Lost/stolen card and cancellation fees
We do not believe that Regulation E or Illinois law would prohibit a bank from charging fees for lost or stolen cards or for card cancellations, provided that such fees are disclosed in the card agreement.
As a general rule, Regulation E restricts banks from charging three types of fees: a “dormancy, inactivity, or service fee.” 12 CFR 1005.20(d). (And, it does not prohibit those fees in all cases — a bank may charge a dormancy, inactivity, or service fee if it meets the regulation’s disclosure and timing requirements.)
As you noted, Regulation E’s fee restrictions do not apply to lost or stolen card fees. The official comment you identified explains that the “[a] service fee does not include . . . a lost or stolen certificate or card replacement fee”. Comment 1, Official Staff Commentary, Paragraph 20(a)(6).
We also believe that the definitions of the restricted fees, “dormancy or inactivity fee” and “service fee,” would exclude a cancellation fee, provided that a card cancellation would require an affirmative act on the part of the customer and would not be based on a lack of activity on the card:
(5) Dormancy or inactivity fee. The terms “dormancy fee” and “inactivity fee” mean a fee for non-use of or inactivity on a gift certificate, store gift card, or general-use prepaid card.
(6) Service fee. The term “service fee” means a periodic fee for holding or use of a gift certificate, store gift card, or general-use prepaid card. A periodic fee includes any fee that may be imposed on a gift certificate, store gift card, or general-use prepaid card from time to time for holding or using the certificate or card.
Illinois law also does not prohibit banks from charging lost/stolen card fees for cancellation fees. The Consumer Fraud and Deceptive Business Practices Act still exempts from its coverage “any gift certificates usable with multiple sellers of goods or services.” 815 ILCS 505/2SS. Two bills were introduced in the last legislative session that would have regulated reloadable gift cards by amending the Transmitters of Money Act (Senate Bill 2939 and House Bill 4451). However, we have defeated those bills for the time being — neither has passed out of committee in either the Senate or the House.
Card refunds
Whether you are required to refund a customer who decides to cancel a card may depend on your card agreement with the customer. If the card agreement allows customers to withdraw funds from an ATM, they may be able to withdraw all funds from the card via ATM.
Note that if the gift cards may be governed by MasterCard’s card association and that those rules may require that the bank allow customers to withdraw cash with their MasterCard gift cards. These rules may depend on your specific contract with MasterCard, but we can give you an idea of the rules that may govern based on a generic version of the MasterCard rules that is available online (see MasterCard rules). Chapter 8.9 governs cash disbursements, and those rules allow banks (the “Customer”) to establish a maximum limit of $5,000 for making cash disbursements (rule 8.9.2, p. 205). That limit can be lowered, provided that the limit:
- Is not less than USD 1,000;
- Is not less than the maximum cash disbursement amount established for any other acceptance brand at the office; and
- Applies only at those offices where the Customer can, if requested by the Corporation, demonstrate that a higher maximum would create a hardship.
Also note that the MasterCard rules generally prohibit charging a fee for cash disbursements, which may prevent the bank from charging a cancellation fee if the customer is cashing out a gift card (rule 8.9.3, p. 206).