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What You Need To Know About The PayPal Settlement

What is behind the $25 million settlement PayPal entered into with the Consumer Financial Protection Board?

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So maybe you’ve heard about the complaint and settlement that the Consumer Financial Protection Bureau filed in Maryland district court against PayPal for deceptive practices, and the $25 million PayPal has agreed to pay in restitution and fines. But what is really going on behind the settlement?

Complaints — in the colloquial, not-legal sense — have been floating around the internet for what feels like forever. There are even entire websites (aboutpaypal.org and paypalsucks.com) dedicated to collecting and archiving the consumer frustration with the service. The stories? Well, some of them are real doozies — accounts frozen, thousands of dollars missing from accounts, being signed up for credit accounts without permission, and late fees arbitrarily assessed. The horror stories go on and on, and really start to make you question if buying anything on eBay is worth the hassle.

As most people who spend even a modicum of time doing online shopping are aware, since 2008, PayPal has offered a credit option (known as “Bill Me Later,” and later as “PayPal Credit”) that is designed to function as a credit card, sans the plastic. This product is at the center of of the CFPB’s complaint against PayPal.

“But Kathryn,” you think, “I don’t use PayPal Credit. I only use funds I have deposited into my PayPal account.” Are you sure about that? Because one of the allegations is that customers were signed up without their knowledge and when trying to use other payment options, the transactions got posted to the PayPal Credit account. Which brings us to the six counts in the CFPB’s complaint.

  1. Enrolling consumers in PayPal Credit without their consent or authorization;
  2. Customers that attempted to use other payment methods instead had their transactions funneled to PayPal Credit;
  3. Failure to accept, process, or post payments made to PayPal Credit resulting in late fees and finance charges;
  4. Straight up false advertising, i.e., saying a consumer was eligible for 6 months interest free, but not actually giving said consumer that deal;
  5. Not providing information about the way in which payments were allocated between standard balances and balances at a promotional rate (such as deferred interest for certain purchases). Even when customers requested particular allocations, PayPal often ignored the request;
  6. Unfair billing dispute practices.

While none of these sound great, on count 5, the practices surrounding deferred interest or promotional balanced, the CFPB describes the conduct as “abusive.” The National Law Journal reports why this standard is key.

In its complaint, the agency listed six charges against PayPal, including one that details the conduct the CFPB said was “abusive.” The agency has declined to define abusive conduct—a standard that’s apart from long-established consumer protection terms “unfair” and “deceptive”—through any regulation.

Instead, the CFPB is laying out what it means one enforcement action at a time. For lawyers and their clients, and even members of Congress, understanding the parameters of abusive practices has been unsettling.

“How can companies comply with this law?” Rep. Sean Duffy, R-Wisconsin, asked Cordray at a 2012 oversight hearing, calling it “a subjective standard with no bright line.”

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So the behavior here was particularly egregious. Due to a particular promotion, a customer might have two balances, one that was interest free, and another that was a standard (interest accruing) balance. PayPal told customers they could decide how payments were divided between these balances, but the reality was far different. There were misallocations of funds, misinformation provided to consumers about the minimum payment due, and trying to get ahold of a customer service representative was frequently a futile quest.

For their part, PayPal now seems contrite over the matter, and in an email to Bloomberg, a spokesperson for the company seemed to say all the right things.

Amanda Miller, a spokeswoman for PayPal, said the company “takes consumer protection very seriously.”

“We continually improve our products and enhance our communications to ensure a superior customer experience,” Miller said in an e-mail. “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.”

And what about the PayPal users that got screwed? If you signed up for PayPal late one night because you couldn’t live without a mint condition Legs the Frog original Beanie Baby (and OMG, the eBay auction’s ending in 5… 4… 3…) fear not, of the $25 million settlement, $15 million will be used to refund affected customers.

Read the full complaint on the next page.

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Why the CFPB Found PayPal’s Conduct ‘Abusive’ [National Law Journal]
PayPal Will Pay $25 Million to Resolve CFPB Bill Me Later Claims [Bloomberg]

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