(Bloomberg) — Rodney Williams and Travis Holoway co-founded peer-to-peer lending platform SoLo Funds Inc. in 2018. promising to help the millions of Americans targeted by abusive lenders. As one of the few Black-founded venture capital startups – a demographic that raised just 0.48% of all venture capital in 2023 – SoLo Funds positioned itself as a lending solution for those in dire straits.

The founders billed the Los Angeles-based fintech company as a third-party platform that connects borrowers with lenders without mandatory fees or interest; users can apply for loans of up to $575, which must then be repaid to individual lenders within 35 days. SoLo’s business model quickly attracted attention and has benefited many since its launch. The company reached nearly 2 million users earlier this year, landed 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. Several lawsuits plus internal unrest and claims of questionable business practices have raised questions about who ultimately benefits from the services SoLo Funds provides, and who may be harmed.

On October 16, a class action lawsuit was filed against the company, alleging that SoLo Funds’ lending practices are “illegal and deceptive.” According to the lawsuit, SoLo Funds led customers to believe they were signing up for an interest-free loan, but most borrowers end up paying a fee that is masked in the form of “tips” to the lender and “donations” to the company.

Regulatory issues

The Consumer Financial Protection Bureau said in a May complaint that the total cost of some loans made by SoLo Funds is an equivalent annual percentage rate of more than 1,000%, and that the company is harming consumers by offering a “no donation” option hide it and place it deep in the heart of society. the settings section of the mobile app. The District of Columbia, Pennsylvania, Connecticut and California have also sued the company on similar grounds in the past two years. SoLo Funds does not admit wrongdoing in any of these cases. The company has reached settlements with all agencies except the CFPB, whose case is ongoing.

Several former SoLo Funds employees — most speaking on condition of anonymity for fear of retaliation — said the founders instructed them to deliberately bury the “turn off” donation options. In a statement to Bloomberg News, SoLo Funds denied that the company is deliberately making it difficult for users to opt out of paying tips or donations.

SoLo Funds spent more than $1 million in legal fees between July 2022 and July 2023, according to documents seen by Bloomberg. The company said more than 90% of these fees were spent “navigating the most complex regulatory landscape in the United States.” In May 2023, the California Department of Financial Protection and Innovation accused SoLo Funds in a consent order of brokering consumer loans without the required license, for which the company has since filed, according to a DFPI spokesperson. SoLo Funds said in a statement last year that it had reached an agreement with DFPI to resume operations in California and told Bloomberg News that it has “regularly communicated with CA regulators (and many other states), all of which relate to a new product launch in California and beyond.”

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

Gary Tumanov, a SoLo Funds lender in Illinois, said he has been trying to collect $1,000 in outstanding payments from users he has lent money to over the past five years. When borrowers default on a loan, SoLo Funds’ policy is to turn the account over to a third-party collection agency to attempt to recover at least some of the money owed to creditors. However, Tumanov said he was never contacted by a collection agency or received an update on the status of the money he borrowed. Hundreds of users on a SoLo lenders subreddit have posted similar complaints about SoLo Funds’ efforts to recover delinquent loans. The company said Tumanov “has not regularly used 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 the difficulty in obtaining financing, SoLo Funds users took matters into their own hands. Last year, users launched a Discord server that allowed borrowers and lenders to connect and even transact informally.

“SoLo Funds is a nickel and dime on the lenders and has no oversight of the borrowers,” said Casey Brock, a Montana borrower and lender. “They advertise their platform as if you are guaranteed to get financing within 20 minutes.” Many borrowers have posted complaints about waiting weeks for a loan to be processed.

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

The recent regulatory actions against SoLo Funds come as no surprise to some former employees, who describe the founders as more concerned about growth and raising money than improving the product itself. The former employees added that the founders often prematurely introduced new features to the app and inflated key business metrics to investors.

From 2020 to mid-2023, a former employee said SoLo Funds did not write off loan receivables it was supposed to collect under its secured loan product. This led to revenue figures being inflated by millions of dollars, according to documents seen by Bloomberg and a person with knowledge of the situation who asked not to be named discussing private information. SoLo Funds rejects these estimates.

“The accounting rules are intended to be conservative, which means you have to be a little more aggressive in anticipating losses, but you absolutely shouldn’t be aggressive in anticipating profits,” said Shiva Rajgopal, professor of accounting and auditing at Columbia Business School.

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

“The founders actually didn’t make decisions in line with the values ​​they had established for the company,” said a former employee. “They didn’t make decisions that protected borrowers.”

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

“All credit or debt agreements are adequately documented,” the company said in a statement.

Internal disagreements

One of the company’s former senior leaders said the founders occasionally hid unflattering but accurate information from board members.

“On numerous occasions I was asked to remove things from my presentation to the board that went something like ‘I think we’re at risk here’ or ‘I think there may be something wrong here,’” the person said. “I had the feeling that my job would be in jeopardy if I had started talking to a board member independently.” SoLo Funds denies these claims.

Opposition to corporate decisions was often met with disdain by Williams and Holoway, according to a former member of SoLo’s senior leadership team, who described the cofounders’ decision-making as “erratic.” SoLo Funds disagrees with this claim, but at least seven senior employees said they left the company because of what they characterized as poor leadership.

“Every time there was a disagreement with a founder, that person was adamant about not being a team player and then basically got rid of them,” said a former employee who worked closely with the founders. “I have witnessed the promise of bonuses that have never been paid out. I’ve seen people get shouted down if they disagreed with what the co-founders said. I have seen gaslighting of female employees.”

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

“SoLo can only speak to its company and its atmosphere,” the company said in a statement. “To date, SoLo Funds has never filed a claim of harassment nor has it been sued by any employee (current or former) for any reason, but especially not for misconduct by Williams or any other leadership member.”

LISNR did not respond to a request for comment.

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

Several former SoLo Funds employees referenced a disagreement with the founders last May over a decision to reset users’ passwords after at least 37 SoLo Funds accounts were opened by unauthorized users — only to realize that it company did not have the correct software to fix this. Ultimately, the company implemented a password reset. According to documents seen by Bloomberg, SoLo Funds suffered six fraud incidents between 2021 and June 2023, costing the company at least $1.3 million. SoLo Funds told Bloomberg News that the company’s track record is much cleaner than that.

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