Federal authorities are seeking $25 million in penalties from PayPal for a series of alleged abuses of its credit service, including charges of deceptive advertising and signing up customers for the service without their knowledge.
PayPal, without admitting or denying guilt, has agreed to the consent order, which is now pending before a judge in U.S. District Court in Maryland.
On Tuesday, the Consumer Financial Protection Bureau (CFPB) announced the terms of proposed settlement involving PayPal Credit, previously known as Bill Me Later. The CFPB is seeking $15 million in refunds to consumers and $10 million in penalties, along with improvements to the company’s policies and disclosures.
“PayPal illegally signed up consumers for its online credit product without their permission and failed to address disputes when they complained,” CFPB Director Richard Cordray said in a statement. “Online shopping has become a way of life for many Americans and it’s important that they are treated fairly. 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.”
Reached on Tuesday, a PayPal representative declined to comment on the matter directly, instead providing the following statement:
“PayPal Credit takes consumer protection very seriously. We continually improve our products and enhance our communications to ensure a superior customer experience. Our focus is on ease of use, clarity and providing high-quality products that are useful to consumers and are in compliance with applicable laws.”
The CFPB noted that consumers often sign up for PayPal Credit or its predecessor while making a purchase or creating a new account with the payments service, and, like other forms of credit, PayPal’s offering includes the potential to rack up interest and penalties. In its complaint, the agency charges that PayPal illegally signed up many consumers for its credit service without their knowledge, and then made a number of missteps in how it handled customer accounts.
Cordray explained that many of the surreptitious account enrollments came because PayPal set its credit program as the default funding method for its payment service, and consumers were unable to select another payment option.
“Tens of thousands of consumers who were attempting to enroll in a regular PayPal account, or make an online purchase, were signed up for the credit product without realizing it,” Cordray said in prepared remarks discussing the consent order, according to a script provided by the CFPB. “The company enrolled other consumers while they tried to cancel or close out of the application process. Many people ended up enrolled without knowing how or why, only to discover unexpectedly that they actually had an account when they learned of a credit-report inquiry, or when they received emails welcoming them to PayPal Credit, billing statements, or debt-collection calls.”
Among the other allegations detailed in the CFPB’s complaint, the agency is charging that PayPal reneged on promotional offers it made, such as the promises of $5 or $10 in purchase credit.
Additionally, the bureau alleges that PayPal offered abusive deferred-interest options, with consumers seeking to make payments in accordance with the terms that had been promised unable to do so because they could not get through to the company.
“Once enrolled, consumers encountered headache after headache,” Cordray said. “PayPal failed to post payments properly, lost payment checks and mishandled billing disputes that consumers had with merchants or the company itself. Numerous consumers reported that the company took more than a week to process payment checks. And even when customers were unable to pay because of website failures, they still got charged late fees.”
The $15 million in refunds that the CFPB is seeking would be disbursed to consumers who errantly signed up for PayPal Credit, mistakenly made a payment through the service or were hit with fees or deferred-interest payment resulting from “the company’s inadequate disclosures and flawed customer-service practices,” Cordray said.
The consent order would also require PayPal to offer clearer disclosures during enrollment and checkout, including the ability to opt for a different payment method and the assurance that the company would deliver on the promotional offers it promises.
