On May 19, 2015, the Consumer Financial Protection Bureau ("CFPB" or "Bureau") filed a complaint and proposed consent order against PayPal, Inc. and its subsidiary Bill Me Later, Inc. (collectively, "PayPal") in the U.S. District Court for the District of Maryland. If approved by the court, the settlement will require PayPal to pay $15 million in redress to consumers and a $10 million civil money penalty. Although the case is not the largest settlement in CFPB history, it is interesting for at least two reasons: (1) it sheds important new light on the meaning of "abusive" acts and practices, which is slowly being defined through the CFPB's enforcement actions1; and (2) it continues a recent trend of filings in federal court instead of in an administrative proceeding.
PayPal Credit offered deferred-interest loans for online purchases
PayPal Credit (formerly called Bill Me Later) is a line of credit that PayPal offers to consumers making online purchases from eBay and other merchants. Chief among the problems cited by the CFPB with regard to PayPal Credit is that consumers were often enrolled in PayPal Credit without their consent, and/or did not receive promised promotional offers when they did enroll. The CFPB charged that these were unfair (and, with regard to the unrealized promotional offers, deceptive) acts or practices. In addition, the CFPB charged that the manner in which PayPal applied payments constituted an "abusive" act or practice. It is this aspect of the consent order that is most interesting and illuminating.
With each new purchase, according to the CFPB's complaint, consumers who paid with PayPal Credit were frequently offered a deferred-interest period, which allowed consumers to avoid paying any interest so long as they paid off the balance before the end of the period and did not make any late payments. Critically, the "deferred-interest periods for the transactions would expire on different dates, depending on the date of the initial transaction. Consumers could thus have multiple deferred-interest balances." The Bureau alleged that, "Numerous consumers believed they made a payment large enough to pay off purchases with expiring promotions, but the Defendants allocated payments in a way that resulted in the consumer incurring deferred interest." The Bureau alleged that PayPal engaged in abusive practices by making it difficult for consumers who took out deferred-interest loans to avoid paying interest.