The Connecticut banking commissioner recently sent SoLo Funds, a fintech that hosts an online peer-to-peer loan marketplace,
Loans on SoLo’s platform are initiated by a request from a consumer for a certain loan amount, and include a proposed tip to the lender of up to 12% of the loan amount and a “donation” to SoLo itself of up to 9% of the loan amount. According to SoLo, both tips and donations are voluntary.
Rodney Williams, co-founder of Los Angeles-based SoLo Funds, says SoLo customers are receiving the financial help they need in emergencies through loans from their neighbors. He says these loans come at a cost that’s far less than what payday lenders charge and banks’ overdraft fees. He also argues that existing banking laws perpetuate loan discrimination, that the way annual percentage rates are calculated should be re-examined, and that every state looks at companies like his a little differently.
The case is an example of the harsher spotlight regulators have been putting on fintechs with unusual business models. It’s also an example of a
In a recent interview, Williams shared with us his side of the story. The following is an edited transcript of the call.
What was the original idea and mission behind SoLo Funding?
RODNEY WILLIAMS: My co-founder, CEO Travis Holoway, and I had a shared experience of our friends and family needing access to small-dollar loans.
When we double-clicked on the problem, it was much bigger than just our friends and family. But more importantly, when we went out into the world to see what the options were, we felt like there weren't things that were equitable. And we wanted to do something different. That was the premise of why we started SoLo.
Along the way, a couple of things were really important to the story of how we built it. No. 1, community. It was community over everything for us. Travis is from Cleveland, I'm from Baltimore. I'm very familiar with what underserved or marginalized communities look like. There isn't a Chase Bank on every corner. There are more churches, there are more check-cashing places. So what that means is there's money being taken from the community and it's not being reinvested in the community. So we wanted to remove the institution from this transaction.
I’ll give you a stat that we love: 82% of our members live in underserved ZIP codes, both the lending members and the borrowing members. They are literally in the same neighborhood. We like to talk about neighborhoods like Harlem, for example, where the lenders are the folks in the brownstones lending to the person down the street in public housing. They're close in proximity, also close in understanding the plight and the fight.
The second piece was autonomy and giving control to the borrower versus the lender. This community is always being told what to do, what not to do, and how to do it. We are rarely given the opportunity to speak for ourselves. I know that even today, the loan process is like, you fill out the paperwork and you wish. You push your hands together and you hope it works out for you. We didn't like that feeling and we wanted it to be borrower-driven. We wanted borrowers to set their own terms. We wanted borrowers to put their requests out and we thought this was the best way to actually teach financial literacy.
Borrowers tip [to individual lenders on the marketplace] and donate [to SoLo Funds itself] less over time. When you first make a loan request, you can only get $100. As you pay back on time, [the allowable loan amount] increases in increments up to $500. When someone is new in the marketplace, they don't have any history and the loan tends to be the most expensive. But by the time you get to a $300 loan or a $400 or $500 loan, it's much cheaper than it was for the first $100.
One of the claims made in the Connecticut cease-and-desist order was that borrowers paid tips on 100% of the loans made in Connecticut. Is that true?
There is an ongoing investigation, and I think it's important to be sensitive to that. What I will say is there were inaccuracies. More than 19% [of SoLo loans] do not include a donation to SoLo. About 3% of loans don’t include a tip to the lending member.
We want to work with the department. We want to follow the due process. We do not want to debate their logic and our logic. We want to do it in a very constructive way.
Does SoLo operate in all 50 states?
Our goal is to be live in all 50 states. [The company's operations are currently paused in several states.] There's certain states where we have a different framework. Especially around financial services, every state is a bit different.
That's probably the biggest challenge of being a founder in fintech: the significant amount of scrutiny around financial services that is really not conducive to innovation. And I have a big problem with it because financial services has been discriminatory for so long. So these same laws were the laws that were designed to hurt marginalized communities. But at the same time, when financial service companies start to try to do something about it, we are referring to those same laws that do not work right. It's counterproductive.
And then the state-by-state complexity, the federal complexity, it's a lot. And I would tell you for our tiny company, we're doing the best that we can. We've spoken to legislators. We were on the Hill two weeks ago on a panel. We have engaged, we're out there. We really have a different purpose. When we start to communicate the data, we're doing way more good. And this is significantly more equitable than what's currently in the market. To the naked eye, I can totally understand how it can look or be perceived a certain way, but under the hood, it's very different.
