Written by: Mike Senecal
Edited by: Lillian Guevara-Castro
Reviewed by: Adam West
Key Takeaways
- On February 21, the CFPB, under Acting Director Russ Vought, dropped a suit it filed in May against the community lending platform SoLo Funds.
- Two days later, Vought spoke out against the "weaponization" of consumer protection, accusing the Biden CFPB of trying to destroy the company.
- The CFPB has since deleted its announcement of the original suit from its website; an archived copy details arguably deceptive behavior around tips and donations.
Is SoLo Funds a great idea because it looks like one, or does it look like one because it actually is? That’s the convoluted question I’ll try to answer as we probe recent events around the Consumer Financial Protection Board’s withdrawal of its lawsuit against the company last Friday.
As you may remember, the CFPB, currently led by Acting Director Russ Vought, told a court it was dropping its lawsuit filed in May in which it accused Solo Funds of deceiving borrowers about the cost of loans.
After Reuters reported the about-face, Vought amplified the story in a post on X in which he decried “the weaponization of ‘consumer protection'” and claimed “the CFPB tried to destroy this company.”
But it seems to me that SoLo Funds is thriving. Speaking as an internet user since the 1990s, I consider the SoLo Funds website one of the best-designed and impactful I’ve ever come across.
The CFPB’s withdrawal from a lawsuit against SoLo Funds grants its voluntary tipping model a fair chance in the market.
In words and images, SoLo Funds, a financial technology company, positions itself as a community-driven alternative, inviting underbanked and unbanked individuals from all walks of life to engage in financial opportunities beyond the reach of traditional institutions that have historically overlooked them.
I’m not the only person who sees the appeal. More than 2 million users, including 82% from underserved ZIP codes, have downloaded the SoLo app and made nearly 1.7 million disbursements.
SoLo Funds functions as an impartial platform facilitating lending on a peer-to-peer basis. Users lend to other users, in other words, and the service charges no interest or fees.
The catch, if you can call it that, is that tips from borrowers are the fuel for transactions. SoLo Funds does not explicitly state upfront that lenders can prioritize borrowers who leave larger tips. But the platform’s structure allows lenders to see and consider tips when choosing whom to fund. It’s supply and demand in action, according to the company.
“We should be able to transact with each other directly,” the SoLo Funds website asserts. “And we should be able to benefit or profit from that.”
From P2P Lending to Community Finance
It’s not a new idea. Since 2014, EarnIn has provided access to earned wages, among other services, through a voluntary tipping model, with tips potentially influencing access to faster funding. The Dave app has used tips as a voluntary, user-determined way of compensating for cash advances since 2016.
But while those and other companies require users to directly link their bank accounts to receive value-added services, the bank links at SoLo Funds work behind the scenes as technical facilitators.
That means the platform manages the connection between lenders and borrowers but relies on its banking partners, who pay SoLo Funds a small portion of the resulting interchange fees, to move the money. That enables the company to stand as an impartial third party.
“Unless applicable law requires otherwise, your exclusive and maximum remedy against SoLo or its affiliates is a refund of any donation amount,” the company states in its terms of service. “Neither SoLo nor its affiliates accept any responsibility for the acts or omissions of a lender or any other user of the platform.”
Borrowers set the tip amounts and pay them in addition to the principal. Although borrowers can also choose to donate directly to SoLo Funds, those transactions are separate from tips. A lender’s earnings depend entirely on a borrower’s willingness to offer tips.
The approach has found an audience among borrowers who gain a sense of agency from their power over setting terms and avoiding traditional interest charges. Users also appreciate that advances typically arrive in their bank accounts within the same day.
SoLo Funds imposes no credit checks, allows borrowers and lenders to negotiate independently, and is transparent with respect to the tipping process.
It even reports on-time payments to the U.S. credit bureaus to help responsible users build better scores. By advancing opportunity on quasi-personal terms, SoLo Funds helps many borrowers feel as if they’re joining a mutual aid society.
An Era of Heightened Consumer Responsibility
The question for the CFPB under Rohit Chopra, the aggressive director of the Biden version of the agency, was whether gaining that sense of community was enough to justify the platform’s cost.
In dissolving the suit, Vought overturned a view of consumer protection in which the public interest is paramount in favor of one in which individuals and corporations have more autonomy.
I wish I could tell you I learned that through the CFPB website. However, the agency deleted its announcement of the suit (published on May 17, 2024) sometime after I decided to write this story on February 24 and before I started it on February 25.
Fortunately, a copy of the original CFPB announcement remains on The Wayback Machine, the service provided by archive.org that allows users to view archived versions of web pages from the past.
Looking at data from the company’s founding in 2018 through 2022, the CFPB concluded that the SoLo Fund tip and donation model resulted in a considerably higher total cost of credit.
Dealing directly with lenders on the SoLo Funds platform is a superior alternative to informal lending.
“Almost all of SoLo’s loans carry an equivalent annual percentage rate of over 36% APR, and many loans carry an APR in excess of 300%, with some over 1,000%,” the report read.
Furthermore, the CFPB accused the company of using what the National Consumer Law Center calls digital dark patterns to obscure the option of not providing a tip, placing it in the settings section of the app rather than with the other tip options.
The company has since remedied that practice. “You set the terms of your loan,” the website states. “All fees in tips and donations are optional and voluntary.”
What that tells me — and what it ought to tell everyone with a connection to subprime — is that disclosure matters as much as design, especially when financial incentives are at play.
Actual SoLo Funds loans may be more expensive than traditional solutions users may not qualify for, yet they’re a far better alternative than informal lending. Connecting with a P2P lender through SoLo Funds gives unbanked and underbanked consumers another option for financial inclusion.
Today’s CFPB wants the market to decide its value and fate — not an abstract notion of the public interest. That’s what will determine whether it’s great.
