PayPal to pay $25M in refunds and penalties

Kevin McCoy | USA TODAY

Online payments company PayPal illegally enrolled customers for an online credit program without their permission, a federal consumer agency charged Tuesday.

The Consumer Financial Protection Bureau alleged in a federal lawsuit that PayPal also used deceptive advertising for its PayPal Credit program, previously known as Bill Me Later.

The company, the electronic payments unit of eBay (EBAY), required its customers to use PayPal Credit instead of their preferred payment method, and also mishandled billing disputes, the CFPB charged.

PayPal and the CFPB agreed to a consent order that would require the company to return $15 million to customers who were affected by the alleged practices. The firm also must pay a $10 million penalty to the consumer agency. The consent order requires approval from a Maryland federal court judge.

"This kind of conduct has no place in the consumer financial marketplace," said CFPB Director Richard Cordray in a media phone conference announcing the action.

PayPal, which neither admitted nor denied the government allegations, said its credit program "takes consumer protection very seriously."

"We continually improve our products and enhance our communications to ensure a superior customer experience," said company spokeswoman Amanda Miller. "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."

Along with enrolling customers in PayPal Credit and making them use the service for payments, the CFPB said PayPal:

• Failed to honor advertised promotions, such as a $5 or $10 promised credit toward consumer purchases.

• Abusively charged consumers deferred interest fees that company practices made difficult to avoid.

• Neglected to post payments or remove late fees and interest charges from bills even when website failures left customers unable to make payments.

• Mishandled customer disputes about payments.

The proposed consent order would require PayPal to improve its consumer disclosure policies for PayPal Credit and not use the program as the payment method unless specifically authorized by customers.