The Introduction to the Complaint which was filed by the CFPB on May 17, 2024 against Solo Funding, Inc. in the United States District Court for the Central District of California – Western Division Los Angeles (Judge R. Gary Klausner) describes the CFPB’s claims as follows:

INTRODUCTION

1. The Consumer Financial Protection Bureau (“Bureau”) brings this action under §§ 1031, 1036(a), 1054, and 1055 of the Consumer Financial Protection Act of 2010 (CFPA), 12 U.S.C. §§ 5531, 5536(a), 5564 and 5565, and under Section 607(b) of the Fair Credit Reporting Act (FCRA), 15 U.S.C. § 1681e(b). This court has subject-matter jurisdiction over this action because it is brought under “Federal consumer financial law,” 12 U.S.C. § 5565(a)(1); presents a federal question, 12 U.S.C. § 1331; and is brought by an agency of the United States, 28 U.S.C. § 1345.
2. SoLo Funds, Inc. (“SoLo” or “Defendant”) is a fintech company that operates a nationwide website and mobile-application based peer-to-peer marketplace (“SoLo Platform”) through which consumers can obtain small- dollar, short-term loans.
3. SoLo markets its online lending platform to prospective borrowers as a consumer-friendly alternative to high-cost, short-term loans. But SoLo misleads borrowers with advertising and disclosures that falsely tout no- interest loans when, in fact, consumers are routinely subject to fees that result in an exorbitant total cost of credit. In addition, Defendant illegally services and collects on loans that are void or uncollectible in numerous states. Defendant also gathers and shares borrowers’ credit information with prospective lenders but fails to take steps to ensure the maximum possible accuracy of that information. Lastly, when loans are overdue, SoLo has repeatedly attempted to coerce payment by falsely threatening to report borrowers to the credit bureaus even though it did not report borrowers to the credit bureaus.
4. Defendant invites consumers to apply for loans through its website and mobile lending application, falsely stating in advertisements that consumers could obtain financing on terms that included “no interest,” “0% APR,” or “0% interest.” At the same time, SoLo invites consumers to serve as individual lenders to fund loan requests and thereby make a profit, based on the purported “tips” that the borrowers would pay (“Lender tip fee”). During the loan application process, borrowers are prompted to select a Lender tip fee and encouraged to pay larger tips to get funded.
5. The Lender tip fee is only one of the fees borrowers are expected to pay to obtain a loan. The loan application process includes an additional step in which the borrower is prompted to select one of three default “donation” fees that goes directly to SoLo (“SoLo donation fee”). SoLo does not provide consumers with a “$0” SoLo donation fee option during the loan application process or even a way to click through to the next page without selecting a SoLo donation fee. Furthermore, Solo obscures the method by which consumers can opt for no donation fee, hiding it in another section of its mobile application and failing to provide readily available information to consumers about how to disable the donation fee.
6. Virtually all consumers who receive loans incur a Lender tip fee, a Solo donation fee, or both.
7. Defendant provided borrowers with loan documents that purported to disclose the amounts owed and costs of the loans but failed to disclose fees that SoLo would seek to collect. For example, some of these documents stated that only the principal amount was due, and others failed to include the Lender tip fee and SoLo donation fee in the calculation of the finance charge and annual percentage rate for the loan.
8. SoLo also serviced and collected (and attempted to collect) on loans that were void and uncollectible under the laws of a number of states because the loans were not made by a licensed person or entity and/or the loans were in excess of state usury limitations. In such states, all the loans brokered were void and uncollectible. SoLo deceptively, unfairly, and abusively represented that these loan amounts were due and attempted to collect and collected on those loans.
9. To aid lenders’ ability to vet consumers’ loan applications, SoLo gathers credit information about prospective borrowers’ bank accounts, debit cards, and prior SoLo loans and combines that information received from third parties into a credit score—the “SoLo Score.” SoLo then provides this SoLo Score to prospective lenders. However, SoLo failed to maintain reasonable procedures to ensure the maximum possible accuracy of the SoLo Score it shared with prospective lenders.
10. Finally, SoLo repeatedly attempted to coerce payment on loans obtained through the SoLo Platform by misrepresenting that if the consumer failed to repay the loan on the due date, it would be reported to the credit bureaus and negatively impact the consumer’s credit score, even though SoLo never reported any of its loans to the credit bureaus and was not set up to do so.

There are 9 counts in the complaint which allege the following violations of law:

1. Violations of the CFPA through deceptive advertising (based largely on advertising loans as being “interest-free” when borrowers were expected to tip lenders and make a donation to Solo)
2. Violations of the CFPA through deceptive disclosures and documents (same as 1)
3. Violations of the CFPA through abusive act or practices of obscuring “no donation” option (same as 1)
4. Violations of the CFPA through the deceptive collection of amounts that the consumer did not owe (based on alleged failure to obtain state licenses which void loans made by lenders that should be licensed)
5. Violations of the CFPA through unfair collection of amounts that consumers did not owe ( same as 4)
6. Violations of the CFPA through Solo’s abusive demands for and collection of amounts that consumers did not owe (same as 4)
7. Violations of the CFPA through false credit reporting- threats to consumers
8. Violations of the FCRA through Solo’s failure to follow reasonable procedures to ensure maximum possible accuracy of consumer report information
9. Violation of the CFPA by virtue of violating the FCRA.

