A fintech peer-to-peer lender has entered into separate consent orders with California, Washington D.C., and Connecticut relating to its practice of requesting tips and donations in connection with the loans offered through its platform. The fintech’s platform offers opportunities for members to act as borrowers or lenders and facilitates loans between its members. According to the allegations, borrowers were deceived into paying a tip to the lender, calculated as a percentage of the loan, in order to get their loan funded. The fintech also allegedly asked borrowers to pay them a donation, also a calculated as a percentage of the loan. The tip-based model has become increasingly popular in small dollar lending, earned wage access, and other fintech lending as an alternative to more traditional interest and fee-based models.

In the California settlement, dated May 8, 2023, the Department of Financial Protection and Innovation (“DFPI”) alleged that borrowers were encouraged to offer the maximum tip to ensure that their loans were funded. Pop-up messages soliciting donations could not be easily closed, and most borrowers in California paid both a tip and a donation as it was difficult to proceed with the loan application without doing so. The DFPI alleged that this amounted to brokering consumer loans without a license, that the interest being charged (after including the tips and donations) exceeded the maximum interest rate permissible under the California Financing Law, and that the notes generated failed to comply with the Truth-In-Lending Act by disclosing that the loans had a 0% APR. The fintech agreed to pay a $50,000 fine and refund all donations received from borrowers in California.

The District of Columbia alleged that the fintech engaged in deceptive practices by hiding the true cost of its loans, which were advertised as having no interest or fees, and the optional nature of the tips and donations were not clearly disclosed. The D.C. Office of Attorney General’s Office of Consumer Protection asserted that when accounting for tips and donations, the average APR of loans on the platform was more than 500%, well above D.C.’s 24% usury cap. The D.C. Attorney General also alleged that the fintech’s representations to its peer-to-peer lenders that they could make a quick return on their loans made to borrowers was deceptive because of high default rates. The company was assessed a $30,000 fine, out of which remediation will be made to impacted borrowers.

The Connecticut Banking Commissioner’s consent order alleged that the fintech engaged in deceptive practices, brokered small dollar loans without a license, and acted as a collection agency without a required license. The company agreed to cease and desist lending activity in the state until it addressed these issues and obtained the required licenses. In the future, the fintech also agreed to only allow tips to be made after loans are fully repaid. Under the settlement, the company must pay a $100,000 fine and reimburse borrowers in Connecticut for all fees paid on loans. The consent order follows a 2022 Cease and Desist Order from the Connecticut Banking Commissioner challenging these same practices.

The fintech did not admit to any violations of law or wrongdoing under the three agreements.

The tips model is somewhat prevalent in short-term loan and earned wage advance products. Lenders that collect tips should be mindful of the recent scrutiny of these practices, as evidenced by these settlements.