Okay I figured out what PayPal did and it's a half hearted attempt at best. In order to sign in using two factor authentication both the following must be true: 1. Your phone must be registered to receive security key codes via SMS. 2. No other security keys can be on your account. That includes the VIP app. #1 is bad for people who pay per SMS. #2 is bad for everyone since it means if you are in an area with no cell coverage, but still have Wifi, you won't be able to access your PayPal account at all since the only way to get in is to receive a code via SMS. Basically, PayPal's fix requires you intentionally potentially crippling your access to PayPal.
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