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US consumer regulators are increasing the pressure on a Serena Williams-backed lending start-up, introducing a proposed rule that would restrict the way it charges customers.
The action by the Consumer Financial Protection Bureau and its director, Rohit Chopra, follows a lawsuit filed by the regulator earlier this year for deceptive lending practices.
Earlier this year, SoLo announced that it had received a “seven-figure investment” from Serena Ventures, the finance firm of the tennis star, who retired in 2022. The VC firm, which says it invests in start-ups that are either run or cater to minorities, lists SoLo on its website as one of its portfolio companies.
“SoLo is transforming the lives of everyday Americans with democratized access to capital and returns that’s truly rooted in community. Community finance is working and SoLo is proof of that,” said Williams at the time of the investment.
Williams and the company did not respond to requests for comment by the Financial Times about the new proposed regulation, which would take effect after a six-week comment period.
Three months later, the CFPB sued SoLo, saying it was deceiving borrowers by advertising that its loans are “zero-interest loans or 0% APR”, despite the fact nearly all of its borrowers end up paying a fee, in the form of a “tip”. SoLo is fighting the lawsuit.
The tennis star contends the start-up, SoLo Funds, is improving the financial lives of Black people and other minorities by providing a more compatible form of credit than traditional lenders. SoLo Funds is a peer-to-peer lending platform that uses a pay-what-you-like model. Authorities believe borrowers wind up paying fees on the loans that far exceed existing limits.
The CFPB would require SoLo and other upstarts to price their loans in terms of annual interest rates, and not as a flat fee. The rule would also require SoLo to ensure that the fees borrowers are paying on its website to obtain loans do not exceed federal or state caps on what lenders can charge.
SoLo Funds, which was launched in 2018 by two Black entrepreneurs, Rodney Williams and Travis Holoway, says it gives individuals more power over what they pay when they take out a loan. Critical to that model, SoLo says, is the flat fees that customers can set themselves when they borrow through SoLo’s website.
Unlike a traditional lender, SoLo doesn’t charge a specific interest rate on its loans, which average $500. Instead, customers are asked how much they would like to borrow and what fee they would pay to get the loan. SoLo calls the fee a tip.
Lenders can browse requests — which include a proposed duration as well as what the borrower plans to use it for — and decide whether they would like to make the loan. SoLo facilitates the loan and the payment through its website, taking a cut of the fee.
The CFPB’s new rule would affect a number of lenders but is specifically targeting the tipping model that SoLo Funds and a handful of other fintech’s use.
“We want to see the market compete down costs for employees and employers, rather than innovate on ways to harvest junk fees and push people into cycles of debt,” said the CFPB’s Chopra in a statement that specifically referenced its prior actions against SoLo.
In fact, the CFPB says, the actual average annualised interest rate that borrowers pay through SoLo is 36 per cent but in many cases tops 300 per cent.
SoLo maintains it is in compliance with federal and state lending loans and it is working with regulators to help them understand the advantages of its offering.
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