At the end of the day, Paypal is a slave to the credit card associations. To that end, whenever they find something out-of-the-ordinary, they have no choice but to act. The sad reality is, they really don't have any latitude in cases like this, if they want to prove to their credit card overlords that they are tough on fraud.

For whatever reason, it seems that they'd rather be known for having terrible customer service than own up to the fact that they are hog-tied as to their policies on what kinds of transactions they can process.