Lawsuit Leads CUs To Withdraw Gift Cards In 3 States

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Credit unions in Massachusetts, New Hampshire and Connecticut are bailing out of gift card programs to avoid any negative press associated with lawsuits filed by Attorneys General in these states against the gift card program operated by mall developer and operator Simon Properties.

"The buzz about this is so loud that we have a number of credit unions in those states that have signed up to offer gift cards and then pulled out because of the bad PR," said Liberty Card Services President Michelle Thornton. "It is our contention-and also Visa's contention and that of the national bank we work with to offer this program-that what we're offering is not a retail card and does not fall under these laws. But we have a lot of people who are very nervous about this, and it's risen to such a level that credit unions in these states are concerned."

The Attorneys General claim the Simon gift cards are in violation of state consumer protection laws regarding what fees can be charged on such products. But Simon and its partner, Bank of America, contend that because BofA is a federally chartered bank and the gift card program is offered in Simon malls across the country, the gift card program should fall under federal laws and regulations, not individual state laws and rules.

"So far, VISA has won all of these suits," Thornton said. "These are some big players, we're talking about here. This is Bank of America."

Credit union programs aren't as likely to end up in court, according to Tim Kaliban of Certegy Card Services, which also offers gift card programs to credit unions.

"Simon is charging more fees and higher fees than what our credit union clients are charging," he explained. "Credit unions are looking to charge only those fees that are necessary to support the product. They're not likely to raise the ire of the Attorneys General, and surely the Attorneys General understand that there is a cost involved in offering these cards and credit unions must be able to recoup those costs."

But the potential ramifications of the Simon lawsuits may reverberate far beyond these three states and even beyond just gift cards themselves and effect all stored-value or pre-paid cards by calling regulators' awareness to the fact that there is little guidance offered on any of these products, Kaliban suggested.

"Financial regulators are really looking at these issues now," he offered. "There's been very little clear guidance from regulators on this, and depending on how it all shakes out, it could kill off the whole industry."

Questions include how to differentiate among, say, a one-time-use, disposable gift card and a reloadable payroll card, which acts very much the same as a checking account and therefore could come under even more regulation.

Even the US PATRIOT Act is part of the equation.

"When you buy a $50 gift card, you pay for the card, and you walk out. No one asks to see your driver's license or gets and verifies any of your personal information. You just walk out the door, and no one knows where that gift card goes. When we're talking about a $50, disposable, single-use card, the risk is pretty low," Kaliban commented. "But when you're talking about a payroll card, which is reloadable, you're talking about a lot more money changing hands. Now suddenly, you're talking about a whole different threshold of risk."

At the heart of the existing lawsuits, however, is consumer protection and pre-emption-an issue that is near and dear to NASCUS, which is monitoring these cases.

"For us, this all goes back to pre-emption, and NASCUS has always upheld the states' rights to legislate consumer protection laws," said NASCUS' Brian Knight. "We haven't said much about this publicly, but we are letting our members know about it."

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