistent with federal law because an issuer that has transferred the value of a gift card to the state must still honor the card if a consumer presents it for payment. The issuer can subsequently request reimbursement from the state. Tennessee, however, does not require issuers to honor gift cards after the underlying funds have been escheated to the state, the CFPB said. Holders of escheated gift cards would need to attempt to reclaim the funds by filing unclaimed property claims with the state—a process that could be long and labor-intensive. Since that aspect of the Tennessee law could effectively lead to a gift card expiring before five years after issuance, the CFPB deemed it to be inconsistent with—and thus preempted by—federal law.

In its ruling, the bureau did acknowledge the possible conflict in requiring issuers to transfer unclaimed funds to states in two years while still honoring the gift card for a minimum of five. “However, the primary concern of the relevant provision of the EFTA [Electronic Fund Transfers Act] is to ensure that consumers will be able to use their gift cards for a proscribed period of time,” the agency wrote. “So long as consumers can continue to use their cards at the point of sale for as long as federal law guarantees, the fact that issuers may face an increased burden or cost to comply with both federal law and the Tennessee Act… does not change the bureau’s conclusion.”

“This interpretation may cause issuers and processors located in states that do not exempt gift cards from escheatment some headaches, as they will have to honor cards after  funds have been turned over to the state,” Terry Maher, partner at Baird Holm LLP tells Paybefore.  “They can no longer make them inactive on their systems.” He adds: “It is also an invitation for  fraud—the consumer can hold off using a card until after the funds escheat, then use the card and file with the state to get the funds.”