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The US consumer finance watchdog has ordered PayPal to pay $25 million in refunds and fines, stemming from the regulator's claims the payment company illegally signed up users for PayPal Credit, its online credit service.

The Consumer Financial Protection Bureau said Tuesday PayPal deceptively advertised promotions for PayPal Credit, formerly known as Bill Me Later, which is a line of credit consumers can use to pay for online and other purchases. The company also signed up customers for credit without their permission, directed users to its PayPal Credit instead of their preferred payment method and mishandled billing disputes, the CFPB claimed in a US district court complaint.

"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," CFPB Director Richard Cordray said in a statement.

The ongoing CFPB investigation was previously disclosed in prior financial statements eBay, PayPal's parent, filed with US regulators.

Under a proposed settlement, PayPal will hand over $15 million in refunds to consumers and another $10 million in civil penalties. The company also will have to improve its disclosures for PayPal Credit. PayPal neither admitted nor denied any of the complaint's allegations, and the settlement doesn't constitute a finding that the company violated any laws.

Consumers who are eligible for payments don't need to take any action; they will be contacted by PayPal, the CFPB said.

The settlement comes at a sensitive time for PayPal, a San Jose, Calif., company that processes billions of dollars in payments through its payment networks, including PayPal Credit and Venmo. The company is set to split from its parent, eBay, later this year and become an independent publicly traded firm. The separation will bring increased attention to both eBay and PayPal, so any complications within either company will face heightened scrutiny from investors.

"PayPal Credit takes consumer protection very seriously," a PayPal spokesperson said in a statement Tuesday. "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. "

According to a PayPal source close to the matter, the government investigation was based on it receiving a "very small amount" of customer complaints, totaling 0.01 percent of PayPal Credit's accounts. The source also said PayPal improved its consumer disclosures involving PayPal Credit prior to the investigation.

PayPal has offered PayPal Credit since 2008, allowing customers to make purchases on credit from thousands of merchants, including eBay. The CFPB alleged many consumers were trying to enroll in a regular PayPal account to make online purchases but signed up for the credit service instead without realizing it. That meant they could incur interest and late fees on their purchases, just as with any other line of credit. The company also failed to post payments properly, lost payment checks and mishandled billing disputes, the CFPB said, claiming tens of thousands of consumers experienced these issues.

The regulator also claimed that PayPal abusively charged customers in certain cases, hitting customers with deferred-interest fees that could've been avoided. The PayPal source said the settlement doesn't require any changes to PayPal's deferred-interest services.

In August 2013 and January 2014, the CFPB contacted eBay, PayPal and its subsidiary Bill Me Later, requesting testimony and other information on the operations of PayPal Credit. eBay disclosed that these requests were made in past financial reports to the Securities and Exchange Commission. eBay had said it was cooperating with the CFPB.

Once the settlement is approved by a judge, PayPal will have two months to put together a written plan identifying the consumers affected, the total money paid to each of them and the way it plans to pay them. According to the settlement plan, affected customers who are eligible for these payments include certain people identified by PayPal and the CFPB who paid late fees or interest or incurred deferred-interest charges, or had a payment processed through PayPal Credit without understanding they were using PayPal Credit.