EBay Inc. (NASDAQ: EBAY) is facing a probe by the Consumer Financial Protection Bureau (or, CFPB) regarding aspects of PayPal’s Bill Me Later scheme. PayPal offers Bill Me Later as a line of credit available to approved customers who can then make purchases on eBay, or other merchants accepting PayPal.
In an SEC filing October 18, eBay disclosed how it operates the Bill Me Later program. Bill Me Later is not a bank, or other institution authorized to make loans, according to the filing. For the program to work, a financial institution forwards the money owed by the purchaser to the seller. EBay then purchases the loans, while the financial institution owns the accounts.
Bill Me Later works with Comenity Capital Bank and WebBank, both of which are chartered in Utah. The filing also details a pending lawsuit against Bill Me Later in the U.S. District Court. The suit originates in California and claims that in transactions, Bill Me Later acts as the true lender, violating several California laws.
EBay state in the report the “plaintiffs’ allegations are without merit” and its intention is “to defend ourselves vigorously.” EBay does acknowledge that the law may not ultimately come down on their side, and a decision against Bill Me Later may result in a new system for operations, payments by the company to other parties, or a reduction of fees, all of which the company believes could “adversely affect business.”
CFPB is investigating this program because it is operating in a manner that is similar to how high interest lenders finagled situations to avoid complying with state laws in the late 1990s. Lenders were getting away with not following regulations, which is why, according to National Consumer Law Center lawyer Margot Saunders, state attorney generals cracked down on the practice.
Saunders told Bloomberg that when evaluating this kind of situation, “[t]he key issues are who have the risk of loss and who has the primary income. The banks typically arrange these deals by having no risk at all.”
Bill Me Later also gained unwanted attention from CFPB because of its high interest rates and fees. In PayPal’s explanation of the program, interest rates are set at 19.99 percent annually. Late payments also incur a fee up to $25 on the first offense, $35 for ensuing late payments. No interest or fees will be charged if payments are fulfilled before the due date.
In this sense, Bill Me Later is also operating as a “deferred interest product” as defined by the CFPB in a report dated October 1. Failure to pay on time with Bill Me Now creates a scenario like private label, promotional credit cards. According to the report by the CFPB, the “offers retroactively assess and charge interest if the balance is not paid in fully by a specific date.” These products, the report says, pose a dangers because they “can sometimes be more expensive than revolving the same balance on their existing card.”
Backlash by users concerning what they see as unfair practices and fees is visible. Over a three year period, there have been 949 complaints closed with the Better Business Bureau (or, BBB). Of those 949, 729 revolved around “Billing and Collection” issues.