By TED CARTER
Paypal Inc. is facing a $10 million fine and restitutions of $15 million for signing up users for a Paypal credit card without their knowledge, the U.S. Consumer Financial Protection Bureau says.
The global Internet payments and money transfer company is the latest entity in the last couple of weeks to draw the wrath of the CFPB, a watchdog agency created through the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.
The CFPB said last week it ordered Verizon and Sprint to pay a combined $120 million in reimbursements and $38 million in federal and state fines for inserting unauthorized third party charges into customer bills.
A few days previous, the agency announced it would seek tens of millions of dollars in reimbursements and a fine of $7.5 million from Birmingham’s Regions Bank, the Mississippi market leader, for illegal overdraft practices. The Bureau said Regions’ executives ignored a warning from within the multi-state banking company two years ago that its overdraft practices could be illegal.
In its action against Paypal and the California company’s credit card product Paypal Credit, the CFPB alleges the Internet company lured in consumers to the credit card with deceptive advertising. It signed up people without them knowing it, and then mishandled billing disputes when they arose, the CFP says.
“This kind of conduct has no place in the consumer financial marketplace,” CFPB Director Richard Cordray said in a press statement detailing the proposed consent order.
Under the order, PayPal would return the $15 million that it illegally took from consumers and it would pay a $10 million penalty for its wrongful actions, he said.
The order also requires PayPal to improve its disclosures and procedures, Cordray said.
“The company must now give clear disclosures during the enrollment and checkout process so that consumers know what is happening and that they can use a different payment method if they so choose,” he said. “The company must ensure that customers receive the promotions advertised and that payments are credited in a timely manner. “
PayPal offers PayPal Credit to give consumers a way to pay for online and other purchases. As with other forms of credit, consumers make purchases using it as a form of payment and then repay the debt over time. Consumers using PayPal Credit may incur interest, late fees, and other charges, just as they would with other credit cards.
Consumers often enroll in PayPal Credit while purchasing a good or service online or while creating a PayPal account, the CFPB noted.
PayPal has offered PayPal Credit to consumers since 2008 for making purchases from thousands of online merchants, including eBay. The CFPB alleges that many consumers attempted to enroll in a regular PayPal account, or make an online purchase, were signed up for the credit product without realizing it.
The company also failed to post payments properly from tens of thousands of consumers, lost payment checks, and mishandled billing disputes that consumers had with merchants or the company, the CFPB says.
Specifically, the CFPB alleges that the company:
» Failed to honor advertised promotions, such as a $5 or $10 promised credit toward consumer purchases.
» Offered consumers limited-time, deferred-interest promotions, and that PayPal purported to let consumers pick how payments would be applied to these promotional balances. But consumers who attempted to contact the company to get more information or request to apply their payments to promotional balances often could not get through to the company’s customer service line or were given inaccurate information. Many such consumers were hit with deferred-interest fees that, due to the company’s conduct, they could not avoid.
» Automatically enrolled many consumers in PayPal Credit when those consumers signed up for a regular PayPal account or making purchases. The company enrolled other consumers while they tried canceling or closing out of the application process. Many consumers ended up enrolled in PayPal Credit without knowing how or why they were enrolled. They discovered their accounts only after finding a credit-report inquiry or receiving welcome emails, billing statements, or debt-collection calls for amounts past due, including late fees and interest.
» Automatically set or preselected the default payment method for all purchases made through PayPal to PayPal Credit. This meant consumers used PayPal Credit even when they intended to use another method of payment such as a linked credit card or checking account. Other consumers were unable to select another payment method, finding that their purchases were charged to a PayPal Credit account even when they affirmatively selected another payment. Many of these consumers incurred late fees and interest because they did not know they had made purchases through PayPal Credit.
» Failed to post payments or failed to remove late fees and interest charges from consumers’ bills even when the consumers were unable to make payments because of website failures. Numerous consumers reported that the company lost payment checks or took more than a week to process checks.
» Mishandled consumers’ billing disputes and made billing errors.
PayPal Inc.’s media office did not respond to an email seeking comment on the CFPB’s allegations and the proposed consent order.
Created in 1998, PayPal went public in 2002 and was acquired by eBay later that year.