EBay Inc. is facing a probe by the Consumer Financial Protection Bureau (CFPB) over a loan program that mimics a structure used by high-interest lenders to evade state rules before the practice was stamped out by regulators.
The program, called Bill Me Later, is a service of the online marketplace’s PayPal unit that relies on Salt Lake City, Utah-based Comenity Capital Bank to make loans that are then purchased and managed by EBay, according to regulatory filings. Under federal law, banks can lend in any state without being licensed there or complying with local interest rate caps.
So-called payday lenders used similar arrangements to avoid state rules before regulators and state attorneys general ended the practice, said Margot Saunders, a lawyer with the National Consumer Law Center.
“The key issues are who has the risk of loss and who has the primary income,” Saunders said in an interview. “And the banks typically arrange these deals by having no risk at all.”
San Jose, California-based EBay disclosed the CFPB probe on Oct. 18, saying it had received requests for information related to Bill Me Later’s “products and services, advertising, loan origination, customer acquisition, servicing, debt collection, and complaints-handling practices.” The service is part of its PayPal unit.
Sam Gilford, a spokesman for CFPB, did not respond to requests for comment. Kari Ramirez, EBay spokeswoman, said the companies “take consumer protection very seriously and are cooperating with the CFPB’s investigation.”
In 2008 EBay acquired Bill Me Later, which also lets users finance purchases in online markets run by Wal-Mart Stores Inc., The Walt Disney Co., and Apple Inc. Customers can avoid the annual 19.99 percent rate by paying off the loan before the end of a six-month promotional period. If they pay later, they incur accumulated interest and fees that effectively raise the annual rate.
The consumer bureau said in an Oct. 1 report that these “deferred interest” products can end up being more expensive for consumers than using a normal credit card.
Mark Lavelle, a senior vice president at PayPal, said on Feb. 11 that Bill Me Later, which was founded in 2000, “probably couldn’t get off the ground today” because of increased regulatory scrutiny applied to lenders.
The absence of competitors “is good for my company now, but I don’t think it’s necessarily good for our economy,” Lavelle told analysts.
In 2012, EBay purchased loans worth $3.2 billion, according to regulatory filings. Its total revenue that year was $14.1 billion.
In the late 1990s, so-called payday lenders, which offer loans due when a borrower gets his or her next paycheck, linked with banks to lend in states where the practice is illegal or requires licensing. Payday loans can carry interest rates of as much as 521 percent, according to the consumer bureau.
Banks officially made the loans, which payday lenders then purchased. Regulators including the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. stamped out the practice over the next decade, arguing it was a reputational risk to the banks.
A lawsuit in U.S. District Court in Utah charges that EBay has embraced the same approach with Bill Me Later. A customer of the service in California, Kyle Sawyer, charged in the suit that EBay worked with another bank, New York-based CIT Group Inc., to dodge the state’s interest-rate limits. The rates on Bill Me Later loans can exceed 100 percent, according to the lawsuit.
“PayPal, who acquired Bill Me Later, bought a program that structured a scheme to launder loans to evade state law,” the plaintiff’s lawyer, Jeff Friedman, said in a 2012 hearing. “It’s that simple.”
EBay said in its most recent regulatory filing that the lawsuit is “without merit.”
EBay now uses Comenity Capital, which is owned by Plano, Texas-based Alliance Data Systems Corp., to make the loans, according to regulatory filings in which EBay describes itself as the lending decision-maker. In its 2012 annual report, it said that 55.8 percent of Bill Me Later customers had prime credit scores.
Karen Shaw Petrou, a managing partner at Federal Financial Analytics, said the service resembles a “shadow banking industry” in which “serious consumer protection issues” can arise.
“What kind of incentives are there to bypass the rules?” Petrou said in an interview. Non-bank lenders like EBay can lack the “compliance culture” that characterizes banks, she said.