FinTech News
P2P Lending Platform SoLo Funds Responds to CFPB Lawsuit
After being sued by the Consumer Financial Protection Bureau (CFPB), the FinTech SoLo Funds has now issued a response.
About the lawsuit and response:
Recently, the CFPB announced that it was suing SoLo Funds, accusing the company of misleading customers about the true costs of loans obtained through the platform. This stems from SoLo’s model, which allows prospective borrowers to offer a “tip” to lenders as well as provide a “donation” to SoLo for their services. According to the CFPB, while SoLo’s loan application does allow borrowers to select their “donation” to the platform, none of the options are 0% — despite the FinTech advertising 0% APR loans (users can turn on a “No Donation” option, but this is found in the app’s Settings menu). Moreover, in the case of tipping, the CFPB states that those who choose not to include a tip for borrowers are far less likely to have their loan fulfilled, with only 0.5% of funded loans offering no fee to lenders.
In response, SoLo Funds argues that this tipping fee structure has been employed by several other companies. Furthermore, they state that they’ve not only followed the rules but have also been working on a regulatory framework with the CFPB for 18 months and allege that they had “primarily agreed on a path forward” just one day before the lawsuit was filed. SoLo also says that its platform has helped save users $40 million in fees since its founding.
About SoLo Funds:
SoLo Funds is a peer-to-peer community finance service that helps facilitate short-term loans. On the platform, borrowers can request between $20 and $575 while stating what they hope to use the funds for. Then, lenders can choose which loans to fund. As part of this, lenders will see the borrower’s repayment history and a SoLo Score.
According to SoLo, the average tip given to lenders from borrowers is 10.4% while the average donation to the platform is 6.2%. With an average late fee of 0.4%, SoLo states that their average loan cost is 17%. The service also says it has a cap of 36%, while the lowest cost would be 0%.
What they’re saying:
Announcing the firm’s lawsuit, CFPB Director Rohit Chopra stated, “The CFPB is suing SoLo for using digital trickery to hide interest and fees on its online loans. SoLo has had repeated run-ins with state regulators, and we are putting a stop to their fake tipping scheme.”
However, in a statement, SoLo Funds CEO Travis Holoway said, “This lawsuit feels selective. Our political leaders challenged minority innovators to create new models to address our communities’ financial inequalities. That is precisely what we’ve created, but regulators have worked hard to stifle innovation and prevent underserved communities from accessing better financial products.”
Holoway continued, “It’s important to note that this call for innovation has stemmed from a long history of predatory practices and products that have disproportionately impacted low- to middle-class communities. Ironically enough, regulators have provided clear licensing frameworks for the products that harm consumers most today, such as subprime credit cards and payday loans. The stifling of innovation has the opposite effect; it increases costs and limits access to capital. Regulating by enforcement only perpetuates this inequity.”
My thoughts:
This is a complicated one. On the one hand, I definitely see the CFPB’s point that the 0% “donation” option should be part of the application and not hidden in Settings. Beyond that, though, I don’t think you can really blame SoLo for tip-less loan applications not getting fulfilled. While I understand that it’s disappointing to apply for a 0% loan only to find no one willing to fund it, the apparent 0.5% chance that someone will is still better than you’d find just about anywhere else IMO.
Therefore, my solution would be that SoLo make the 0% “donation” option easier to access, while also explaining to customers why such a donation is vital to the platform. Similarly, with the “tip,” SoLo can again make it clear that those submitted with a 0% tip are realistically less likely to be fulfilled. Perhaps these warnings are things the app already does, but I think they’d be helpful.
Personally, having just discovered SoLo Loans through this controversy, I’m now more interested in checking the platform out and will be keeping an eye on this CFPB situation as it develops.
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