The CFPB has indicated that it may utilize its Civil Penalty Fund to compensate customers who lost money due to Synapse’s bankruptcy last year.

In a recent court filing related to the Synapse bankruptcy, the CFPB suggested that Synapse might have engaged in unfair practices by failing to adequately track and reconcile consumer funds across Partner Financial Institutions.

Given these alleged unfair practices and their significant impact on consumers, the Bureau plans to conduct further investigations and analysis to establish its claim. Additionally, CFPB’s statement supported converting or dismissing the case but argued that maintaining it as a Chapter 7 bankruptcy would facilitate pursuing a claim against Synapse for allegedly violating the Consumer Financial Protection Act.

Details of Potential Compensation

The Bureau believes there is evidence to suggest that Synapse may have violated Sections 1031 and 1036 of the Consumer Financial Protection Act by improperly managing consumer funds. This potential enforcement action could result in a claim against Synapse’s estate for monetary or other relief.

However, since the Synapse estate lacks sufficient assets to satisfy any claims, the Bureau intends to pursue its case through the Civil Penalty Fund. Companies and firms that reach settlements with the CFPB often contribute to this fund, which can then be used to reimburse victims who would otherwise not receive compensation.

To use these funds, the Bureau must first obtain a final order against Synapse’s estate imposing civil penalties for any violations.

Aftermath of Synapse Bankruptcy

Multiple partners and companies have distanced themselves from Synapse Financial Technologies following its bankruptcy. In April 2024, when Synapse filed for Chapter 11 bankruptcy, its four banking partners lost access to financial records, leaving USD 265 million in customer deposits untraceable. No regulatory accountability has been established for any entities involved.

CFPB’s Recent Focus

This initiative aligns with the CFPB’s recent emphasis on ensuring that financial markets meet consumer needs while safeguarding individuals within the financial landscape, as the Bureau was developed to provide a single point of accountability for enforcing federal client financial laws.