California, DC Cite SoLo Funds For Deception, Illegal Interest Rates Disguised as "Donations"
Fed SLOOS Survey Shows Tightening Credit Conditions, FDIC Releases Special Assessment Details
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California, DC Cite SoLo Funds For Deceiving Lenders and Borrowers, Illegal Interest Rates Disguised as “Tips” and "Donations"
SoLo Funds, recently named to CNBC’s Disruptor 50 list, has reached settlements with California and Washington, DC, for operating without necessary licenses, charging illegally high interest rates disguised as “tips” and “donations,” and engaging in deceptive practices.
The actions come a year after the company was hit with a cease and desist order in Connecticut and a citation from Minnesota’s regulator for operating as a collections agency without proper licensing and more than two years after the risks of SoLo Funds’ business model were first reported by Fintech Business Weekly, in February 2021.
California Finds SoLo Operated Without Required Licenses, Violated State Usury Law
According to the consent order published last week, the California Department of Financial Protection and Innovation (DFPI) began an investigation into SoLo Fund’s compliance with state and federal law in the first half of 2021.
By May 2021, based on the DFPI’s initial report, SoLo Funds ceased facilitating loans in the state.
Now, the DFPI’s final consent order confirms what have been longstanding problems with SoLo Funds’ business model and product structure. Specifically, the DFPI found:
SoLo Funds acted as loan broker, without the license required to do so
SoLo Funds provided substantial assistance to lenders on its platform, without the license required to do so
When incorporating lender “appreciation tip” and “donation” to the company as “charges,” loans exceeded the maximum allowable interest rate
Promissory notes failed to comply with TILA and Reg Z by falsely claiming the loans had 0% APR
The order requires SoLo Funds to “desist and refrain” from violating the California Financing Law (CFL), requires SoLo Funds to provide borrowers with a copy of their loan agreements, disallows borrowers from taking more than one loan at a time, and requires the company to refund all “donations” charged to California borrowers. The consent order also includes a $50,000 penalty.
While the contents of the order are notable, what’s absent from it is notable as well:
Despite requiring the company to refund the “donations,” the order does not require SoLo Funds to refund the “tips,” despite such charges presumably violating interest rate limits and not being disclosed as required by TILA Reg Z
While the order acknowledges SoLo Funds serviced the loans and acted as a debt collector, there is no mention that the company was doing so without the required registration
The order documents SoLo Funds’ dubious claims to borrowers (“the most affordable loans in the market,” “no credit check,” “0% APR with no finance charge,” funds delivered “instantly,” etc.), but the order doesn’t make a finding that the company’s practices were deceptive
It also documents potentially misleading claims to lenders (“make a quick return on your extra cash,” touting a lender that made a 9.27% return in 90 days, and that another lender made $500 in the prior month, “more than Robinhood”), without making a finding that such claims were deceptive
And while the order does require SoLo Funds to desist and refrain from violating relevant laws, it doesn’t actually specify that the company is required to obtain the necessary licenses, should it intend to operate in the state (though, as pointed out on Twitter, this may just be sloppy drafting by the DFPI)
DC’s Attorney General Finds SoLo Deceived Lenders and Borrowers; Loan Charges Totaled As Much As 500% APR
SoLo Funds also recently reached a settlement with attorney general for Washington, DC. The attorney general found that the company engaged in deceptive practices and violated DC’s 24% usury cap, with SoLo-facilitated loans charging as much as 500% APR.
In a statement released with the order, the attorney general said (spacing adjusted and emphasis added):
Our office will not tolerate Fin-tech lenders resorting to new, deceptive practices that adversely impact vulnerable residents who are frequently ineligible for traditional loans. 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 deceptive practices weren’t limited to borrowers on its platform; DC’s order found that, while advertising to potential lenders that they could “make a quick return on [their] extra cash,” in reality, “for a high percentage of the loans offered by SoLo, the borrowers either failed to repay the loans on time or at all—which SoLo also failed to disclose.”
The settlement SoLo reached with DC requires the company to cease violating the CPPA and DC’s usury cap. SoLo must also refund all tips and donations previously paid by DC borrowers and pay $30,000 in restitution to DC.
