Fintech founded to stop abusive lending, leaving trail of lawsuits – BNN Bloomberg

(Bloomberg) — Rodney Williams and Travis Holoway co-founded peer-to-peer lending platform SoLo Funds Inc. in 2018 with the goal of helping the millions of Americans who fall victim to abusive lenders. As one of the few startups in the venture capital space founded by Black people – a demographic that secured just 0.48% of all venture capital investments in 2023 – SoLo Funds positioned itself as a lending solution for those facing cash-strapped situations.

The founders branded the Los Angeles-based fintech company as a third-party platform that connects borrowers with lenders without incurring mandatory fees or interest; Users would be able to apply for loans of up to $575, which would then have to be paid back to individual lenders within 35 days. SoLo’s business model quickly gained attention and has helped many since its launch. The company reached nearly 2 million users earlier this year, secured a spot on CNBC’s 2023 Disruptor list and received financial backing from tennis superstar Serena Williams’ venture fund.

But hundreds of SoLo users and officials in three states and Washington DC say the company has broken its promise. Multiple lawsuits, as well as internal unrest and allegations of suspicious business practices, have raised questions about who ultimately benefits and who may be harmed by SoLo Funds’ services.

A class action lawsuit was filed against the company on October 16, alleging that SoLo Funds’ lending practices were “unlawful and deceptive.” According to the lawsuit, SoLo Funds tricked customers into thinking they had taken out an interest-free loan. However, most borrowers end up paying a fee masked in the form of “tips” to the lender and “donations” to the company.

Regulatory issues

The Consumer Financial Protection Bureau said in a complaint in May that the total cost of some loans serviced by SoLo Funds represents a corresponding annual percentage rate of more than 1,000% and that the company is harming consumers by hiding a “no donation” option and She places deep inside the settings section of the mobile app. The District of Columbia, Pennsylvania, Connecticut and California have also sued the company in the last two years on similar grounds. SoLo Funds does not admit any wrongdoing in any of the cases. The company has reached settlements with all authorities except the CFPB, whose case is still pending.

Several former SoLo Funds employees — most spoke on condition of anonymity for fear of retaliation — said the founders instructed them to deliberately turn off donation options. In a statement to Bloomberg News, SoLo Funds denies that the company intentionally makes it difficult for users to opt out of paying tips or donations.

Between July 2022 and July 2023, SoLo Funds spent over $1 million in legal fees, according to Bloomberg data. The company said over 90% of those fees were spent “addressing the most complex regulatory landscape in the United States.” In a May 2023 consent order, the California Department of Financial Protection and Innovation accused SoLo Funds of arranging consumer loans without the required license, for which the company has since filed, a DFPI spokesperson said. SoLo Funds said in a statement last year that it had reached an agreement with DFPI to resume operations in California, telling Bloomberg News that it had “been in regular communication with California (and many other states) regulators.” , all related to one thing: “Introducing new products in California and beyond.”

“What concerns me about all of these products is that they are designed for people who can least afford it,” Ted Rossman, a senior industry analyst at Bankrate, said of lending platforms. “While the payday loan industry rightly has a very negative connotation, some of these new things speak a kinder, kinder and gentler language but could be credit-friendly in their own way.”

Gary Tumanov, a SoLo Funds lender in Illinois, said he tried to collect $1,000 worth of outstanding payments from users he had lent money to over the past five years. When borrowers default on a loan, SoLo Funds’ policy is to transfer the account to a third-party collection agency to attempt to collect at least a portion of the money owed to creditors. However, Tumanov said he was never contacted by a debt collector or received an update on the status of the money he borrowed. Hundreds of users on a subreddit for SoLo lenders have posted similar complaints about SoLo Funds’ efforts to collect on delinquent loans. The company said Tumanov “did not regularly participate in our platform, ignored follow-up emails from our employees, or made false statements about how it works.”

Frustrated by unpaid loans, the anonymity of borrowers and lenders, and difficulty obtaining financing, SoLo Funds users took matters into their own hands. Last year, users launched a Discord server where borrowers and lenders can connect and even transact informally.

“SoLo Funds is nickel and diming lenders and not monitoring borrowers,” said Casey Brock, a Montana borrower and lender. “They advertise their platform as if you are guaranteed to get financing in just 20 minutes.” Many borrowers have complained about having to wait weeks for a loan to be processed.

