The Consumer Financial Protection Bureau (CFPB) has sued the online lending platform SoLo Funds for claims the Fintech deceived borrowers about the total cost of loans. The CFPB notes that SoLo markets itself “as a consumer-friendly alternative to high-cost, short-term loans.”
Solo is a Fintech that partners with a bank to provide certain financial services. The peer-to-peer lender promotes itself as a better way to provide small loans to individuals in need of credit. On May 7th, Solo Funds indicated it had paused all social media activities until it addressed customer service shortcomings.
According to the CFPB, despite advertising zero-interest loans or 0% APR loans, SoLo’s lending ensures that almost every borrower pays a fee, in the form of a “tip” or “donation.”
The CFPB is seeking, among other things, “injunctions against SoLo to prevent future violations, monetary relief for borrowers, forfeiture of ill-gotten gains, and a civil money penalty.”
CFPB Director Rohit Chopra said:
“The CFPB is suing SoLo for using digital trickery to hide interest and fees on its online loans. SoLo has had repeated run-ins with state regulators, and we are putting a stop to their fake tipping scheme.”
SoLo Funds is a nonbank financial technology company “headquartered in Los Angeles.”
Since at least 2018, SoLo has operated “a digital lending platform through which consumers can obtain short-term loans.”
The maximum SoLo loan amount “is $575, and the minimum is $20. SoLo brokers loans between consumer borrowers and investors.”
SoLo requests consumers pay fees to lenders and to SoLo, which the company refers to as “tips” and “donations,” respectively.
SoLo uses a proprietary credit scoring tool to determine a consumer’s credit score – commonly referred to by the company as a “social score.”
To compose the social score, SoLo relies “on third parties to, among other things, scrape personal and financial information from borrowers’ mobile phones, social media, and bank accounts.”
While SoLo claims fees paid to lenders and the company are voluntary, the CFPB “alleges that is not the case.”
When consumers reach the part of the application “that asks them to pay a fee to SoLo, consumers only see options for what percentage to give—none of the options is zero. SoLo also informs prospective lenders of the fee they will receive from a consumer to fund a loan. The result is that consumers who do not pay a fee to lenders are unlikely to get their loans funded. In fact, as of December 31, 2022, only 0.5% of funded loans did not include a fee paid to the lender by the borrower.”
From approximately March 2018 through December 2022, borrowers “took out more than 540,000 loans on SoLo’s platform in nearly all fifty states. In that time, SoLo received more than $8 million in “donations,” and lenders received almost $13 million in “tips” through the SoLo platform. As of May 2024, SoLo represents on its website that its platform has brokered more than 1 million loans.”
State Enforcement Actions
SoLo has also been the subject of law enforcement actions across the country. Many of these cases allege deceptive advertising and its practice of masking fees as “tips” and “donations.”
In May 2023, California resolved its claims “against SoLo that the company used misleading disclosures and advertising, as well as failed to obtain a required state license.”
Also in May 2023, the District of Columbia Attorney General “filed a complaint and consent order concerning SoLo’s usury limit violations and actions to deceive consumers.”
Connecticut also recently settled its claims “against SoLo, which required the company to, among other things, refund to consumers all tips, donations, late fees, administrative fees, transaction fees, and recovery fees.”
Specifically, the CFPB alleges that the company harms consumers by:
- Misrepresenting 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. These fees result in a high total cost of credit. Almost all of SoLo’s loans carry an equivalent annual percentage rate of over 36% APR, and many loans carry an APR in excess of 300%, with some over 1,000%.
- Using digital dark patterns to trick borrowers: SoLo presents three default options to consumers for the “donation,” and it requires consumers to select one before moving forward with the loan process. SoLo does not inform consumers that a “donation” is not required, and it obscures a “No Donation” option by placing it in a settings section of the mobile application that is not part of the loan application flow.
- Making false threats and collecting money consumers do not owe: SoLo services and collects on loans that are void and uncollectible because they were either made without a required state license or in excess of state usury caps in the state where the borrower resides. When collecting on debt, SoLo has threatened consumers that it will furnish negative information to credit reporting companies even though SoLo has never reported any information to credit reporting companies.
- Creating a “social credit” score without safeguards: By using its own credit scoring method for potential borrowers, SoLo acts as a credit reporting company. However, SoLo has not taken adequate steps to make sure the data the company gathers on consumers is accurate.
Enforcement Action
Under the Consumer Financial Protection Act, the CFPB has “the authority to take action against financial institutions violating consumer financial protection laws, including the Fair Credit Reporting Act and for engaging in unfair, deceptive, or abusive acts or practices.”
The CFPB’s lawsuit against SoLo seeks to stop ” alleged unlawful conduct, forfeiture of ill-gotten gains, redress payments to harmed consumers, and imposition of a civil money penalty, which will be deposited in the CFPB’s victims relief fund.”
In December 2023, Solo Funds reported that it had “delivered over $275 million in community-driven support, saving consumers over $30 million in fees compared to sub-prime credit cards.” The company also shared that it was on pace to deliver $1 billion back into underserved communities by Q1 2024. Solo Funds recently stated on X that it was still in business, but the system was not 100%.