EBay Inc. is facing a probe by the Consumer Financial ProtectionBureau (CFPB) over a loan program that mimics a structure used byhigh-interest lenders to evade state rules before the practice wasstamped out by regulators.

The program, called Bill Me Later, is a service of the onlinemarketplace's PayPal unit that relies on Salt Lake City, Utah-basedComenity Capital Bank to make loans that are then purchased andmanaged by EBay, according to regulatory filings. Under federallaw, banks can lend in any state without being licensed there orcomplying with local interest rate caps.

So-called payday lenders used similar arrangements to avoidstate rules before regulators and state attorneys general ended thepractice, said Margot Saunders, a lawyer with the National ConsumerLaw Center.

“The key issues are who has the risk of loss and who has theprimary income,” Saunders said in an interview. “And the bankstypically 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 BillMe Later's “products and services, advertising, loan origination,customer acquisition, servicing, debt collection, andcomplaints-handling practices.” The service is part of its PayPalunit.

Sam Gilford, a spokesman for CFPB, did not respond to requestsfor comment. Kari Ramirez, EBay spokeswoman, said the companies“take consumer protection very seriously and are cooperating withthe CFPB's investigation.”

2008 Deal

In 2008 EBay acquired Bill Me Later, which also lets usersfinance purchases in online markets run by Wal-Mart Stores Inc.,The Walt Disney Co., and Apple Inc. Customers can avoid the annual19.99 percent rate by paying off the loan before the end of asix-month promotional period. If they pay later, they incuraccumulated interest and fees that effectively raise the annualrate.

The consumer bureau said in an Oct. 1 report that these“deferred interest” products can end up being more expensive forconsumers than using a normal credit card.

Mark Lavelle, a senior vice president at PayPal, said on Feb. 11that Bill Me Later, which was founded in 2000, “probably couldn'tget off the ground today” because of increased regulatory scrutinyapplied to lenders.

The absence of competitors “is good for my company now, but Idon't think it's necessarily good for our economy,” Lavelle toldanalysts.

In 2012, EBay purchased loans worth $3.2 billion, according toregulatory filings. Its total revenue that year was $14.1billion.

In the late 1990s, so-called payday lenders, which offer loansdue when a borrower gets his or her next paycheck, linked withbanks to lend in states where the practice is illegal or requireslicensing. Payday loans can carry interest rates of as much as 521percent, according to the consumer bureau.

Banks officially made the loans, which payday lenders thenpurchased. Regulators including the Office of the Comptroller ofthe Currency and the Federal Deposit Insurance Corp. stamped outthe practice over the next decade, arguing it was a reputationalrisk to the banks.

A lawsuit in U.S. District Court in Utah charges that EBay hasembraced the same approach with Bill Me Later. A customer of theservice in California, Kyle Sawyer, charged in the suit that EBayworked with another bank, New York-based CIT Group Inc., to dodgethe state's interest-rate limits. The rates on Bill Me Later loanscan exceed 100 percent, according to the lawsuit.

Evasion 'Scheme'

“PayPal, who acquired Bill Me Later, bought a program thatstructured a scheme to launder loans to evade state law,” theplaintiff's lawyer, Jeff Friedman, said in a 2012 hearing. “It'sthat simple.”

EBay said in its most recent regulatory filing that the lawsuitis “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 asthe lending decision-maker. In its 2012 annual report, it said that55.8 percent of Bill Me Later customers had prime creditscores.

Karen Shaw Petrou, a managing partner at Federal FinancialAnalytics, 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?” Petrousaid in an interview. Non-bank lenders like EBay can lack the“compliance culture” that characterizes banks, she said.

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.