On August 15, Solo filed a motion to dismiss counts of the complaint (except 3 and 7). However, Solo’s lead argument seeks dismissal of the entire complaint based on the filing and prosecution of the lawsuit using funding obtained from the Federal Reserve Board in violation of Dodd-Frank Act which requires that the CFPB may only be funded out of “combined earnings of the Federal Reserve System.” Since September 2022, the Federal Reserve System has incurred substantial losses and, thus, no earnings. The Complaint states:

THIS LAWSUIT WAS FILED AND IS BEING PROSECUTED USING FUNDS OBTAINED IN VIOLATION OF THE BUREAU’S ENABLING STATUTE AND THE CONSTITUTION.

This enforcement action suffers from a fatal, threshold infirmity that requires dismissal with prejudice: it is being litigated with funds transferred to the Bureau in violation of statutory restrictions on the Bureau’s funding and, therefore, in violation of the Appropriations Clause’s mandate that “[n]o Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.” U.S. Const. art. I, §9, cl. 7. Under the Dodd-Frank Act, the Bureau funds its operations by making a demand of the Federal Reserve in “the amount determined by the [Bureau’s] Director to be reasonably necessary to carry out” its operations, subject to a cap of twelve percent of the total operating expenses of the Federal Reserve. 12 U.S.C.§5497(a)(1)-(2). Those funds may come, however, only “from the combined earnings of the Federal Reserve System.” Id. §5497(a)(1) (emphasis added). The “earnings” of the Federal Reserve are its net earnings – i.e., revenues in excess of liabilities. The Supreme Court recognized as much in CFSA [v. CFPB]. It held that the Appropriations Clause applies to the Bureau’s funding, because the funds derive from the “surplus funds in the Federal Reserve System [that] would otherwise be deposited into the general fund of the Treasury.” 601 U.S. at 425 (emphasis added); see 12 U.S.C. §289(a)(3) (directing transfer of surplus funds to the Treasury). The Federal Reserve’s “surplus fund[s]” are its “net earnings.” 12 U.S.C. §289(a)(2) (emphasis added). The plain meaning of the term “earnings” (which the Dodd-Frank Act does not define) confirms this interpretation. “Earnings” means “net income” – i.e., income in excess of [expenses]. See Earnings, Oxford Dictionary of Accounting (4th ed. 2010) (defining “earnings” as “[t]he net income or profit of a business”); Nasdaq, Glossary (defining “earnings” as “[n]et income for the company during a period”);Webster’s Third New Int’l Dictionary 714 (3d ed. 2002) (defining “earnings” as [t]he balance of revenue for a specific period that remains after deducting related costs and expenses.); Merriam-Webster’s Collegiate Dictionary 391 (11th ed. 2007) (defining “earnings” as “the balance of revenue after deduction of costs and expenses”). Thus, the Bureau’s funding must come from the combined net income or profits of the Federal Reserve System.

Since September 2022, the Federal Reserve has had no net earnings or profits. Swank Decl., Ex. 2. For the year ending December 31, 2023, the Federal Reserve reported a cumulative “deferred asset” amount of $133.3 billion, which “represents the net accumulation of costs in excess of earnings.” Id., Ex. The Federal Reserve continues to operate at a loss, reporting a deferred asset of $175 billion as of last month. Id., Ex. 4 at 48. Despite its lack of earnings, the Federal Reserve has continued to transfer funds to the Bureau. Id., Ex. 5 at 4 (reporting transfer of $315 million for first quarter of FY 2024). These transfers are, as the Bureau acknowledges, the “principal[]” means by which “[t]he CFPB is funded.” Id. Thus, the Bureau filed and is prosecuting this lawsuit using funds transferred in violation of its enabling statute. The requirement that the Bureau’s funding come from the combined “earnings” of the Federal Reserve System stands in stark contrast to how Congress chose to fund the Financial Stability Oversight Council and the Office of Financial Research – both also created by the Dodd-Frank Act. For the first two years of its existence, the expenses of the Oversight Council were “treated as expenses of, and paid by, the Office of Financial Research,” 12 U.S.C. §5328, which was funded by the Federal Reserve in “an amount sufficient to cover the expenses of the Office,” id. §5345(c). Congress could have chosen to fund the Bureau from any source of revenue at the Federal Reserve’s disposal. Instead, it limited the Bureau’s funding to a specific source: the combined “earnings” of the Federal Reserve System. This is not to say that the Bureau must cease operations until the Federal Reserve returns to profitability. If the “sums available to the Bureau” from the Federal Reserve are “not … sufficient to carry out [its] authorities,” the Bureau may seek appropriations directly from Congress. 12 U.S.C. §5497(e)(1)(A). But the Bureau may not flout its enabling statute and bypass Congress by using unlawfully requisitioned funds to prosecute this enforcement action. The Court should dismiss the Complaint with prejudice.

To our knowledge, this is now the fourth time that this argument has been made within just a few weeks. For our blogs about the other cases, see here, here, and here.

We would expect to see this argument raised routinely as a defense in most, if not all, future enforcement lawsuits brought by the CFPB.

The CFPB Complaint is also noteworthy because the CFPB once again has concluded that tips and donations paid by a borrower are finance charges even when they are completely voluntary. Recently, the CFPB proposed an interpretive rule regarding Earned Wage Access (“EWA”) products in which it concludes that tips paid by employees are finance charged under the Truth in Lending Act and Regulation Z.

[View source.]