SoLo Funds faces a new consent order in Connecticut: Will a third order pressure the fintech to pursue a lending license?

Earlier this month, the Office of the Attorney General (OAG) of the District of Columbia (DC) and the California Department of Financial Protection and Innovation (DFPI) penalized SoLo Funds for breaching a number of consumer protection laws and operating without required licenses.

The DFPI also issued a consent order for the Black-owned peer-to-peer lender, which raised eyebrows and a lot more questions. Last week, the Connecticut Department of Banking issued a relatively coherent consent order for SoLo, in regard to Connecticut’s ongoing disagreement with the fintech. This marks the third consent order for SoLo for the second consecutive week.

The new order comes after The Connecticut Department of Banking halted Solo Funds’ operations in the state by providing a temporary cease-and-desist order in May last year. The state authority alleged the firm of being involved in misleading lending practices leading to violations of state rules – including operating without a loan or debt collection license and showcasing 0% APR on loans that can actually reach as high as 511% - 4,280% APR. Additionally, the fintech lender marketed its lender tips as optional – however, Connecticut borrowers generally paid a tip on each loan as the platform implied that the bigger the tip, the quicker the loan would be funded.

As a consequence, the Connecticut consent order requires SoLo to pay a $100,000 penalty followed by refunding all tips, donations, and all other costs including late fees, administrative fees, synapse transaction fees, and recovery fees. SoLo was told it cannot continue operations in the state unless it obtains a collection license or either a small loan license not evading the 36% APR – or a written notification that a loan license is not required. The order also mandates SoLo to rectify its practices pertaining to its lending model allowing consumers to offer tips only after complete repayment of the loan, blocking lenders from seeing any information, score, or rating based on the consumer’s past tips, in a move to ensure that loan approval remains unaffected by past tips.

“Connecticut, California, and DC have called out the Emperor’s New Clothes, taking important actions against SoLo Funds, which uses so-called ‘tips’ and ‘donations’ to conceal APRs that can reach 511% or higher,” said Lauren Saunders, associate director of the National Consumer Law Center. “All three agencies appear to have effectively barred SoLo Funds from facilitating unlicensed fintech payday loans at rates that violate state rate caps.”

“These actions against Solo Funds are an important step in combating tricks that new fintech payday lenders are using to disguise interest and evade laws limiting predatory interest rates,” said Saunders. “A tip is something that goes to a human being after good service, not a cost paid upfront to a company to get a loan. Calling a loan payment a ‘tip’ doesn’t change the cost of a 511% APR loan.”

Meanwhile, SoLo Funds is sticking to its guns about the firm’s model, which it says falls under community finance or microfinance – a system that exists in Asia, Europe, Africa, and LATAM. The company is also of the opinion that the current US regulatory and legislative system has not sufficiently contemplated laws related to community finance or microfinance.

“The current financial system hasn't empowered underserved communities today and historically, so we feel compelled to bring this innovation to the US. With this in mind, there are no laws or clear regulations for community finance in the US, just like other newer models like Buy Now Pay Later (BNPL) or Earned Wage Access (EWA),” Rodney Williams, SoLo Funds’ co-founder and president, told Tearsheet.

All things considered, it could be argued that operating across several jurisdictions without proper and mandatory licensing is punishable by law regardless – even if it was in pursuit of serving the underserved. Solo’s Williams disagrees.

“SoLo followed existing precedent regarding tipping models like Dave or EarnIn, which also operate on unlicensed models. Unlicensed models in sectors such as EWA, BNPL, and community finance have yet to be legislated nationally with clear laws and regulations. The fact that there may not be any current laws around community finance doesn’t mean that it's wrong, it just means that laws have not caught up to the innovation,” he added.

Connecticut’s consent order has clearly vetoed SoLo’s operations in the state until it obtains a collection license – on the other hand, OAG and CA DFPI seem to allow SoLo to resume operations in their states after fulfilling the settlement requirements, but said nothing about getting a license besides “don’t violate the law”.

The situation following the string of consent orders begs the question: whether SoLo Funds will cease operations across other US jurisdictions or continue working until it applies for and obtains the required licenses to keep serious repercussions at bay?

According to Williams, the fintech intends to maintain positive relationships in the industry and is open to solutions deemed acceptable by the agencies involved, to provide a product that serves its customers and doesn't cross regulatory boundaries – including the Consumer Financial Protection Bureau’s (CFPB), with whom the firm has recently entered into detailed correspondence.

“Governments are comfortable with bringing our short-term capital solutions to their constituents. To that end, we will continue to have important conversations to collaborate around the appropriate level of licensure and oversight. We are going to meet all of the regulatory requests from the states of CA, CT, and DC and return SoLo to their residents,” he said.