Why it matters

In a not-unexpected announcement, the Consumer Financial Protection Bureau (CFPB) revealed a $25 million settlement with PayPal resolving allegations that the company illegally signed consumers up for its online credit product. The CFPB alleged that PayPal deceptively marketed and illegally registered consumers in PayPal Credit (formerly known as Bill Me Later), a line of credit that could be used when making an online payment. But the CFPB went further, and charged that PayPal’s conduct was not just deceptive but abusive, asserting that the terms of PayPal Credit relating to deferred-interest promotions were unclear or consumers were provided with misinformation, and as a result consumers “could not protect their interests” in using the product, which Dodd-Frank establishes as abusive. The CFPB has not defined abusive behavior by regulation, and instead the parameters of what the CFPB may view as abusive is slowly developing through actions like this against PayPal. But this approach, where allegations of abusive behavior turn on numerous facts, continues to leave financial services providers uncertain as to what practices the CFPB may claim are abusive. Industry should also take note that this was the Bureau’s first public action against an online payments company. “Online shopping has become a way of life for many Americans and it’s important that they are treated fairly,” CFPB Director Richard Cordray said in a statement. “The CFPB’s action should send a signal that consumers are protected whether they are opening their wallets or clicking online to make a purchase.”

Detailed discussion

The recently announced $25 million settlement between the Consumer Financial Protection Bureau (CFPB) and PayPal, Inc., began years ago.

In 2013, eBay—which acquired PayPal for $1.5 billion in 2002 and Bill Me Later, Inc., in 2008 for $945 million, which later became known as PayPal Credit—revealed in a filing with the Securities and Exchange Commission (SEC) that the CFPB had launched an investigation into the Bill Me Later feature.

While the Bureau declined to take public action at that point, the company disclosed in SEC filings in August 2014 and again in January 2015 that the CFPB made additional Civil Investigative Demands requesting testimony and documents from PayPal about Bill Me Later.

Ending all the speculation, the CFPB filed a complaint and proposed consent order in federal court, alleging that PayPal deceptively advertised promotional benefits that the company did not honor, signed users up for credit without their permission, forced them to use PayPal Credit in lieu of other options, and mishandled billing disputes.

Consumers can use PayPal Credit to pay for online and other purchases as it operates as a line of credit, incurring interest, late fees, and other charges. Enrollment in PayPal Credit typically occurs when consumers are purchasing a good or service online or when creating a PayPal account, the CFPB explained.

The Bureau alleged that since 2008, “many consumers” were signed up for PayPal Credit without realizing it, sometimes during the process of enrollment or while making a purchase. Some consumers only found out after a credit report inquiry or receiving a debt collection call for amounts past due.

According to the complaint, the company automatically set or preselected PayPal Credit as the default payment method for all purchases made through PayPal so that consumers were unable to select another payment method. Late fees and interest were charged to some consumers who were unaware they had made a purchase with PayPal Credit, the CFPB said.

PayPal also failed to honor advertised promotions—such as a $5 or $10 promised credit toward consumer purchases—and abusively charged consumers deferred interest. In some instances, the Bureau said, PayPal offered consumers limited time, deferred interest promotions and said users would have the chance to pick how payments would be applied to the promotional balances. But consumers who attempted to follow up with the company or make a request about how to apply their payments were unable to make contact or given inaccurate information leading to deferred interest fees. The CFPB asserted that consumers were therefore unable to protect their interests in selecting and using PayPal Credit, which Dodd-Frank defines as an example of “abusive” conduct.

Other problems with the product: The company failed to properly post payments (sometimes taking more than a week to process a check), lost payment checks, neglected to remove late fees and interest charges due to website failures, and mishandled billing disputes, the CFPB said.

To settle the allegations, the parties agreed to a consent order. PayPal will reimburse affected consumers to the tune of $15 million as well as improve its consumer disclosures for PayPal Credit enrollment and use of the product. The company will also pay $10 million to the CFPB’s Civil Penalty Fund.

To read the complaint in CFPB v. PayPal, Inc., click here.

To read the proposed consent order, click here.