The CFPB May Use Its Civil Penalty Fund to Reimburse Fintech Customers Impacted by Synapse’s Bankruptcy

In a New Court Filing, the CFPB Suggests Potential Unfair Practices by Synapse

The CFPB has stated that it may use its Civil Penalty Fund to compensate customers of Synapse who lost money due to the fintech company’s bankruptcy last year. According to a recent court filing related to the Synapse bankruptcy, there are concerns about whether Synapse failed to properly track and reconcile consumer funds across partner financial institutions.

CFPB’s Intentions: Fact-Finding, Analysis, and Legal Action

The Bureau intends to continue its investigation into the alleged unfair practices by Synapse. These actions are believed to have caused significant harm to consumers. The CFPB has supported a motion to convert or dismiss the case but also argued that the court should keep it as a Chapter 7 bankruptcy to facilitate the pursuit of a claim against the Synapse estate for violations of the Consumer Financial Protection Act.

CFPB’s Decision and its Basis

The filing outlines several reasons why the CFPB believes that Synapse may have violated Sections 1031 and 1036 of the Consumer Financial Protection Act by improperly tracking and reconciling consumer funds. This could lead to an enforcement action against the Synapse estate, potentially resulting in civil penalties.

The Bureau can use these potential civil penalties as a means to reimburse victims through its Civil Penalty Fund if it successfully wins a final order against the Synapse estate. The fund is used to help those who would otherwise not receive compensation from companies that reach settlements with the CFPB.

Industry Response and Broader Context

In the wake of Synapse’s bankruptcy, multiple partners distanced themselves due to financial uncertainty. As of April 2024, four banking partners lost contact with Synapse’s financial records, leaving USD 265 million in customer deposits blocked. No regulatory accountability has been established for those involved.

CFPB’s Focus and Future Implications

This move by the CFPB aligns with its recent emphasis on ensuring that financial markets meet consumer, provider, and overall economic needs. The bureau was created to provide a single point of accountability for enforcing federal client financial laws.