It sounds like a great idea, especially during a prolonged recession: a company that offers instant credit to cash-strapped consumers. That's the idea behind Bill Me Later, a website that lets consumers complete online transactions using only their birth date and the last four digits of their social security number.

But, as with most gimmicks, Bill Me Later comes with a catch and a pretty big one at that. According to a class action filed on Monday, Bill Me Later charges sky-high interest rates and late fees, a practice that violates California consumer protection laws.

California usury laws those that govern interest rates prevent non-bank entities from charging rates above 10 percent. Bill Me Later tried to get around these regulations by enlisting CIT Bank to provide banking services for its transactions. But according to the suit, Bill Me Later is the one pulling all the strings; it alone interacts with customers, provides and accepts loan applications, decides whether or not to approve loans, and services customer accounts. Simply put, Bill Me Later in effect 'rents' CIT Bank's name and its bank charter as a scam, for the sole purpose of evading California law and collecting exorbitant interest rates.

And exorbitant may be putting it mildly. According to Jeff Friedman, the case's lead attorney, nearly all of the company's loans carry an interest rate over 10 percent, and many exceed 100 percent. One consumer quoted in the complaint incurred an eye-popping 116.67 percent.

Lead plaintiff Kyle Sawyer, of Torrance, California, used Bill Me Later to finance a $1,068.08 computer purchase from Cyberpower in October 2008. Sawyer started out with a 19.99 percent interest rate, but was subsequently charged several late fees of $39.99 each. According to the complaint, if one were to compute the assessed late penalty fee as an annual percentage rate, [Sawyer] has been charged at more than a 70% annual interest rate during his monthly billing cycles.

Consumers stand to lose more than money. Friedman, of Hans Berman Sobol Shapiro LLP, pointed out that simply clicking on the Bill Me Later button when completing a transaction can adversely affect a consumer's credit rating. He said the extent of credit-related damage will become clearer during discovery.

Further, Bill Me Later, which eBay bought for $945 million in 2008, has been working behind the scenes to integrate its service into other well-known websites. PayPal, for example, now offers consumers the option to you guessed it Bill Me Later, which subjects them to the same interest rates and late fees as consumers who sign up directly on the company's website. Sandra of Evergreen, Co., who wrote to Consumer Affairs in June, and who is quoted in the plaintiffs' complaint, was lured into Bill Me Later via Blue Mountain e-Cards:

"Using Blue Mountain e-cards online I seem to have invoked billing by BillMeLater. I thought their US Mail communications were junk mail. I called today and paid the base amount that would have been due, 15.99, for Blue Mountain Cards. However, between March 18 and June 17 they tacked on another 25 in fees, more than I initial owed Blue Mountain Cards. There is a place on this statement in front of me that says their ANNUAL PERCENTAGE RATE for this billing cycle is 104.39% No one, for anything, should charge an APR 104.39%. Further, adding on late fees in excess of the original debt is absurd."

CitiBank veterans

The plaintiffs point out that Bill Me Later's executive team comes with deep roots in the credit card lending industry. CEO Gary Marino worked at Citibank for 15 years, and subsequently managed the credit and marketing operations for First USA. According to the complaint, Marino secured $100 million in venture capital to develop Bill Me Later's complex and proprietary lending model when he founded the company in 2000.

According to Friedman, Bill Me Later is just the latest version of the centuries-old practice of usury, defined as charging illegal or unconscionable interest rates. Just as payday loans those that provide consumers with a high-interest cash advance until their next paycheck took off in recent years, models like Bill Me will likely pop up with more regularity in coming years.

The complaint alleges breach of contract and violation of California consumer protection laws against both Bill Me Later and eBay, and accuses eBay of aiding and abetting. The plaintiffs are seeking damages and an injunction prohibiting Bill Me Later from continuing its illegal practices. California law allows consumers victimized by bad faith practices to collect treble damages, which Friedman confirmed that the class is seeking.