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The US Consumer Financial Protection Bureau (CFPB) has begun another enforcement action against a "deceptive" lender, following a major payout from the agency's victim relief fund earlier this month.

On Friday (May 17), the CFPB  a lawsuit against SoLo Funds, a non-bank community finance platform, for “deceiving borrowers” and “illegally extracting fees” from them.

The lawsuit follows a Supreme Court ruling, filed on Wednesday (May 15), which found that the CFPB's funding structure is not unconstitutional. The verdict effectively saved the agency from a potential wind-down, and two days later, it filed its case against SoLo Funds.

Despite advertising zero-interest loans, the CFPB alleges that SoLo uses “dark patterns” to ensure that almost every borrower pays a fee, in the form of a “tip” or a “donation”. Once these are taken into account, the total cost of credit obtained via SoLo is much higher than advertised, the regulator says.

Almost all of SoLo’s loans carry an equivalent annual percentage rate of more than 36 percent, the bureau said, while some carry an APR in excess of 300 percent or even 1,000 percent.

Rohit Chopra, director of the CFPB, claimed that SoLo uses “digital trickery” to hide the real cost of its loans. He added that, despite enforcement actions in multiple states, SoLo continues to violate both the Consumer Financial Protection Act and the Fair Credit Reporting Act.

In a statement shared with 91����ԭ��, SoLo said the CFPB’s lawsuit “misrepresents” the platform as a high-cost credit broker. As the largest black-owned consumer-facing fintech in the US, SoLo said it has saved more than $50m in fees for underserved Americans since its launch in 2018.

It added that, in the , SoLo was recognised as one of the country’s most affordable subprime loan options.

“SoLo has been wrongly accused of misconduct regarding its voluntary tipping fee structure and P2P community finance model, despite tips going 100 percent to community members,” the company said. “SoLo has diligently followed the rules, engaging with leading legal counsel and approaching regulators requesting collaboration since its inception.”

The lending platform said it had been “working voluntarily” with the CFPB over the past 18 months in an effort to find a regulatory path forward. By late Thursday (May 16), SoLo said it had reached an agreement with the CFPB, only to be “blindsided” by the lawsuit the next day.

“This lawsuit feels selective,” said Travis Holoway, CEO of SoLo Funds. “Our political leaders challenged minority innovators to create new models to address our communities' financial inequalities. That is precisely what we’ve created, but regulators have worked hard to stifle innovation and prevent underserved communities from accessing better financial products.”

‘Dark patterns’

In addition to allegations of misrepresenting the cost of its loans, the CFPB alleges that SoLo uses “dark patterns” to deceive customers during loan applications.

As a P2P lending platform, SoLo Funds allows members to sign up as borrowers or lenders and brokers between them. “Borrow from other members. You set the terms,” SoLo states on its . “Offer a tip to show your appreciation. No roll over fee. No compound interest. No debt traps.”

In the CFPB’s investigation, the bureau found that SoLo presents three default options for borrowers to “donate” to lenders when applying for a loan. Borrowers are required to select one of these options, which are presented as percentage amounts, to continue with the loan application.

“SoLo does not inform consumers that a ‘donation’ is not required, and it obscures a ‘No Donation’ option by placing it in a settings section of the mobile application that is not part of the loan application flow,” said the CFPB.

However, at the foot of SoLo’s website, among other small print, the company does state that “Tips and Donations are voluntary”. Nonetheless, as of the end of 2022, the bureau found that only 0.5 percent of funded loans did not include a fee paid to the lender by the borrower.

The agency further states that between March 2018 and December 2022, SoLo received more than $8m in “donations” and lenders received almost $13m in “tips”.

SoLo, which said it has enabled more than 1m loans since its founding in 2018, responded by asking for cooperation from the CFPB.

“Moving forward, we ask for open-mindedness from political and regulatory leaders,” the company said. “We want to be managed with fairness and respect. America deserves viable alternatives to the traditional subprime credit solutions perpetuating our most significant wealth gap in history.”

Victim payout milestone

Earlier this month, the CFPB’s victim relief fund  after distributing $384m to almost 200,000 victims of lending platform Think Finance.

In 2017, the CFPB sued Think Finance for deceiving borrowers into repaying loans they did not owe.

The CFPB’s victims relief fund, also known as the Civil Penalty Fund, has now distributed more than $1bn to consumers harmed by scams, frauds and other illegal practices.