Banking, Lending, Member Exclusive

Unlicensed lending, misleading practices, and legal actions: Is SoLo Funds in trouble?

  • Attorney General for the District of Columbia and the California DFPI have penalized SoLo Funds for breaching a number of consumer protection laws.
  • The DFPI also issued a consent order for the Black-owned firm, which is raising eyebrows and more questions.

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Unlicensed lending, misleading practices, and legal actions: Is SoLo Funds in trouble?

Attorney General for the District of Columbia, Brian L. Schwalb penalized SoLo Funds, the Black-owned peer-to-peer lending marketplace, on May 10 and reached an agreement with the firm concerning its lending practices.

The company was alleged to breach the Consumer Protection Procedures Act (CPPA), charging as high as 500% APR on loans – which included mandatory tips and donations charged from borrowers – going way beyond the District’s implied 24% usury cap.

Additionally, the Office of the Attorney General (OAG) also found other misleading advertising representations and claims made to consumers by SoLo that contradict the actual activity on the platform.

According to the OAG, SoLo lured lenders to its platform by promoting that they could “make a quick return on (their) extra cash.” But in fact, for a high percentage of the loans offered by SoLo, the borrowers either failed to repay the loans on time or at all. SoLo was aware of this but chose to withhold this information.

As a result, the OAG slapped SoLo with a $30,000 fine – which includes full reimbursement to District borrowers for the tips and donations they previously paid, as well as a payment to the District.

The settlement also requires the fintech to make certain alterations to its business model, including providing honest disclosures to both borrowers and lenders explaining the fees charged to borrowers and to what extent lenders can earn, and clearly stating that tips and donations are optional. And if a borrower refrains from paying either of the two or both, their loan approval application will remain unaffected.

“Our office will not tolerate fintech lenders resorting to new, deceptive practices that adversely impact vulnerable residents who are frequently ineligible for traditional loans,” said AG Schwalb. “SoLo sought to disguise exorbitant interest charges by deceptively calling them tips and donations. This settlement makes clear that we will take decisive legal action against predatory lending models in the District and nationwide, regardless of whether the predatory lender is a brick-and-mortar store, or operates entirely online.”

SoLo’s misleading lending practices are not new or limited to the District of Columbia – last year in May, The Connecticut Department of Banking halted Solo Funds’ operations in the state by providing a temporary cease-and-desist order accusing the firm of violations of state rules.

California Department of Financial Protection and Innovation (DFPI) also unearthed a similar lack of compliance by the fintech back in 2021. DFPI opened a probe into SoLo Fund’s compliance with state and federal law in the first half of 2021. 

In response to a report of preliminary findings from the Commissioner, in May 2021, SoLo voluntarily paused operations in California.

On May 8, 2023, DFPI also issued a consent order pointing to underlying problems with SoLo’s product framework.

According to DFPI’s detailed investigation:

  • SoLo brokered consumer loans between April 1, 2018, and May 10, 2021, without the required license and also provided assistance to lenders in the absence of a license.
  • SoLo did not mandate or investigate whether lenders had a license under the California Financing Law (CFL) to make consumer loans.
  • SoLo has a requirement to ‘tip’ the lender and make ‘donations’ for the platform as a service charge -- expressed as a percentage of the loan amount that couldn't go beyond 12% and 9%. But loans exceeded the maximum permissible interest rate under the CFL.
  • The final loan agreement was viewable to lenders and borrowers could only view it after finalization. 
  • These practices also violated the TILA, implemented by Regulation Z – designed to protect consumers from unfair practices when taking out certain types of loans and lines of credit. 
  • The tip requisition also stated that “borrowers who offered the maximum tip amount were two times more likely to have their loan funded”. This implies that the tip amount had a clear effect on loan applications and SoLo was likely trying to steer consumers into a loan that meant more compensation for the fintech itself. 

SoLo denied some of these allegations and stood its ground that it was operating in good faith in adherence to the legal guidelines. The firm countered, saying “The marketplace has provided hundreds of thousands of people with the access they need to put food on the table or pay off an unexpected expense.”

In response to these accusations, the DFPI slapped a penalty of $50,000 on SoLo. After all was said and done, SoLo agreed to adhere to a list of conditions set by the DFPI from that day onward.

These include desisting and refraining from violating the California Financing Law, followed by providing a copy of loan agreements to borrowers prior to the final agreement. New loans can only be applied for if previous loans have been repaid by borrowers. Additionally, all donations received by SoLo need to be refunded within 120 calendar days of the effective date of the consent order – as well as submitting a report to DFPI for the same.

If SoLo fails to comply with any terms of the consent order, the agency may take more severe action against any violations otherwise resolved under this consent order.

Tearsheet Take:

While the OAG and CA DFPI agree that SoLo Funds was an unregistered loan broker that took tips and donations against the law and turned its own consumers into unlicensed lenders themselves – DFPI’s consent order is especially raising eyebrows.

The State of California and the District of Columbia have allowed SoLo to resume operations in their states. This was also evident from a clause in the consent order that seemingly translated to SoLo continuing to offer loans after the settlement – but says nothing about getting a license besides “don’t violate the law”.

Also, while there was a mention of refunding donations, the consent order didn’t bring up the reimbursement of compulsory tips.

Additionally, SoLo was penalized with $30,000 and $50,000 fines for misleading practices and predatory lending but wasn’t exactly charged for the violation of unregistered debt collection. Critics are also cross-questioning the silence of the Consumer Financial Protection Bureau (CFPB) on the matter and penalty amounts – which are very little compared to when the CFPB ordered Wells Fargo to pay $3.7 billion for repeatedly misapplied loan payments along with other illegal activities. 

And in another instance, the CFPB levied a fine of $10 million on a web of corporate entities operating under TMX Finance, broadly known as TitleMax, for violating the financial rights of military families and other consumers in providing auto title loans.

Following the litigation, other critics are of the opinion that borrowers who obtained quick loans via SoLo had poor credit scores and no background checks, which is why a majority of borrowers couldn’t repay their loans and were likely not eligible to get loans elsewhere.

In March, Tearsheet reported that SoLo had become the first Black-owned financial services company to cross the 1 million customer account mark.

These incidents are also fostering discussions around calling investors that backed SoLo – Serena Williams’ venture firm, among other investors – to account. Investors are required to do a background check on the startups they fund, which is essential to meet the legal standard of due diligence.

While all these questions remain unaddressed and none of the agencies have advised SoLo to acquire the required licenses in clear words – they all have collectively mentioned, “do not violate the law”. On their part, this may imply that the first step to operating within the bounds of the law is to apply for and obtain required licenses in order to steer clear of any future serious proceedings.

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