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Proposed law would tighten rules on gift cards

(Moneywatch) As CBS MoneyWatch's Kathy Kristoff has pointed out, often onerous fees and time limits can make gift cards a terrible gift. A new bill in the Senate seeks to change that.

Gift cards are a type of pre-paid card. Visa, MasterCard, American Express and Discover all issue pre-paid cards that look like credit cards but have far fewer legal protections. For one thing, gift cards may expire if they're not used within five years. Customers also may be charged "dormancy," for lack of use, or maintenance fees as high as $3 a month. Finally, even companies that have gone bankrupt can currently continue to sell gift cards.

The Gift Card Consumer Protection Act would bar all of those practices. The law is sponsored by Sen. Richard Blumenthal, D-Conn., who got a similar law passed in Connecticut when he was serving as the state's attorney general.

"This bill bars absolutely draconian deadlines and abusive fees and charges that unfairly confiscate consumer gift card cash," Blumenthal said in a statement. "Gift card companies fatten their profits and shrink consumer wallets with exploitative expiration dates and petty, underhanded junk fees."

Blumenthal is not the only one trying to rein in the $100 billion gift card industry. The federal Consumer Financial Protection Bureau is also weighing new regulations for pre-paid cards.

"We are considering how best to extend protections to prepaid cardholders in the event that a card is lost or stolen, unauthorized charges are made or a processing error results in an incorrect charge amount," CPFB director Richard Cordray said earlier this year. "Of course, even if the funds are secure, a prepaid card can still be risky for consumers in other ways. If you do not know the card's fee structure, it is easy to rack up charges unknowingly."

The increasing popularity of pre-paid and gift cards suggests a need for regulation. More than 81.1 percent of shoppers will purchase at least one gift card this holiday season, spending an average of $156.86, according to a survey by the National Retail Federation. This is the highest amount in the survey's 10-year history.

A new study by CEB TowerGroup projects $110 billion in gift card sales by the end of 2012, an increase of 10 percent over last year and up 34 percent since 2006.

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