Are there specific rules that you would like to see changed? Some states have a 36% cap on annual percentage rate for loans. Is that the kind of thing you would like to see changed?
Maybe. One of the things that we're pretty passionate about is that we do not believe that APR is an accurate measure anymore. I know the Consumer Financial Protection Bureau is starting to look at junk fees. When we think about cost, we think about all of the fees — the instant pay fee, the transaction fee, the subscription fee, the late fee — that are not considered APR that make a loan predatory.
APR is not what gets people in trouble in this demographic. I know what happens when you pay an extra $15 every two weeks to roll a loan over. And rollover fees, for example, are not considered APR. Long story short, I just think that total cost is a much more accurate perspective, especially to this demographic.
We measured all of the total costs associated with SoLo in over 12 months of usage. A typical borrower only uses us four times a year. That's 50% less than the national average for using a payday loan. If you were to compare us to cash advances, consumers use cash advances more than 30 times a year.
And when you look at the total cost, it's actually around 13.6% in total cost after 12 months. A customer may come in and pay the maximum tip and donation on a $100 loan. When they come back two months later, they now can get a $200 loan and they're going to tip a little bit less. Three months later, when they get a $500 loan, they're not even donating [to SoLo] at all. They're just tipping their lender.
The Connecticut order said the equivalent APRs that your borrowers are paying is 43% to 4,280%. Is your answer to that, that they're not calculating it the right way?
Yes. The voluntary nature of our tips and donations do not fit the definition of APR today. Could someone pay the max tip and max donation every time they make a loan request? Yes. Does it happen? No. That's the difference.
The Connecticut order also stated that SoLo Funds does not have a lending license or a debt collection license in the state. Do you have such licenses, or do you feel they're not needed?
Anytime these things happen, it's an allegation and that's it. So our response has been to follow their process and our legal counsel is responding accordingly.
We're not lending any money off of our balance sheet. We're not the lender. Every loan is funded by an individual. We would get a lending license and be okay with that determination, if you want to determine us as the lender, because it's up for interpretation. But certain states are going to be on the fence about that. Our goal is to continue to work with states about their determination and their interpretation of what we do.
The Connecticut order said that SoLo works with Evolve Bank & Trust. What is the bank's role? Is it simply holding these accounts from which the borrowers and the lenders give and receive money? Or does it have more of a role than that?
No, that's the only role that it has.
Do you report the loans to the credit bureaus so that if these people haven't been able to get a loan in the past, through working with you, they will build a credit history and credit score?
Those are things we have coming in the future, for sure. We do not report to credit bureaus yet. We are actively innovating and we definitely are going to bring to the market our credit-building solution.
There's a lot of healthy behavior that SoLo has unlocked. We're seeing over 90% repay rates. We see total costs on the decline. We see borrowers not opting for a donation or a tip.
We're not the bad guys. And our data doesn't show that we're the bad guys. At the end of the day, we're part of the marginalized community. What we have unlocked by community and people helping people and removing the institution from this decision, we're showing that we can give access to this group better, faster and more efficiently than any bulletproof-glass-window check-cashing place.
We also understand that you may have a job Uber driving during the day and DJ-ing or bartending on the weekend. Sometimes life has inconsistencies and that causes this wealth gap where there’s a gap on a week-by-week basis, and that doesn't mean that you should be taken advantage of. It means that you should have a community to lean on when you need it and then you should pay it forward when you don't.
According to the Connecticut order, SoLo Funds stopped disclosing the tips in its loan agreements in April 2021. Why is that, and is that something you might change going forward?
One thing that's missing from the order is if you look at the promissory note that is created between two parties on our platform, the borrower is only required to pay the principal; there's no requirement in the loan obligation to pay the tip and the donation. Anything that’s not obligated does not need to be disclosed in a Truth in Lending Act disclosure. That's why it's not there. We want our members to understand that it's voluntary and it's optional.
Has any other state ever raised these kinds of questions?
The states have raised questions. States have different opinions. For example, Minnesota reached out to us and based on their rules, categorized us as a debt recovery company and asked if we could get a license for that. They looked at the entire business, they looked at the optionality of our loans, they looked at what is ultimately happening and they determined this was the category to put us in, because post-delinquency, we send reminders to pay. Other states will not share that view. There is no consensus on a state-by-state basis right now. Our goal is to try to work with them all.
