Research and Statistics

PayPal lending arm fined for deception, abuses


PayPal Credit, formerly known as Bill Me Later, misled customers and ratcheted up their costs with unfair practices, consumer bureau charges

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A $25 million crackdown against PayPal’s online financing arm shows that consumers — and regulators — need to beware of newfangled services that don’t fit neatly under existing legal protections, consumer advocates said.

“New market entrants, just because they’re newcomers and use the Internet, doesn’t mean they’re excused from complying with consumer protections,” said Chi Chi Wu, staff attorney at the National Consumer Law Center.

PayPal Credit, formerly called Bill Me Later, offers line-of-credit financing online at thousands of merchants, including eBay. The financing is described as being like a credit card without the plastic, because a single credit line can be used to shop at multiple online stores.

According to regulators, the company misled and overcharged consumers, starting from the time they signed up for service though the billing process and handling of payments.

PayPal “lured in consumers to this product through deceptive advertising, signed up people without them knowing it and then mishandled billing disputes as they arose,” Consumer Financial Protection Bureau Director Richard Cordray said in a press call.

“Online shopping has become a way of life for Americans and it’s important that they be treated fairly,” he added.

Who can get refunds
Under a consent order, PayPal will pay a $10 million fine to the agency and $15 million in refunds to consumers. To be eligible for a refund, you must have paid late fees or interest at some time between Jan. 1, 2011 and May 1, 2015. You must have paid as a result of confusion with the account enrollment process, or have been charged deferred interest on an account with multiple deferred-interest balances. Deferred interest programs charge no interest only if the balance is paid within a set time. The consent order faces review by a federal judge in Maryland.

Tens of thousands of people were enrolled in the credit account without realizing it, Cordray said. The CFPB hasn’t identified the individual consumers due refunds.

“Consumers do not need to take any action,” CFPB Deputy Enforcement Director Jeffrey Ehrlich said. “The bureau will approve a payment process that PayPal will then undertake.”

PayPal Credit attracted some customers by advertising discounts or deferred interest promotions that it didn’t honor, the CFPB said. Others were enrolled without their knowledge as they tried to sign up for a standard PayPal account or buy something online. The default payment method was set to use PayPal Credit, making it difficult to use alternatives such as a linked credit card or checking account, the consumer bureau said.

Once customers were enrolled, PayPal would sometimes run up their late fees and interest charges by mishandling their payments, according to the government’s court complaint. The lender also ignored consumers’ instructions about how to allocate payments to deferred credit balances, triggering charges for deferred interest that consumers were unable to avoid. Interest rates were typically 19.99 percent, according to court papers.

PayPal statement
PayPal issued a statement contradicting the CFPB’s allegations. The company said it “takes consumer protection very seriously” and offers high-quality products “that are in compliance with applicable laws.” PayPal communications head Amanda Miller did not say whether the company plans to dispute the CFPB charges.

Much of the company’s conduct, such as handling payments to trigger deferred interest charges, is prohibited under the Credit CARD Act of 2009, Wu said.  “Should this [financing] be covered under credit card laws?” Wu said. The consumer bureau filed its legal action under the broader Consumer Financial Protection Act, alleging unfair, deceptive and abusive conduct. The more specific Credit CARD Act sets out a detailed framework of practices that lenders must comply with.

Bill Me Later was founded in 2000 and bought by PayPal owner eBay in 2008. EBay has separated PayPal as a stand-alone company and says it expects to complete the spinoff sometime later in 2015. EBay revealed in 2013 that the CFPB was investigating Bill Me Later.

PayPal’s $10 million fine is to be paid into the consumer protection bureau’s civil penalty fund, which pays for financial literacy programs and compensates victims of unfair financial practices. The company is barred from taking tax write-offs for the penalty or seeking reimbursement from insurance.

See related:Using PayPal? 10 tips to stay safe

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