First time setting up a hotpsot for use with paypal, have been at it for a few days now and I have been encountering this exact problem also. Account is created with no credits, username/password verified, paypal transaction works too. As the user tries to logon, "Invalid username or password" error occurs everytime.
No sure what to make if it, the paypal response back to the usermanager appears to go through over https and the user is returned to the logon page.
Anyone have any ideas what I am missing?