Digital Transactions Authoritative, insightful and timely information for payments professionals
By Jim Daly
PayPal Inc. says the federal Consumer Financial Protection Bureau might sue it over its credit products by June 30. The possible lawsuit would stem from an investigation dating to 2013, when the CFPB in August of that year filed so-called civil investigative demands (CIDs) for documents, testimony and other information from PayPal and its parent company eBay Inc. about its credit operations.
San Jose, Calif.-based PayPal, the payments unit of online marketplace eBay, disclosed the CFPB’s investigation in the Securities and Exchange Commission document it filed last week that gave more details about its planned spin-off from eBay later this year.
The CFPB filed more CIDs in January 2014. The investigation relates “primarily to the acquisition, management, and operation of our PayPal Credit products, including online credit products and services, advertising, loan origination, customer acquisition, servicing, debt collection, and complaints handling practices,” the SEC filing says. “The CIDs could lead to an enforcement action and/or one or more significant consent orders, which may result in substantial costs, including legal fees, fines, penalties and remediation expenses.”
PayPal said it is cooperating with the CFPB and is in settlement talks with it. Still, the CFPB has “indicated that a lawsuit could be filed against us as early as the second quarter of 2015,” the filing says. “Resolution of these inquiries could require us to make monetary payments to certain customers, pay fines and/or change the manner in which we operate the PayPal Credit products, which could adversely affect our business.”
An eBay spokesperson said in a brief emailed statement that “we take consumer protection very seriously and we are cooperating with the CFPB.” A CFPB spokesperson tells Digital Transactions News that the agency does not comment on its investigations.
PayPal got into the lending business in 2008 when eBay bought the transactional lender Bill Me Later Inc. for $945 million. Bill Me Later provided applicants with instant credit based on the transaction, not a traditional credit card account. Now known as PayPal Credit, the lending operation charges no annual fee to consumers and offers no-interest promotional rates. The standard interest rate is 19.99%. Receivables are funded by PayPal’s partner lender, Comenity Capital Bank, a subsidiary of Plano, Texas-based processor Alliance Data Systems Corp.
In addition to overseeing debt-collection practices, the CFPB, a creation of 2010’s Dodd-Frank Act, can regulate PayPal’s businesses in a number of ways. The CFPB has some authority to enforce Regulation E of the Electronic Fund Transfer Act, which governs bank-account withdrawals, debit cards, and ATM and point-of-sale monetary transfers
Last December, PayPal became subject to a new regulation that empowers the CFPB to examine companies that provide more than 1 million international money transfers annually. The filing says PayPal expects its first examination under that rule this quarter. Federal law now requires more disclosures by international money transmitters and gives consumers more error-resolution and cancellation rights. And a sweeping prepaid card rule the CFPB proposed last November would apply to PayPal, according to the filing.
Last week the CFPB named four merchant acquirers as defendants in a lawsuit against alleged fraudulent debt collectors.