When users on SoLo Funds’ Discord channel asked about the CFPB lawsuit, Williams said it shows the company is “really on to something groundbreaking.”

The recent regulatory action filed against SoLo Funds comes as no surprise to some former employees, who the founders say are more concerned with growth and fundraising than improving the product itself. The former employees added that the founders often rushed to introduce new features to the app and inflated key business metrics to investors.

A former employee said that from 2020 to mid-2023, SoLo Funds did not write off accounts receivable on loans it was responsible for collecting under its secured loan product. That resulted in sales figures that were inflated by millions of dollars, according to documents seen by Bloomberg and a person familiar with the situation, who asked not to be named discussing private information. SoLo Funds rejects these estimates.

“The accounting [rules] “You’re supposed to be conservative, which means you’re a little more aggressive in predicting losses, but you definitely shouldn’t be aggressive in predicting profits,” said Shiva Rajgopal, a professor of accounting and auditing at Columbia Business School.

Donation-based models in the lending industry are not only available at SoLo Funds. Fintech Dave offers short-term loans of up to $500 with its ExtraCash feature, which also gives borrowers the option to tip. But unlike Dave, which makes loans directly to borrowers, SoLo Funds acts as an intermediary for loans between ordinary people.

“The founders didn’t really make decisions in line with the values ​​they had set for the company,” said one former employee. “They didn’t make decisions that provided protection for borrowers.”

Between 2022 and 2023, SoLo Funds entered into loan agreements totaling nearly $1 million with people who sometimes knew the founders personally and who agreed to deposit funds into their SoLo Funds account in exchange for a guaranteed monthly return of 1 %, according to a person familiar with the source agreements.

“All credit or debt agreements have been properly documented,” the company said in a statement.

Internal disagreements

One of the company’s former executives said the founders occasionally withheld unflattering but accurate information from board members.

“On numerous occasions I have been asked to remove things from my presentation to the board that said, ‘I think we have a risk here’ or ‘I think there is a possibility that something is wrong here,'” she said Person. “I felt like my job would have been in jeopardy if I had spoken independently to a board member.” SoLo Funds disputes these claims.

Williams and Holoway often faced resistance to company decisions, according to a former member of SoLo’s leadership team, who described the co-founders’ decision-making as “erratic.” SoLo Funds disagrees with that claim, but at least seven senior employees said they left the company because of what they saw as poor leadership.

“Every time there was a disagreement with a founder, that person was determined not to be a team player and then they were basically kicked out,” said a former employee who worked closely with the founders. “I witnessed the promise of rewards that were never paid. I’ve seen people get yelled at when they disagree with what the co-founders said. I have seen how female employees are put under pressure.”

Prior to SoLo Funds, Williams co-founded the ultrasound data transfer platform LISNR. In 2020, a former LISNR employee filed a lawsuit against SoLo Funds and Williams, claiming that Williams “repeatedly and regularly” required her to “perform sexually oriented tasks” and that she was discriminated against based on her gender. The lawsuit was ultimately dismissed by the plaintiff, who declined to comment. However, several former LISNR employees told Bloomberg News that they had experienced similar behavior from Williams, but said there was no human resources representative to report to at the time.

“SoLo can only speak about its company and its atmosphere,” the company said in a statement. “To date, a harassment lawsuit has never been filed against SoLo Funds, nor has the company been sued by any employee (current or former) for any reason, including but not limited to misconduct by Williams or any other executive.”

LISNR did not respond to a request for comment.

Williams stepped down as CEO of LISNR in 2018, shortly after he founded SoLo Funds with Holoway, a Cleveland native who previously worked at Northwestern Mutual. Williams, a Baltimore native, worked at Procter & Gamble before LISNR.

Several former SoLo Funds employees pointed to a disagreement with the founders last May over the decision to reset users’ passwords after unauthorized users accessed at least 37 SoLo Funds accounts – only to discover that the company had been denied the correct software missing to fix. Finally, the company performed a password reset. According to documents seen by Bloomberg, SoLo Funds experienced six fraud cases between 2021 and June 2023 that cost the company at least $1.3 million. SoLo Funds told Bloomberg News that the company’s balance sheet is much cleaner.

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