Investigations find app-based lender charging interest rates in excess of 500% for short-term loans
California, Connecticut, and the District of Columbia have all taken action against fintech lender SoLo Funds as a result of the app-based, peer-to-peer lending outfit using "tips" to disguise the true cost of its loan products. Investigations by regulators in all three jurisdictions found SoLo charging interest rates in excess of 500%.
“Connecticut, California, and DC have called out the Emperor’s New Clothes, taking important actions against SoLo Funds, which uses so-called ‘tips’ and ‘donations’ to conceal APRs that can reach 511% or higher,” said Lauren Saunders, associate director of the National Consumer Law Center (NCLC). “All three agencies appear to have effectively barred SoLo Funds from facilitating unlicensed fintech payday loans at rates that violate state rate caps.”
SoLo Funds operates a lending platform where consumers can request loans up to $500 from individual lenders. It uses various techniques to push borrowers into paying “tips” and “donations.” The standard loan has a 15-day term, and SoLo encourages a tip of 12% of the loan amount plus a donation to SoLo of up to 9%, though some borrowers pay more or less. SoLo discloses a 0% APR, but a 12% tip and 9% donation on a 15-day loan would be the equivalent of a 511% annual percentage rate (APR).
NCLC noted that the decisions in these states could have implications for other fintech lenders that use tips or donations in conjunction with their loan offerings.
Fintech apps such as Earnin, Dave, Money Lion, Klover, Albert, and Chime also collect tips instead of explicit fees or interest on cash advances and overdraft services. Data released by DFPI shows the high costs of earned wage advances and other fintech payday loans, with APRs that on average exceed 330% regardless of the tip or fee model.
“Other states and the Consumer Financial Protection Bureau should challenge the use of so-called ‘tips’ and other evasions to disguise fintech payday loans that put people in a debt trap,” Saunders urged.