The Consumer Financial Protection Bureau sued Los Angeles-based fintech SoLo Funds on Friday, asserting it has deceived borrowers regarding the true cost of loans on the platform, owing to its “tip” structure.

SoLo also has concealed from borrowers the option to forgo a tip, and has offered loans to borrowers in states that require platforms to have a license, the CFPB argued.

The fintech, for its part, asserts it’s not a lender but a broker that connects potential borrowers with investors who fund the loans.

Borrowers are prompted to offer tips to lenders and “donations” to SoLo in exchange for the loans. The average tip to lenders is 10.4% of the loan, according to American Banker, and the average donation to SoLo is 6.2%.

The CFPB contends, however, that the tips and donations are not voluntary.

SoLo shows consumers three default options for the donation, requiring borrowers to choose one before proceeding in the loan application, the CFPB said. But none of those options is “No Donation,” the regulator said. That option is located in a settings section of the mobile app outside the flow of the loan application, the CFPB asserted.

In a statement Friday, CFPB Director Rohit Chopra called SoLo’s methods “digital trickery.”

Rodney Williams, SoLo’s president and co-founder, told American Banker this week that the fintech changed the way it displays those options several years ago.

The tip structure itself has been the subject of regulatory attention at the state level — a notion Chopra also highlighted.

SoLo agreed to pay $100,000 to the Connecticut Department of Banking over allegations that, including tips, the annual percentage rate on loans through the platform often exceeded state limits. Further, the state alleged, although SoLo donations were technically voluntary, only users who tipped were able to access credit on the platform.

Indeed, roughly 0.5% of funded loans did not include a fee paid to the lender by the borrower as of Dec. 31, 2022, the CFPB said.

Connecticut isn’t the only state to have settled with the fintech. SoLo agreed last year to pay $50,000 to California’s Department of Financial Protection and Innovation, and $30,000 to Washington, D.C.’s attorney general.

SoLo launched in 2018 as an alternative to costly payday lenders, offering short-term loans of between $20 and $575. The platform has brokered 1 million loans as of this month, the CFPB said. But almost all of those loans carry an APR above 36%, the regulator noted.

“The whole question of these so-called voluntary payments and whether they should be treated as fees is an attempt by lenders to evade requirements for disclosure in the Truth in Lending Act,” Todd Baker, a senior fellow at the Richman Center for Business, Law and Public Policy at Columbia University, told American Banker. “If you treat it as if it were a long-term loan, you have high APR.”

SoLo said it is not violating any laws, adding that the fintech and the CFPB have been hashing out a solution.

“SoLo Funds has been voluntarily working with the CFPB for the last 18 months, attempting to work toward a regulatory framework that maintains its affordability for Americans,” the company said in a statement. “We had primarily agreed on a path forward [Thursday], and unbeknownst to us, we were blindsided the next morning with a suit.”

Williams told American Banker that SoLo plans to fight the CFPB’s complaint in court.

“I think if [the CFPB] cared about protecting consumers or helping consumers, they would work with new companies that were trying to do things differently,” he told the publication. “But there is no pathway for a company like ours to do anything new because it's always being scrutinized.”

The CFPB is seeking injunctions against SoLo, along with monetary relief for borrowers, forfeiture of ill-gotten gains and a civil penalty.

Aside from its other allegations, the CFPB said SoLo has threatened consumers, saying it would send negative information to credit bureaus over nonpayment. The company, however, has never reported any information to credit bureaus, the CFPB said.

Instead, SoLo acts as a credit reporting company, constructing a “social credit score” to give to lenders, the CFPB said. For that, SoLo gathers information regarding potential borrowers' mobile phone plans and uses the data aggregator Plaid to gather bank account information.

“That score is based on cash flow data,” Williams told American Banker. “And it’s very simple. Either you have a history and you score well, or you don’t.”

Williams characterized the score as a risk measure that is not sold to anyone.