Feds slap PayPal with $25 million fine over credit service

PayPal illegally signed up customers for PayPal Credit, formerly known as Bill Me Later, without their permission, made it their default payment method, and then failed to address disputes when customers complained, said Consumer Financial Protection Bureau Director Richard Cordray in the agency's announcement Tuesday.

PayPal also failed to post payments properly, lost payment checks, and deceptively advertised promotional benefits it failed to honor, according to the agency.

Tens of thousands of customers experienced the issues, the agency said.

Under the proposed order, PayPal will pay $15 million to reimburse affected consumers, as well as a $10 million civil penalty. The company will also be required to take steps to improve its notices to consumers about their enrollment in the credit service and how it works.

PayPal did not immediately respond to comment.

PayPal's service offers users a line of credit that they can use to pay for purchases. People can make purchases using the credit as a form of payment, and then repay the debt over time. As is typical with other forms of credit like credit cards, users of the service could incur interest, late fees, and other charges.

PayPal has offered the service since 2008 to customers who have made purchases from thousands of online merchants, including PayPal owner eBay, the agency said.

EBay plans to spin PayPal off as an independent publicly traded company later this year.

PayPal's net payment volume for the first quarter of the year, or the total value of its transactions, increased by 18 percent to $61 billion.

Zach Miners covers social networking, search and general technology news for IDG News Service. Follow Zach on Twitter at @zachminers. Zach's e-mail address is zach_miners@idg.com