Last Updated May 19, 2015 1:08 PM EDT
Federal consumer watchdogs say PayPal illegally signed up customers for the online payment processor's online credit product.
The Consumer Financial Protection Bureau on Tuesday filed a lawsuit in federal court charging PayPal with enrolling customers in the product, called PayPal Credit, without their permission. Customers were also allegedly required to use the service, formerly called Bill Me Later, instead of other payment methods.
The CFPB alleges that "tens of thousands" of consumers were automatically enrolled in PayPal Credit without realizing it, often when they were signing up for a regular PayPal account or making purchases. Others were signed up while trying to halt the enrollment process, the agency said.
Along with illegally enrolling customers, PayPal is accused in the suit of deceptively advertising promotional offers that it failed to honor, mishandling billing disputes, making billing errors and losing payments.
"Online shopping has become a way of life for many Americans, and it's important that they are treated fairly," CFPB Director Richard Cordray said in a statement. "The CFPB's action should send a signal that consumers are protected whether they are opening their wallets or clicking online to make a purchase."
Under a legal settlement proposed by the CFPB to address the charges, PayPal would pay a total of $15 million to consumers who were wrongly signed up for PayPal Credit, mistakenly paid for a purchase using the service, or who were charged fees or interest as a result of the company's practices. PayPay would also pay a $10 million penalty.
"PayPal Credit takes consumer protection very seriously," Amanda Christine Miller, head of global communications for PayPal Credit said in a 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."
PayPal is owned by e-commerce company eBay (EBAY). The companies have previously disclosed plans to split up later this year.