Consent orders target SoLo Funds platform offering loans as high as 511%-4,280% APR
WASHINGTON – Advocates applauded new consent orders from California, Connecticut, and the District of Columbia that block the fintech payday loan website SoLo Funds from offering unlicensed payday loans that use “tips” and “donations” to conceal annual percentage rates (APRs) of 511% and evade state interest rate limits. A consent order issued late Tuesday by the Connecticut Department of Banking joins actions last week by the California Department of Financial Protection and Innovation (DFPI) and the Office of the Attorney General (AG) of the District of Columbia (DC).
“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 up front to a company to get a loan. Calling a loan payment a ‘tip’ doesn’t change the cost of a 511% APR loan.”
SoLo Funds operates a lending platform where consumers can request loans up to $500 from individual lenders. It uses various techniques to push borrowers into paying “tips” and “donations.” The standard loan has a 15-day term, and SoLo encourages a tip of 12% of the loan amount plus a donation to SoLo of up to 9%, though some borrowers pay more or less. SoLo discloses a 0% APR, but a 12% tip and 9% donation on a 15-day loan would be the equivalent of a 511% annual percentage rate (APR).
In Connecticut: The order issued Tuesday by the Connecticut Banking Commissioner follows a 2022 cease and desist order that found that SoLo Funds was operating without a loan or collection license, was deceptively disclosing 0% APR on loans with rates as high as 4,280%, and was claiming that “tips” were optional even though every single Connecticut borrower paid a tip and SoLo urged borrowers to increase their tips in order to get the loans funded.
The Connecticut Consent Order requires SoLo to pay a $100,000 penalty and to refund all tips, donations, late fees, administrative fees, Synapse transaction fees, and recovery fees. The Order states that SoLo has ceased offering loans in Connecticut and bars SoLo from making or facilitating loans in the state, or receiving any payments from Connecticut residents, unless it obtains a collection license and either a small loan license or written notification that a loan license is not required. In addition, SoLo represented that, if allowed back into Connecticut, it would only allow consumers to offer “tips” after complete repayment of the loan; would prevent potential lenders from seeing any information, score, or rating based on the consumer’s past tips; and would ensure that past tips have no effect on the consumer’s ability to obtain a loan.
In California: California’s consent order found that, accounting for tips and donations as “charges,” the loans on the SoLo platform violated California law by exceeding the state’s maximum interest rate limits. DFPI also found that SoLo violated the law by brokering loans without a license, by providing assistance to individual lenders in making loans without a license, and by claiming that the loans had 0% APRs, in violation of the federal Truth in Lending Act (TILA), which is incorporated into California law. SoLo Funds had already stopped lending in California two years ago in response to DFPI’s investigation, and last week’s formal Consent Order effectively bars Solo Funds from offering its current services in California by directing the company to desist and refrain from violating the California Financing Law, including the rate cap. DFPI also ordered SoLo to refund all donations received from California borrowers and to pay a $50,000 penalty.
DFPI found that the “vast majority of Borrowers in California paid both a tip and a donation.” The order details some of the ways in which SoLo coerced these payments despite claiming that they were voluntary, including:
- Pop-up messaging urging borrowers to offer the maximum tip in order to get their loans funded and suggesting that new borrowers must offer a tip.
- Pop ups soliciting donations, which could not be disabled without using an unadvertised, buried setting, which would need to be turned off each time.
- A theoretical option to renege on a prior commitment to make a tip or donation that SoLo never told borrowers about.
“California’s monetary relief is disappointing, especially compared to Connecticut’s; SoLo should have been required to refund all ‘tips’ as well as ‘donations, and to pay a larger penalty. But the bottom line is that SoLo is no longer lending in California, and it will not be allowed to return unless it complies with the law, including subjecting tips and donations to the state’s rate cap,” Saunders said.
In a separate action, DFPI has proposed to clarify that voluntary payments are charges subject to California law limits.
In the District of Columbia: As in the two states, the DC AG found that “by compelling nearly all borrowers to provide monetary ‘tips’ and ‘donations’ to obtain SoLo loans, the APR for the loans exceeded 500% per loan, which is significantly higher than the District’s cap of 24%.” The DC consent decree includes injunctive relief to prohibit these novel and deceptive practices, as well as a $30,000 penalty to be used as restitution of tips and donations to impacted consumers. While the consent decree does not directly ban the use of tips, the restrictions will effectively prohibit SoLo’s current business model from being offered in DC by targeting the myth that tips were optional. DC AG Brian Scwhalb emphasized: “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.”
Other fintech apps such as Earnin, Dave, Money Lion, Klover, Albert, and Chime also collect tips instead of explicit fees or interest on cash advances and overdraft services. Data released by DFPI shows the high costs of earned wage advances and other fintech payday loans, with APRs that on average exceed 330% regardless of the tip or fee model.
“Other states and the Consumer Financial Protection Bureau should challenge the use of so-called ‘tips’ and other evasions to disguise fintech payday loans that put people in a debt trap,” Saunders urged.
For more information:
- NCLC, Data on Earned Wage Advances and Fintech Payday Loan “Tips” Show High Costs for Low-Wage Workers (April 10, 2023)
- NCLC, Center for Responsible Lending, California DFPI Should Prevent Fintech Predatory Lending, Expand Protections in Earned Wage Advance Proposal (May 17, 2023)
- NCLC et al., Consumer Comments to the CFPB Regarding Junk Fees Imposed by Providers of Consumer Financial Products or Services (May 2, 2022)
- NCLC, Consumer Credit Regulation (3rd ed. 2020), updated at library.nclc.org