You might not be familiar with the term "fintech" but it's an increasingly important part of the financial services world. It basically means providing financial services through technology – websites, blockchain, and so forth.
It can have benefits but in too many cases, fintech is used to get around state and federal consumer protection laws. That's what California, Connecticut, and the District of Columbia alleged SoLo Funds was doing – offering unlicensed payday loans that use “tips” and “donations” to conceal annual percentage rates (APRs) of 511% and to evade state interest rate limits.
The three used a variety of legal tools to block SoLo from operating in their jurisdictions.
“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,” Saunders said.
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).
A consent order issued last week by the Connecticut Department of Banking joins earlier actions by the California Department of Financial Protection and Innovation (DFPI) and the Office of the Attorney General (AG) of the District of Columbia (DC).
“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.”
In Connecticut: The order issued 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.
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.
DFPI 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.
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
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.