The Connecticut Department of Banking (“Department”) has issued a temporary cease and desist order (“Order”) that directs SoLo Funds, Inc., (“SoLo”) a fintech company that uses peer-to-peer technology to assist consumers in obtaining small dollar loans from third-party lenders, to immediately stop engaging in such activity because it is not licensed as a small loan company in Connecticut. The Order also directs SoLo to stop enforcing loans made to Connecticut residents and make restitution of any amounts it obtained in connection with such loans together with interest. In addition, the Order sets forth the Department’s intention to issue a permanent cease and desist order and to impose a civil penalty and other legal or equitable relief subject to SoLo’s right to request a hearing.
As described in the Order, SoLo’s website promotes its ability to “connect lenders and borrowers” through a mobile application (“Platform”). The Department alleges that loans on the Platform are initiated by a consumer’s request for a certain loan amount, and include a proposed tip amount to the lender (“Lender Tip”) and a proposed tip to SoLo (“SoLo Tip”). Consumers are encouraged to offer a Lender Tip in an amount up to 12% of the loan amount and a SoLo Tip of up to 9% of the loan amount. The Department alleges that 100% of the loans to Connecticut residents originated on the Platform from June 2018 to August 2021 either contained a Lender Tip or a Solo Tip.
The Department also alleges:
- SoLo controls many aspects of the loan transaction on its Platform, including the form of promissory note and TILA loan disclosures.
- To lend or borrow using the Platform, lenders and borrowers are required to set up a special account at a designated bank.
- SoLo assigns proprietary SoLo scores to borrowers to assist lenders in determining borrowers’ creditworthiness.
- If the proposed terms of a loan request are satisfactory to a lender, the borrower executes a promissory note with the lender via the Platform and the lender funds the loan through the borrower’s account at the designated bank. On the due date, the designated bank initiated a debit from the borrower’s account for the lender’s benefit.
- Upon loan consummation, lenders are required to pay the offered SoLo Tip [to SoLo] on the borrower’s behalf.
- From at least June 2018 to the date the Order was issued, SoLo facilitated over 1,600 loans to over 275 Connecticut borrowers via the Platform, with $100 the most common principal loan amount, an average Lender Tip of $21, and an average SoLo Tip of $10.
- Regulation Z requires both tips to be included in the finance charge, resulting in APRs on the loans made to Connecticut borrowers ranging from approximately 43% to over 4280%.
- The loan disclosures stated that the loans had 0% APRs.
- Lenders are not permitted to communicate directly with borrowers and must collect delinquent loans through SoLo or consumer collection agencies under contract with SoLo.
- Some Connecticut borrowers were assessed a late fee equal to 15% of the principal loan amount, which was generally split equally between the lender and SoLo. SoLo also charged other fees on delinquent loans, including an administrative fee, a synapse transaction fee, and a 20% recovery fee for its collection efforts. Loans that remained unpaid after a “delinquency period” were referred by SoLo to collection agencies that were permitted to retain 30% of all payments received on defaulted loans.
Under Connecticut law, it is unlawful for any person, unless exempt, to engage “by any method, including, but not limited to, mail, telephone, Internet or other electronic means” in the following activity without having first obtained a small loan license from the Department: (1) “[o]ffer, solicit, broker, directly or indirectly arrange, place or find a small loan for a prospective Connecticut borrower;” or (2)”any other activity intended to assist a prospective Connecticut borrower in obtaining a small loan, including, but not limited to, generating leads.” (“Small loans” are defined as loans of $1500 or less with an APR greater than 12%.)
In addition to alleging that SoLo was required to hold a small loan license, the Department alleges in the Order that SoLo was required to be licensed in Connecticut as a consumer collection agency.
The Order also includes a claim for violations of the federal Consumer Financial Protection Act’s (CFPA) UDAAP prohibition. The Department alleges that SoLo’s activities made it a “service provider” to “covered persons” (lenders) under the CFPA and that SoLo engaged in deceptive acts and practices by providing false and misleading information to borrowers, including that the loans had 0% APRs. The Department asserts that it is authorized to assert the UDAAP claim pursuant to Section 1042 of the CFPA. Section 1042 authorizes a state regulator to bring an enforcement action to enforce the CFPA “with respect to any entity that is State-chartered, incorporated, licensed, or otherwise authorized to do business under State law (except [national banks and federal savings associations]).”