Why it matters

A recent filing by eBay with the Securities and Exchange Commission (SEC) included some litigation news: the company may be facing a lawsuit from the Consumer Financial Protection Bureau (CFPB) over the lending services offered by its PayPal Credit unit (PayPal Credit was formerly known as Bill Me Later). The company revealed that the Bureau has been investigating PayPal Credit since 2013, including its “online credit products and services, advertising, loan origination, customer acquisition, servicing, debt collection and complaints handling practices.” The credit arm—which offers same-day credit to consumers making online purchases—has received multiple Civil Investigative Demands (CIDs) from the Bureau and could be facing an enforcement action and/or a consent order prior to June 30, 2015. Any CFPB enforcement action could have implications for other online lenders, including those relying on bank partner relationships, as PayPal Credit does.

Detailed discussion

In October 2013, eBay revealed in a filing with the Securities and Exchange Commission (SEC) that the Consumer Financial Protection Bureau (CFPB) had launched an investigation into the company’s Bill Me Later feature.

While the Bureau declined to take public action at that point, the company reported in an April SEC filing that in August 2014 and January 2015 the CFPB made additional Civil Investigative Demands (CIDs) requesting testimony and documents related to “the acquisition, management, and operation of our PayPal Credit products, including online credit products and services, advertising, loan origination, customer acquisition, servicing, debt collection, and complaints handling practices.”

The company said it has worked with the Bureau but could be facing a lawsuit as soon as the second quarter, with possibilities ranging from fines, penalties, legal fees, and other substantial costs.

“We are cooperating with the CFPB in connection with the CIDs and exploring whether we may be able to resolve these inquiries,” the company said in the filing. “Resolution of these inquiries could require us to make monetary payments to certain customers, pay fines and/or change the manner in which we operate the PayPal Credit products, which could adversely affect our financial results and results of operations.”

eBay acquired PayPal Inc. for $1.5 billion in 2002. In 2008, eBay purchased Bill Me Later, Inc., for $945 million, which became known as PayPal Credit. The service offers instant credit for customers engaged in online transactions and charges no annual fee, offering promotional rates with no interest; the standard interest rate is 19.99 percent with the possibility of additional fees.

The company faced a class action from consumers after the acquisition of Bill Me Later contending the purchase created a monopoly for the online bidding site. A subsequent civil suit claimed that eBay and Bill Me Later violated consumer protection laws by charging usurious interest rates and illegal penalty fees. A Utah federal court judge dismissed the suit last year, finding the claims were preempted by the Federal Deposit Insurance Act.

A potential lawsuit isn’t the only problem eBay may have with the CFPB. The filing also noted that PayPal—which will separate from eBay to form two publicly traded companies later this year—faces increased regulatory oversight as a result of new Bureau regulations on companies that make at least one million international money transfers annually. An initial exam by the CFPB is expected in the current quarter. In addition, the Bureau’s prepaid card rule proposed by the Bureau last November would also apply to PayPal.

To read eBay’s SEC filing, click here.