The second rep was correct - if you have your return policy set to accept returns, it is eBay policy that you are obliged to accept returns for any reason, including remorse returns (you can make it conditional, eg the items have to be unopened / unused etc, but you can't contradict the policy by stating that it's for faulty goods only or somesuch, since consumer laws and buyer's right to refunds still apply in those cases and a buyer will still be able to open a return request for items not as described, damaged etc).

Soon, remorse or change of mind returns will be accepted automatically on your behalf if you have it set to buyer pays return shipping, so yes - if you do not wish to accept such returns, your policy needs to be switched to no returns (note, a buyer can still initiate a change of mind return request when you have no returns accepted, but you can decline them).

Since the return request came up as seller pays return shipping, it sounds like the buyer may have opened an item not as described case, as sellers are obliged to pay return shipping for those, and restocking fees can not be applied, even if implemented. Because this is the kind of dispute where the blame is automatically and indiscriminately (in a certain sense of the word) placed on the seller, it may also explain why they've put further restrictions on your PayPal funds.

Check the reason the buyer gave for the return to verify if they have opened the wrong type of return, eg if they said it arrived damaged or something like that. If it does, call eBay back, get them to look through the messages you exchanged previously with the buyer where they stated explicitly that they wanted to return because they found it cheaper, which is most definitely a change of mind return, and that you want explicit instructions to follow to ensure your change of mind return policies are applied properly (buyer pays return shipping, 20% restocking fee applied). 

I know it's extremely frustrating to deal with, even at the best of times and with competent customer support, but the best thing you can do is remain calm, polite and consistent with eBay, while reminding them that you have followed their advice to ensure your store policies were upheld and it is unacceptable for them to force you into complying with a different set of policies due to their incorrect advice. Also ask for the information they provide to you in conversation to be copied and sent to you in an email, so that there is written record of the advice and information they have provided, as it makes it much easier to refer future reps to that and insist they hold true to their word.