• CFPB plans legal action against bankrupt Synapse
• Accuses firm of poor recordkeeping and mismanagement
• $60–90M in consumer funds remain missing
• Hundreds of fintech users report frozen accounts
• Case may convert from Chapter 11 to Chapter 7
• CFPB could use civil penalty fund to repay victims
• Synapse collapse froze $265M for over 100,000 customers
• Partnered with fintechs and banks including Evolve and Mercury
• AWS data copied for ongoing review
• Hearing on bankruptcy conversion set for Monday

The Consumer Financial Protection Bureau is preparing to sue bankrupt Synapse Financial Technologies, accusing the middleware fintech of failing to track and reconcile millions in customer deposits, leaving tens of thousands without full access to their funds.

According to a court filing by Synapse’s Chapter 11 trustee, former FDIC Chair Jelena McWilliams, the CFPB plans to allege that Synapse did not maintain adequate records of where consumer money was held or ensure those records matched those of partner banks. 

The alleged lapses caused consumers to lose access to an estimated $60 million to $90 million, much of which remains unrecovered.

The bureau and McWilliams are negotiating a proposed stipulated final judgment with “nominal monetary penalties” for court approval. 

The CFPB has argued that keeping the case active – whether in Chapter 11 or converted to Chapter 7 – will allow it to move more quickly toward judgment and potentially compensate victims.

In June, the CFPB opposed dismissing the bankruptcy in favor of converting it to Chapter 7, saying it would better protect consumers who have not been made whole. 

Hundreds of users of fintech platforms connected to Synapse have complained to the bureau, saying their accounts were frozen and they received only partial payouts.

The agency said it has a mechanism to compensate victims without relying on Synapse’s remaining assets, potentially using its civil penalty fund. Since 2010, the fund has paid $3.3 billion to consumers, with $118.9 million in unallocated funds as of last September.

Synapse’s collapse in April 2024 froze more than $265 million in deposits across over 100,000 consumer accounts. 

The bankruptcy exposed severe weaknesses in its operational controls, as neither Synapse nor its bank and fintech partners had clear ledgers showing ownership and location of the funds. The trustee described the situation as “gross mismanagement.”

Synapse’s network included fintech firms such as Yotta, Juno, Mercury and Copper, and insured banks like Evolve, Lineage Bank, American Bank and AMG National Trust. 

Acting as a bridge between apps and banks, Synapse handled fund transfers and record maintenance — responsibilities now under scrutiny.

The investigation has also involved efforts to preserve and analyze Synapse’s data. In June, Evolve Bank gained access to Synapse’s records stored in Amazon Web Services with help from GlassRatner Advisory Services. 

By July 31, Evolve and independent data analysis firm Ankura had completed copying the data into an Evolve-controlled environment for ongoing review.

On Wednesday, Evolve filed an agreement with McWilliams to continue maintaining the AWS data beyond the case’s conclusion. The bank declined to comment on the proceedings.

A hearing on whether to convert the bankruptcy to Chapter 7 is scheduled for Monday.