The Consumer Financial Protection Bureau has accused the Los Angeles fintech SoLo Funds of charging large fees on loans, of failing to disclose loan costs and of lending without a license in states that require one.
But the small peer-to-peer lending company, which was started in 2018 and has a million users, plans to take on the CFPB in court. SoLo Funds says it is not violating any laws and is providing access to affordable loans to a group of people who are overlooked and overcharged by traditional banks and credit card issuers.
The case could have an impact on other fintechs that do some of the same things SoLo does: let consumers lend to one another, ask for tips and use cash flow data in lending decisions.
The CFPB's complaint, which it filed on Friday, follows settlements SoLo has made with California,
"SoLo markets its online lending platform to prospective borrowers as a consumer-friendly alternative to high-cost, short-term loans," the CFPB said in its complaint. "But SoLo misleads borrowers with advertising and disclosures that falsely tout non-interest loans when, in fact, consumers are routinely subject to fees that result in an exorbitant total cost of credit."
The company says it has followed the rules, consulted legal counsel and sought input from regulators since its inception.
"SoLo Funds has been voluntarily working with the CFPB for the last 18 months, attempting to work toward a regulatory framework that maintains its affordability for Americans," the company said in a statement. "We had primarily agreed on a path forward last Thursday night, and unbeknownst to us, we were blindsided the next morning with a suit."
Rodney Williams, president and co-founder of SoLo Funds, said the company has been unfairly targeted.
"I truly believe that if they cared about protecting consumers, they would go after much bigger companies that were hurting consumers," he said in an interview, the only one he says he's giving on this matter. "And I think if they cared about protecting consumers or helping consumers, they would work with new companies that were trying to do things differently. But there is no pathway for a company like ours to do anything new because it's always being scrutinized."
Tips and donations
The crux of the CFPB's complaint is its assertion that SoLo Funds misrepresents the cost of loans.
"While SoLo's advertisements and loan disclosures market no-interest loans, virtually all borrowers pay 'tips' to the investor lenders, 'donations' to SoLo, or both," the agency said in a press release. These fees equate to an equivalent annual percentage rate of more than 36% — and in some cases 1,000%, the CFPB said.
According to SoLo Funds, 99% of its loans include a tip to the lender (a fellow user of the platform) and 80% include a donation to SoLo Funds itself to maintain the platform. The average tip is 10.4% of the loan, the average donation is 6.2%. So on a $100 loan, the typical customer will pay $17 in donation and tip.
"There's very, very limited case law that associates a voluntary fee that's selected by a borrower or tips and donations as interest or APR," SoLo's Williams said. Other, larger fintechs also have a tip model and have not received that same level of scrutiny, he said.
"All of this is often cheaper than a payday loan," said Todd Baker, a senior fellow at the Richman Center for Business, Law and Public Policy at Columbia University. Payday lenders typically charge $25 for a $100 loan, though earned wage access is a less expensive option, says Baker, who is also the managing principal of Broadmoor Consulting LLC.
"The whole question of these so-called voluntary payments and whether they should be treated as fees is an attempt by lenders to evade requirements for disclosure in the Truth in Lending Act," Baker said. "If you treat it as if it were a long-term loan, you have high APR. The challenge that all the short-term credit innovators have is that it's hard to calculate an APR and consumers tend to look at dollars instead of rate." Other fintechs like Dave and Brigit have also faced questions about the cash advances they offer, for which users have to pay a fee to get the money right away.
Michele Alt, partner at Klaros Group, pointed out the CFPB is arguing that Solo's TILA disclosures were unfair and deceptive.
"I think this leaves the CFPB some wiggle room: Even if a court concludes that a tip isn't part of the APR, the court could still conclude that Solo has misrepresented the true costs of the loans," Alt said.
'Dark patterns'
The CFPB accused SoLo Funds of using "dark patterns" to trick borrowers. A dark pattern is a user interface that has been designed to deceive users into doing things, such as signing up for recurring bills.
According to the CFPB, SoLo presents three default options to consumers for donations and requires consumers to select one before moving forward with the loan process, with no option to not donate.
Williams said the company changed the way it displays these options several years ago.
False threats
The CFPB said SoLo Funds has threatened consumers that it will report negative information to credit bureau companies even though SoLo has never actually reported any information to credit reporting companies.
In the early days of the company, Williams said, SoLo Funds told customers it would report nonpayment to the credit bureaus because that's what the company founders originally planned to do. In 2021, they decided to not report to the credit bureaus and the company stopped telling customers it would.
"I certainly understand that protracted enforcement processes frustrate those on the receiving end," Alt said. "But just because a company ceases a problematic practice doesn't mean that it should necessarily be off the hook. If a company's practice causes harm, the company will have to answer for it."
State licensing
The CFPB further said SoLo collected and attempted to collect on loans that were not collectible because SoLo doesn't have a license in those states.
Williams said SoLo is not a lender — the people who use its platform lend money to one another. The company uses a licensed third-party debt collector to collect on loans that are in default. He also said SoLo's consent orders with Connecticut and the District of Columbia don't require licenses to return to the states, they simply require changes to the company's tips and donations.
Williams also does not see state licensing requirements as under the jurisdiction of the CFPB. He also said he would welcome clear rules.
"We're doing something different," Williams said. "I think there should be a regulatory framework for what we do."
Alt pointed out that the CFPB alleges that Solo does not have "a license to lend, broker, arrange or provide credit services" in any of the states where it was required to do so.
Social credit score
In another accusation, the CFPB said SoLo Funds created its own credit scoring method for potential borrowers but has not taken adequate steps to make sure the data it gathers on consumers is accurate.
To calculate the SoLo score, the CFPB said SoLo Funds gathers information about potential borrowers' mobile device models and cell service plans and uses the data aggregator Plaid to gather potential borrowers' bank account information. SoLo offers this score to lenders.
Williams said SoLo does not try to act like a credit bureau.
"That score is based on cash flow data," he said. "And it's very simple. Either you have a history and you score well, or you don't. It's not over complicated; it's not a secret score."
Williams also said the SoLo score is a risk measure, not a social score, and it's not sold to anyone.
The Los Angeles fintech, which hosts a marketplace where people lend to one another, is moving forward and working to set up a "lending DAO" as it deals with questions about its tipping model.
A search for Solo Funds in the CFPB's consumer complaint database turns up 33 complaints.
Meanwhile, the number of complaints about credit report errors from the major credit bureaus more than doubled in recent years, from 165,129 in 2021 to 443,321 in 2023, according to
Overall, Williams says SoLo Funds is more affordable than most other credit for people with low or no credit scores, and thinks the CFPB is going after the wrong company.
Williams expected the CFPB's first consent order after the
"But it's not," he said. "It's out of this tiny company who's honestly on our last leg of survival."
Baker suspects this argument will not win out in court.
"Regulation is one size fits all," he said. "There's no special dispensation for well-intentioned startups that are testing the bonds of legal requirements."
Williams and his colleagues say this is a lifelong mission and they are not giving up. He reiterated that about 99% of members select to tip their lender while only 80% of members include a donation to SoLo Funds.
"The CFPB allegations are statistically incorrect as the data would support substantial consumer evidence against their allegations on dark patterns," Williams said. "The data supports that more members find optionality with our current donation screens vs entry point for a tip.
"We are hopeful, and we are looking forward to going to court," Williams said.
