Gift card fees: Fed cracks down

NEW YORK (CNNMoney.com) -- The Federal Reserve announced final rules for gift cards Tuesday that the central bank says will help protect consumers from unexpected costs.

The rules, which go into effect in August, limit the fees that issuers are allowed to charge on gift cards, including inactivity, dormancy and other service fees. Issuers will also be required to clearly state the terms and conditions associated with gift cards.

Under the new rules, issuers will only be able to charge fees after a gift card or certificate has not been used for a year, and fees will be limited to one per month after that.

In addition, the Fed said issuers cannot charge fees unless the consumer has been given "clear and conspicuous disclosure" about them.

The rules will also extend expiration dates for gift cards to at least five years after the date of issuance, or five years after the date when funds were last loaded.

The Fed was tasked with implementing gift card reforms under the Credit Card Accountability Responsibility and Disclosure Act of 2009.

"Concerns have been raised regarding the amount of fees associated with gift cards, the expiration dates of gift cards, and the adequacy of disclosures," Fed policymakers wrote in a notice that will be published in the Federal Register.

"Consumers who do not use the value of the card within a short period of time may be surprised to find that the card has expired or that dormancy or service fees have reduced the value of the card," the notice said.

The rules will "generally cover" both retail gift cards and network-branded gift cards, the Fed said. Retail gift cards can only be used at a particular merchant or group of merchants, while network-branded cards are redeemable at any merchant that accepts the card brand, such as Visa or American Express.

While most states have already enacted some form of regulation targeting gift card fees, many state laws do not apply to network-branded cards, the Fed said.

"This is definitely a step in the right direction," said Michelle Jun, a staff attorney at Consumers Union, a consumer advocacy group. "We still urge consumers who receive gift cards to use them fast and use them all."

Consumers should use gift cards quickly to avoid inactivity fees and to ensure that the card is not forgotten, she said. There is also the possibility that a retailer could go bankrupt, she added, in which case its gift cards become worthless.

Jun said consumer advocates had urged the Fed to include a cap on the monthly fees issuers are allowed to charge after a year of inactivity.

At present, the amount varies widely from state to state. In California, for example, issuers can charge up to $2 a month, while Connecticut laws prohibit the monthly fee altogether, Jun said.

The Fed said it received over 230 comment letters on the proposal, most of which came from issuers and industry groups. But the central bank said it also received letters from consumers and consumer groups, as well as a city government entity and one state attorney general.

A spokeswoman for the Network Branded Prepaid Gift Card Association said many issuers have already moved to comply with the rules, which have been under consideration since late last year.

However, some issuers could run into problems meeting the Aug. 22 deadline to comply with some of the rules, particularly the ones that require new cards to be manufactured with expanded disclosures printed on them, the association spokeswoman said.

"It's going to be costly and could affect the availability of gift cards in the market place," she said. "A little more time would have been nice."