PayPal vows action after advocates flag ties to unaccredited schools

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PayPal Holdings says it has begun taking action against for-profit educational institutions that have offered its consumer credit product in inaccurate or misleading ways.

The company vowed a quick response to concerns raised by the Student Borrower Protection Center, which last week asked federal banking regulators to investigate business practices involving PayPal Credit. That unsecured line of credit is best known as a way to finance e-commerce purchases, but it can also be used to pay for higher education.

The Washington-based consumer advocacy organization also called on PayPal to begin a comprehensive review of its connections to the for-profit college sector, citing concerns about the cost and marketing of the credit line product. Synchrony Financial, a banking company based in Stamford, Conn., is the exclusive U.S. issuer of PayPal Credit.

PayPal, of San Jose, Calif., said in an emailed statement that it takes the advocacy group’s claims “very seriously.”

PayPal also said it does not market its credit product directly to for-profit financial institutions and that it has no direct relationship with schools that were cited by the Student Borrower Protection Center.

PayPal said that it “adheres to all state and federal regulations to ensure clear, easy to understand information about credit products” and vowed to terminate the use of its services by any organization that is found to be providing inaccurate or misleading messages about the line of credit product without PayPal’s prior knowledge or consent.

A Synchrony spokeswoman declined to comment Monday.

Last month, the Student Borrower Protection Center published a report with findings from its investigation into what it dubbed the “shadow student debt” market. That label refers to high-cost credit offered to students at for-profit educational institutions under terms that may not meet the legal definition of a private student loan.

The report found that PayPal offers credit to borrowers seeking to finance higher education programs that do not allow their enrollees to use federal student loans. In a letter Thursday to PayPal CEO Dan Schulman, the Student Borrower Protection Center said that it found more than 150 educational institutions that prominently advertise PayPal Credit as a preferred financing option.

These schools, many of which are unaccredited, offer training to become makeup artists, flight attendants and bodyguards, as well as courses of study in swordsmanship, hypnosis and veganism, among others, according to the advocacy group’s letter.

“The use of PayPal Credit allows many of these schools to secure students’ upfront payments, which are critical to the institutions’ survival,” stated the letter to PayPal, which was reported by news outlets such as The Washington Post and The New York Times. “But it remains unclear what criteria — if any — your company uses to determine what schools or programs may offer PayPal Credit as a method for student borrowing.”

The advocacy group’s letter cited concerns about several aspects of the credit offers. One is that borrowers pay annual percentage rates of 25.49%, a rate that is more than four times pricier than the most expensive federal student loans. Another concern involves PayPal’s collections practices, which the advocacy group deemed extremely aggressive.

“For example, if a borrower defaults, your company charges the borrower for any expenses associated with the collection of the borrower’s debt,” the letter stated.

The Student Borrower Protection Center also took issue with what it deemed the misleading marketing of deferred interest, a feature of PayPal Credit that allows borrowers to avoid paying interest for six months, but charges them retroactive interest in the event that they fail to pay off their debt completely during that time.

In 2013, the Consumer Financial Protection Bureau ordered Synchrony, then known as GE Capital Retail Bank, to refund $34.1 million to consumers for allegedly using deceptive tactics to enroll consumers in credit cards with a deferred interest feature.

Two years later, the CFPB alleged that PayPal abusively charged deferred interest to PayPal Credit users. The company agreed to pay a $10 million fine and to refund $15 million to consumers to settle those and other charges.

On Monday, a CFPB spokesperson said the bureau does not comment on supervisory or enforcement matters. An OCC spokesman said the agency does not comment on specific bank matters and products.

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Student loans Subprime lending PayPal Synchrony CFPB OCC