Earlier this year, New York delayed the effective date of its new law requiring card issuers to provide a grace period for using credit card rewards points that was slated to be effective later this week.
The delay means that the effective date of the new law is now December 10, 2023. Beginning on that date, credit card issuers must comply with the new requirements in Section 520-e of the general business law for modifying, canceling, closing, or terminating a credit card rewards program.
Pursuant to the new requirements, issuers must provide cardholders notice as soon as possible, and in any event within 45 days of cancellation, closure, termination, or modification. Cardholders then have 90 days after the notice date to use the rewards points, subject to availability of rewards. While “subject to availability” is undefined, we expect it to mean that a rewards program is winding down and certain rewards may no longer be available for redemption due to redemption by other cardholders and no additional inventory. Accordingly, the law makes it unlawful to have any “expiration, forfeiture or cancellation” of credit card rewards points prior to the end of the 90-day grace period.
“Modification” is defined as a change that:
- has the effect of eliminating points,
- reducing the value of points,
- affecting the ability of the holder to accumulate points,
- limiting or reducing rewards availability,
- limiting a holder’s use of points or the credit card account,
- otherwise diminishing the value of the rewards program or the credit card account to the holder, or
- changing the obligations of the holder with respect to the rewards program or credit card account.
We do not believe that, for example, swapping out merchant gift cards for another merchant’s gift cards would be a modification; however, eliminating airline ticket purchases from a travel card that marketed the use of points/miles for airline ticket purchases would likely be a modification.
The last three bullets of the definition of “modification” extend beyond rewards to the underlying credit card account. It is unclear when, for purposes of the definition, a change will be deemed to limit a holder’s use of the credit card account, diminish the value of the credit card account to the holder, or change the obligations of the holder with respect to the credit card account. When the NY Senate delayed the law’s effective date, it missed an opportunity to redraft and clarify the law to ensure issuers understand the compliance expectations.
Additionally, the new law provides that a cardholder, through an agreement with the issuer, cannot waive the new law’s protections.
The new law only provides exceptions to the notice and grace period requirements for cardholder fraud or cardholder misuse of the credit card account or any related rewards program. Unfortunately, “misuse” is undefined so issuers will need to work with their legal counsel to determine which cardholder actions constitute “misuse” for purposes of this law. Issuers should evaluate rewards program marketing materials and program terms prior to the new law’s effective date to determine whether any changes are appropriate to reduce the risk of triggering the application of this new law. At the same time, it would be prudent for credit card issuers to review their credit card rewards programs for UDAAP compliance. The CFPB regularly examines credit card issuers for compliance with UDAAP. We have assisted several credit card issuers in conducting such reviews.
Preemption challenges to the New York law by national and federal savings associations are unlikely to prevail. Section 1044 of Dodd-Frank, codified at 12 U.S.C. § 25b, provides that state consumer financial laws are preempted if:
(A) application of a state consumer financial law would have a discriminatory effect on national banks, in comparison with the effect of the law on a bank chartered by that State;
(B) the state consumer financial law prevents or significantly interferes with the exercise by the national bank of its powers; or
(C) the state consumer financial law is preempted by a provision of Federal law other than this title.
The New York law does not have a discriminatory effect on national banks compared to state chartered banks. Requiring issuers to extend a redemption period for rewards redemption will not significantly interfere with banking powers. While UDAAP/UDAP laws apply to rewards programs, no federal law preempts state laws on rewards programs.