November 16, 2009 / 4:02 PM / in 8 years

UPDATE 2-Fed proposes crackdown on excessive gift card fees

(Adds Schumer quote)

By Corbett B. Daly

WASHINGTON, Nov 16 (Reuters) - The U.S. Federal Reserve stepped up its consumer protection efforts for the second time in less than a week on Monday, proposing to limit the ability of gift card issuers to impose excessive fees.

The Fed proposed banning any fees for the first year, and limiting gift card issuers to one fee per month if the card is not used for at least a year. It also requires clear disclosure to the consumer about possible penalties.

Last week the U.S. central bank banned overdraft fees on banks’ automated-teller-machine and debit-card transactions unless consumers have actively selected an overdraft protection service.

“The rules would protect consumers from certain unexpected costs and would require that gift card terms and conditions be clearly stated,” the Fed said in a statement.

The rules would also prohibit the cards from expiring before five years have passed from the date the card was issued or five years from the date additional funds were added to the card. The rules would be not be implemented until August 2010.

Gift cards are essentially an interest free loan to the issuer from the purchaser.

The Fed has come under fire in recent months for not taking a more active role in its duty to protect consumers.

The Obama administration has proposed creating a separate Consumer Financial Protection Agency that would focus exclusively on consumer issues. Congress still has to approve its creation.

The Fed has stepped up consumer protection efforts since that agency was proposed. In September, it proposed credit card rules that would shield customers from costly fees.

It also said it would investigate consumer complaints against financial companies that are not banks and barred mortgage brokers from earning more when they sell high-cost loans.

Senate Banking Committee Chairman Christopher Dodd has proposed stripping the Fed of its authority to regulate banks, calling the institution’s performance as a regulator an “abysmal failure.”

Senator Charles Schumer, a New York Democrat, said the proposal is a step in the right direction but should be implemented in time for the holiday shopping season.

“We will continue to push the Fed to speed up the effective date so that we end abuses by gift card issuers as soon as possible,” the New York Democrat said in a prepared statement.

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