Synapse Financial Credit Division Loses Lending License

Warren Buffett once remarked that it’s when the tide goes out that you find out who’s been swimming naked.

The continuing regulatory examinations of various parts of the Synapse Financial Technologies web of operations gives some stark illumination between the differences — and perhaps some may say widening gulf — between traditional banks and FinTechs.

And to take a cue from that Buffett comment, the reality is that the tide is going out on Synapse, revealing the extent to which a seeming lack of internal controls or processes have been generating negative ripple effects across the financial services landscape.

It’s been well-documented that as much as (or at least) $85 million in customer funds had been unaccounted for at the time of Synapse’s Chapter 11 filing. And only recently have banks, including Evolve Bank & Trust and Lineage Bank, been able to unlock data housed within Synapse, which paves the way to returning funds to customers.

The State of California Weighs In

Earlier this month, the California Department of Financial Protection and Innovation (DFPI) announced it had issued an order that revokes the California Financing Law license of Synapse Credit LLC (Synapse Credit), a subsidiary of Synapse Financial Technologies.

The credit unit of Synapse offered — we’re using past tense here — loans to individuals and businesses. The link tied to Synapse Financial and also to Synapse Credit no longer seems operational, as of this writing. The California regulators indicated that “after the bankruptcy filing of its parent company, the DFPI commenced a regulatory examination of Synapse Credit. As part of that regulatory examination, the DFPI sought books and records, reports, and other data used by the company, to assess whether it was operating in conformity with the California Financing Law. Despite multiple requests, no documents were provided.”

There’s been no way to determine if Synapse Credit had been in compliance with California lending laws, and so Synapse Credit is no longer allowed to do business in the state. The order revoking the license noted that “Synapse Credit LLC has not requested a hearing, and the time to request a hearing has expired.”

Last year, as detailed here, the Connecticut Banking Commissioner — through a consent order and sanctions levied on Synapse Credit — noted that it had issued a “notice of intent” to refuse to renew the company’s small loan license. And as part of the consent order, which allowed the company to continue to operate in that state, Synapse had to agree to “cease and desist from failing to submit audited financial statements as required” by law.

The latest links in the Synapse saga point to the momentum, as estimated by PYMNTS Intelligence, that FinTechs have had when gaining traction with new account openings and consumers’ enthusiasm for digital only-credit products and other offerings. As recently as last year, FinTechs garnered 47% of new accounts, marking a significant increase from 36% in 2020.

But the regulatory guardrails, on reporting and accountability with deposit accounts, have been honed over decades with banks and are still an evolving story with the FinTechs. Last week, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) issued a statement that warned of the potential risks related to arrangements between banks and third parties and their joint efforts to deliver bank deposit products and services to end users.

Among the risks: “Fragmented operational functions for deposit products and services among multiple third parties may make it more difficult for the bank to effectively assess risks and assess whether all third parties can and do perform assigned functions as intended … A potential lack of sufficient access by a bank to the deposit and transaction system of record and other crucial information and data maintained by the third party can impair the bank’s ability to determine its deposit obligations.”

Elsewhere in the bulletin, the regulators stated, “A third party’s incentives may not be aligned with those of the bank, such as when a third party may be incentivized to promote growth in a manner that is not aligned with the bank’s regulatory obligations, resulting in insufficient attention to risk management and compliance obligations.”

The stark differences between banks and digital upstarts boil down to record keeping, compliance and managing growth, to name just a few — but the regulators will keep a closer watch.