CFPB Sues Synapse, Seeking to Compensate Victims From Civil Penalty Fund

The Consumer Financial Protection Bureau (CFPB) aims to provide compensation from its Civil Penalty Fund to consumers harmed by the actions of the now-bankrupt banking-as-a-service (BaaS) provider Synapse Financial Technologies.

The CFPB sued Synapse on Thursday (Aug. 21) and submitted a proposed stipulated final judgment and order that asks the court to provide a $1 civil money penalty that would enable the agency to access the fund and compensate the harmed consumers, the CFPB said in a Thursday announcement of its enforcement action.

The CFPB also asked the court to prohibit Synapse from selling customer information, according to the announcement.

In its complaint, the CFPB alleges that Synapse failed to maintain adequate records of consumers’ funds and failed to ensure the records matched those maintained by its partner banks, “causing consumers to lose access to their funds,” per the announcement.

“The partnering banks determined that the total funds they were holding for consumers was less than the total amount of consumer funds reflected in records Synapse provided to them, reflecting a shortfall of between $60 and $90 million,” the CFPB said in the announcement. “Consumers did not have any access to their funds for weeks or months as the partnering banks reconciled their records with Synapse’s records and then distributed funds to consumers, and many consumers have not received the full amount of their account balance.”

The Civil Penalty Fund was established to compensate victims harmed by companies that break federal consumer financial protection laws, according to the CFPB’s website. The fund can provide money to those harmed in cases in which a fine was imposed in a case brought by the CFPB and in which they won’t otherwise receive full compensation.

Synapse filed for Chapter 11 bankruptcy in April 2024. The move affected more than 100 firms because Synapse was a middleware firm whose services allowed other businesses to embed banking services into their own offerings.

The trustee of Synapse’s Chapter 11 bankruptcy case found that about $85 million in the company’s customer funds were unaccounted for and that a tangled web of fund flows, bank accounts, FinTechs accounts and ledgers would make it challenging to restore access to those funds.

On the first anniversary of the Synapse collapse, QED Investors partner Amias Gerety underscored basic failures by Synapse and a banking partner, particularly in routine but crucial tasks like account reconciliation.