In fact, nothing here would be out of line for any merchant account (except maybe the customer service issues).
2% chargeback rate is extremely high. It would get you shutdown pretty much everywhere. MSP agreements usually say between 0.25% to 1% for the chargeback rate limit. This is 10x what i've seen some banks specify as an acceptable chargeback rate.
And if you exceed it.. you get warnings, reserve lines and longer holding periods, and eventually the termination of your account. Exactly what happened to OP.
Each one of those actions should have been a red flag to the merchant tellling them they have a serious problem they need to address.
The number of times I've had an MSP call me to discuss fraud in the past 14 years I've had one or more merchant accounts: 0
The number of times I've had an MSP establish a reserve line for my account: 0
The chargeback rate for an ecommerce site I've run for 14 years: 0.1% (about 1 every 1000 orders)
MSPs don't normally contact their customers to discuss fraud. They don't normally require reserves.
Every time they contacted you about the chargeback rate was a warning. When they set the reserve line that was a warning. You didn't negotiate the right to the chargeback rate.. you negotiated how severely their anti-fraud control would impact your business.
These were HUGE red flags. Possibly the biggest red flags you could have gotten, short of a legal notice or the immediate closure of the account.
And while it sounds like PayPal should have been more direct with you about the consequences here... I can tell you that every MSP agreement I've ever seen specially talks about these actions as negative actions they may take to mitigate the risk of fraud.
1 in 1000 is 0.1%
They probably won't do anything particularly nefarious as far as the law is concerned, but that doesn't prevent this situation from becoming an unmitigated disaster for the small business owner who doesn't have their own floor of lawyers.