The agreement also requires specific modifications to the UX of SoLo’s platform, particularly around the treatment of so-called “tips” and “donations”:
SoLo must block lenders from seeing whether or not a borrower is offering a tip and the amount of any tip before the lender’s firm commitment to fund the loan
SoLo must ensure that a borrower’s offer or withholding of a tip has no impact on their likelihood of loan approval or the terms of any loan
SoLo is prohibiting from incorporating tip/donation information into a borrower’s “SoLo Score”
The interface for a borrower choosing a tip must be an open text box with no default amount that accepts all values from 0-12%, without requiring a user to change settings elsewhere in SoLo’s app
The interface for a borrower choosing a donation must be an open text box with no default amount that accepts all values from 0-9%, without requiring a user to change settings elsewhere in SoLo’s app
Lack Of Federal Action Leaves Consumers At Risk
While the two orders attempt to hold SoLo Funds responsible for its problematic practices, they also raise a number of questions.
Given the apparently willful and fairly egregious violations, the fines assessed — a mere $30,000 by DC and $50,000 by California — are de minimis. When LendUp settled with California in a somewhat similar case, it paid over $1 million in costs and penalties, in addition to the refunds owed to consumers.
Having the former California Banking Commissioner, Manny Alvarez, as an advisor surely didn’t hurt in negotiating the settlements. Alvarez joined SoLo Funds in February 2023 — nearly two years after the California DFPI had begun its investigation into the company. Upon joining the company as an advisor, Alvarez said:
“I truly believe in SoLo’s community-first ethos and the founding team’s sincere commitment to that mission. As a former regulator, I know that people desire a fintech industry that better serves their needs and is representative of their experience, so I’m proud to join SoLo’s mission to solve that problem.”
While the California and DC actions illustrate SoLo’s problematic business model and history of deceptive practices, the orders do nothing to protect consumers — both the borrowers and lenders — in other jurisdictions. With now abundant evidence of the company’s issues, where is the CFPB?
Finally, although SoLo’s management is responsible for the company’s decisions, numerous other stakeholders have enabled its business: VC investors, like Techstars, ACME capital, and tennis legend Serena Williams; B Labs, which certifies SoLo as a B Corporation, despite its payday lending business model; partners, like Evolve Bank & Trust and Visa; and media outlets like Fast Company, American Banker, and CNBC that have facilitated the company’s reputation-washing efforts.
Fed Survey Shows Tightening Credit Conditions
The Federal Reserve’s recently released April survey of loan officers shows waning demand and stricter underwriting as credit conditions tighten.
The survey shows a growing share of banks tightening standards and increasing spreads as demand for commercial and industrial loans drops:
The rate of change in commercial real estate lending — a growing area of concern, especially for smaller and regional banks — is even more stark, with 60%+ of respondents indicating they are tightening lending standards amid cratering demand for such loans:
Underwriting standards for residential mortgages are also increasing:
And finally, banks’ willingness to make consumer installment loans is declining as they tighten underwriting standards for consumer credit, the survey shows:
FDIC Releases Details On Proposed Special Assessment
Last week, the FDIC released its notice of proposed rulemaking to backfill the deposit insurance fund in the wake of the collapse of SVB and Signature Bank. In order to guarantee all deposits at the banks, the FDIC invoked the “systemic risk exception,” which requires a special assessment to replenish the fund.
As was widely expected, the proposed assessment is structured such that the cost falls primarily on larger banks and those with significant amounts of uninsured deposits. It was designed this way in an attempt to have costs borne by the banks that are perceived to have benefited the most from the use of the systemic risk exception.
In a statement released concurrently with the notice of proposed rulemaking, FDIC Director Gruenberg said:
“The proposal applies the special assessment to the types of banking organizations that benefitted most from the protection of uninsured depositors, while ensuring equitable, transparent, and consistent treatment based on amounts of uninsured deposits. The proposal also promotes maintenance of liquidity, which will allow institutions to continue to meet the credit needs of the U.S. economy.”
The assessment would only apply to institutions with more than $5 billion in assets. The FDIC is proposing an assessment of 12.5 basis points of an institution’s uninsured deposits, excluding the first $5 billion, as of December 31, 2022, to be paid over eight quarterly assessment periods.
According to the FDIC, it is estimated that approximately 113 banks would be subject to the special assessment, with more than 95% of the burden falling on banks with more than $50 billion in assets.
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