Dive Brief:

• The Connecticut Department of Banking issued a cease-and-desist order last week against Los Angeles-based fintech SoLo Funds for requiring borrowers to pay hefty tips to access loans on its platform.
• All of the loans Connecticut residents originated on the SoLo platform between June 2018 and August 2021 contained a tip, the regulator said.
• Including tips, the annual percentage rates (APRs) on loans made to Connecticut borrowers on the platform during that time frame ranged from 43% to 4,280%, the state's banking commissioner said. 

Dive Insight:

SoLo provides a marketplace for borrowers to connect with lenders to access short-term loans for personal, family or household use in amounts ranging from $50 to $500.

To access the platform, the fintech requires borrowers to set up a special account with Evolve Bank & Trust. Then, to secure a loan, SoLo encourages consumers to offer a “lender tip” of up to 12% of the loan, in addition to a “SoLo tip” of up to 9% of the loan amount. 

The fintech told the Connecticut Department of Banking that “borrowers may opt to include a Lender Tip or a SoLo Donation, but neither is required to submit the Loan request nor to receive a Loan." But the regulator reported in the cease-and-desist order that only Connecticut residents who tipped were able to access credit on the platform. 

The most common principal loan amount that Connecticut borrowers took out on the platform was $100, with an average Lender tip of $21, and an average SoLo tip of $10.

The regulator also pointed to advertisements by the fintech, which stated “not getting funded? Try raising your tip to the maximum percentage,” or “lenders prefer loans that are brief and have a high tip.”

The regulator said SoLo, between June 2018 and March 2021, provided loan disclosures to borrowers that included the value of lender and SoLo tips in the amount due on loans, as well as the contracted due date on which borrowers agreed to pay the amount (including tips). 

But beginning in April 2021, the fintech stopped providing Connecticut borrowers with loan disclosures that included information about tips, and instead referenced only the principal loan amount as due at the end of the term.

Nonetheless, when the loan was due, the total loan amount including tips was withdrawn from borrowers’ accounts at Evolve Bank & Trust.

Although SoLo's loan disclosures to consumers stated 0% APR, actual rates ranged from 43% to 4280%, the regulator said, adding that 15% of Connecticut borrowers were assessed a late fee of 15% of the principal loan amount.

“We are in communication with Connecticut, and look forward to working together on a path forward,” SoLo said in a statement, according to American Banker. 

The Connecticut cease-and desist order could be cause for concern for other fintechs that encourage customers to leave tips. But it isn't the only state to go after lenders with a similar model.

The New York Department of Financial Services subpoenaed cash advance app Earnin in 2019 for requiring tips to access credit. The fintech urged users to leave tips of up to $14 on $100 weekly loans, equating to a 730% APR, The New York Post reported.

Among regulators' concerns with high-interest and payday lenders is a finding that low-income users, often including a disproportionate number of nonwhite borrowers, tend to be repeat customers caught in a paycheck-to-paycheck debt cycle.

“Our regulations are designed to support existing traditional models," SoLo said in its statement. "In order to support marginalized communities, it’s imperative for traditional models to be reimagined and financial innovation to be encouraged.”