By Jenna Greene, from The National Law Journal

PayPal to pay $25M to settle allegations the company illegally signed up consumers.

When are a company’s actions not just unfair and deceptive, but also abusive? A new case against PayPal Inc., which will pay $25 million to settle charges that the company illegally signed up consumers for unwanted credit, sheds light on a murky legal standard created by the Dodd-Frank Act.

The Consumer Financial Protection Bureau on Tuesday filed a lawsuit and proposed consent decree against PayPal in Maryland federal district court. The agency alleged the online payment processor deceptively advertised a product known as PayPal Credit, signed up consumers without their permission, made them use PayPal Credit for purchases rather than their preferred method of payment and mishandled billing disputes.

“This kind of conduct has no place in the consumer financial marketplace,” Richard Cordray, the consumer protection bureau’s director, told reporters Tuesday.

In its complaint, the agency listed six charges against PayPal, including one that details the conduct the CFPB said was “abusive.” The agency has declined to define abusive conduct—a standard that’s apart from long-established consumer protection terms “unfair” and “deceptive”—through any regulation.

Instead, the CFPB is laying out what it means one enforcement action at a time. For lawyers and their clients, and even members of Congress, understanding the parameters of abusive practices has been unsettling.

“How can companies comply with this law?” Rep. Sean Duffy, R-Wisconsin, asked Cordray at a 2012 oversight hearing, calling it “a subjective standard with no bright line.”

The CFPB brought its first action alleging abusive conduct against American Debt Settlement Solutions Inc. in 2013. Since then, the agency has filed another half-dozen cases. The PayPal settlement contains the largest civil penalty in an abusive case: a $10 million fine, on top of $15 million in consumer refunds.

The abusive aspect of the PayPal case “related to how [PayPal] dealt with consumers in applying payments,” CFPB Deputy Enforcement Director Jeffrey Ehrlich said on the conference call with reporters Tuesday. The agency “found under the facts that the company had taken unreasonable advantage of consumers’ inability to protect themselves.”

PayPal Credit customers, according to the agency’s complaint, “could not clearly understand how payments were applied to deferred-interest promotions.” PayPal and merchants sometimes offered customers no interest for six or 12 months on specific purchases.

That meant customers could have some pending charges that were interest-free, while others were accruing interest. The problem arose when consumers wanted to direct their payments to the charges that were racking up interest while leaving the freebies alone.

According to the CFPB, PayPal said this could be done. But in practice, the agency alleged, consumers who wanted to make such a request were unable to reach a customer-service representative. The CFPB also said consumers were “often” given misinformation about how much they needed to pay to avoid interest charges, and that payments were often misallocated.

The result, according to the consumer bureau, is conduct that was abusive, rather than unfair or deceptive.

In addition to the monetary penalty, the proposed consent decree requires PayPal to make the terms of all promotional offers clear, and to ensure that the “consumer receives at least the benefit of the promotional offer as represented by the merchant.”

Ballard Spahr partners Robert Scott and Christopher Willis represented PayPal.

“PayPal Credit takes consumer protection very seriously,” PayPal spokeswoman Amanda Miller said in a written statement. “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.”

IMAGE: PayPal headquarters

For more on this story go to: http://www.nationallawjournal.com/id=1202726875917/Why-the-CFPB-Found-PayPals-Conduct-Abusive#ixzz3amdCLu1d