SoLo Funds received the endorsement of Rep. Jonathan Jackson, D-Ill., just days after the online marketplace lender was hit with a class-action lawsuit, as it continues to defend its unique business model against critics.
SoLo Funds, a Los Angeles-based, Black-led certified B Corporation, runs a platform on which members make loans ranging from $20 to $575 to one another and the company services and collects on the loans. To decide which applicants are creditworthy, SoLo Funds uses a proprietary credit scoring tool it calls a “social score” that’s calculated by analyzing personal and financial information from borrowers’ mobile phone, social media and bank account records.
In a letter to CFPB Director Rohit Chopra, Jackson said the company provides important access to funds to underserved communities.
“SoLo Funds’ peer-to-peer lending platform provides borrowers and lenders the ability to apply advanced technology to support the seamless and quick transacting of short-term, small-dollar lending,” Jackson said in his letter. “I have had the opportunity to speak with and understand how SoLo Funds can help both my own constituents and those across the country access small dollar loans at little or no cost. Fewer than half of American consumers have enough savings to pay for a $1,000 emergency, and most of these Americans are in historically marginalized communities.”
Rodney Williams, co-founder and CEO of the company, said Jackson met SoLo Funds officials before sending his letter to the CFPB.
“He reviewed the product, he asked the questions and he said, ‘This is the type of product I want. I would much rather have this product than payday loans, subprime credit cards, earned wage access or any of the other products,” Williams said in an interview. “This product is the only product that’s funded by people.'”
The trouble with tips
SoLo Funds technically does not charge interest on the loans on its platform, but members can pay optional “tips” to their lenders and “donations” to SoLo Funds itself.
The tips and donations are the rub for the Consumer Financial Protection Bureau,
“The CFPB is suing SoLo for using digital trickery to hide interest and fees on its online loans,” said CFPB Director Rohit Chopra at the time. “SoLo has had repeated run-ins with state regulators, and we are putting a stop to their fake tipping scheme.”
According to SoLo Funds, the average total cost of its loans equates to a 17% annual percentage rate, well below most state interest rate caps and far below the cost of subprime cards and payday loans.
“For fintechs that seek to break the mold of traditional lending that remains out of reach for millions of Americans, class actions like this are not unexpected,” said Richard A. Freshwater, interim general counsel at SoLo Funds, in response to the lawsuit. “Unfortunately, they are an expected growing pain.”
After the CFPB brought its claims against SoLo Funds, class-action lawyers took to Reddit and similar platforms and asked current and former SoLo users to contact them, Freshwater said.
“SoLo considers the claims in this suit to be wholly without merit and looks forward to showing the court that not only does its platform comply with the law, but that it brings benefits to an otherwise underserved community,” Freshwater said.
In his letter to Chopra, Jackson said SoLo Funds has voluntarily engaged with state and federal regulators for more than two years to explain its model and the steps it takes to ensure customers are protected.
“While SoLo Funds’ business model is different from other lending platforms that state or federal regulators may have encountered, their ability to provide financial access to undercapitalized Americans is far-reaching and important,” Jackson said. “I hope you will work with the SoLo Funds team to find fair, meaningful regulation that allows for them to operate in a robust way across the country so that innovation across this field can continue.”
Williams believes his company is being swept up in anti-fintech sentiment.
“The CFPB is very vocal that they don’t believe that fintech is helpful to Americans,” Williams said. “I think there’s a significant bias towards technology and innovation. We’ve had to sustain a lot of scrutiny and a lot of negativity that was unwarranted, and we’ve had to continue to be steadfast.”
Serving a growing need
SoLo Funds, which now has more than two million users, continues to grow, despite these headwinds and no marketing budget, Williams said.
“We don’t grow because of some scheme,” he said. “We grow because this demographic is actually pretty intelligent, based on our research. They understand the cost, they understand the benefit here, and they’re choosing us over other solutions. We’re the people’s choice.”
The company serves working-class consumers, some of whom are paid hourly. More than 10% of SoLo Funds customers make more than $100,000 a year, Williams said. More than half are college-educated.
“It’s everyone from the barista at Starbucks to your Uber driver to your nurse to staff that work in government agencies,” Williams said. SoLo customers own homes and drive cars, he said. Eighty percent have a credit card and 50% use apps like Robinhood.
“They’re choosing us over the best earned wage access company,” Williams said. “They’re choosing us over the best buy now/pay later companies. They’re choosing us over the top credit cards.”
Some of these users have read the CFPB’s complaint and then looked at the product and said, “How do I not understand the cost if I’m the only one that selects it?” Williams said. “This is the only product that lets me select my cost. What’s more transparent than me selecting my cost?”
Some large banks have
But until recently the large banks charged consumers large overdraft fees, Williams said, and now they are looking to charge other kinds of fees, such as account maintenance fees.