Sen. Elizabeth Warren Calls For Regulators To Ban FDIC Claims For Pass Through Insurance

Progress In Synapse Bankruptcy Slows, CFPB Roundup: Horizon Card, TD Bank, Navient

Sep 15, 2024

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Sen. Elizabeth Warren Calls For Regulators To Ban FDIC Claims For Pass Through Insurance, As Progress In Synapse Bankruptcy Case Slows

The Chapter 11 Trustee in Synapse’s bankruptcy case, former FDIC Chair Jelena McWilliams, filed the latest status report in the case last Thursday, September 12th, in advance of Friday’s hearing in the matter.

The report offered few updates for the end users still waiting — more than four months now — for access to their funds.

Since the last status report, approximately two weeks ago, Evolve disbursed $123,857 in DDA funds, leaving just $710,311 of combined DDA funds at Evolve and Lineage that remain to be distributed.

Evolve indicated it has struggled to return the remaining funds as five fintech programs have not responded to outreach for balance verification and payment instructions: Donut, Namebase, Trim, Unest, and SeedFi.

Lineage continues to hold about $200,000, of which $160,000 is associated with a “DDA loan program,” which the bank is attempting to verify against Synapse ledger data.

Regarding funds held in FBO accounts, AMG and Lineage made additional distributions, brining the total of the funds they held that have been disbursed to 99% and 90%, respectively.

American Bank still holds $43,339 and appears to have been unable to identify to whom the funds belong.

Evolve has disbursed no FBO funds, indicating that its stated timeline of eight weeks from having obtained the data it sought, which was completed on August 23rd, remains accurate.

That suggests Evolve will begin disbursing funds around October 18th — which would make more than five months since users lost access to their funds around May 11th, 2024.

Status of FBO funds distributed to date. Chart title in status report appears to be a typo.

The estimated shortfall remains unchanged, at between $65 million and $96 million.

McWilliams continues to recommend that the case remain in Chapter 11, rather than converting to a Chapter 7 liquidation, for the time being.

Former Synapse CEO Brings “Receipts” In Allegations About Funds Shortfall

Meanwhile, Synapse’s cofounder and former CEO, Sankaet Pathak, took to X, formerly known as Twitter, to level allegations at one-time key bank partner Evolve about the causes of the shortfall in customer funds, which Pathak says totals over $92 million.

Pathak describes Evolve’s core banking system as “outdated” and “impossible to integrate with” and the Evolve team as “lack[ing] the technical expertise to fix this.”

He describes five examples of issues: large fluctuations in the daily balance Evolve’s core reported that did not match actual flow of funds; missing transactions in the data feeds Evolve provided to Synapse (previously reported by Fintech Business Weekly here); inaccurate account statements provided by Evolve; unresolved check reconciliation issues (previously reported on here); and what Pathak describes as the Mercury migration “incident,” in which, he alleges, some Mercury transactions continued to be debited from Synapse-linked accounts after the date of transition.

Pathak’s post included a collection of screenshots of partially redacted communications between Synapse and Evolve that purport to corroborate his allegations.

Sens. Warren, Van Hollen Ask Regulators To Prohibit FDIC Claims For Pass-Through Insurance In Advance Of Next Week’s FDIC Board Meeting

Last week also saw Senators Elizabeth Warren (D-MA) and Chris Van Hollen (D-MD), both of whom sit on the Senate Banking Committee, send a letter to the heads of the OCC, FDIC, and Federal Reserve, arguing that the growth of bank/fintech partnerships and banking-as-a-service (emphasis added) “risks harming consumers while posing a broader threat to the stability of our banking system and the economy.”

Warren and Van Hollen specifically named BaaS providers Stripe, Finastra, Synapse, and “Marqueta” [sic] and “fintech entities” Venmo, Cash App, Yotta, and Chime in their letter.

The Senators make two requests of the banking regulators (emphasis added):

“Ban entities that provide products only eligible for pass-through FDIC insurance from using the FDIC name or logo in any materials, and”
“Establish clear and direct rules for nonbank companies that partner with banks to offer deposit-style products, such as BaaS providers and fintech companies, to ensure they are properly safeguarding consumer funds. Directly supervise and examine these entities under the Bank Service Company Act to ensure compliance and conduct enforcement actions against companies that violate these established rules.” (Fintech Business Weekly has previously written about the legal authorities available to regulators, including the BSCA, here.)

Warren and Van Hollen may see some response related to the Synapse situation sooner than later: Bloomberg’s Evan Weinberger reported earlier this month that the FDIC (emphasis added) “is expected to release a proposed rule requiring banks to maintain ledgers of ‘for benefit of’ accounts opened by third-party fintechs so the banks can identify how much end-user money they’re holding.”

The recently released discussion agenda for the next FDIC board meeting, taking place this Tuesday, September 17th, includes an item on a new notice of proposed rulemaking titled “Notice of Proposed Rulemaking on Custodial Deposit Accounts with Transaction Features and Prompt Payment of Deposit Insurance to Depositors.”

CFPB Roundup: Horizon Card, TD Bank, Navient

The CFPB was busy last week, filing suit against Horizon Card Services and its owner and executive, Robert Kane, reaching a consent order with TD Bank, and reaching a proposed stipulated final judgment and order in its long-running case against student loan servicer Navient.

Horizon Card: An Apparent Bait-and-Switch Targeting Low-Income Consumers

The complaint the CFPB filed against Reliant Holdings, doing business as Horizon Card Services, and its owner and executive, Robert Kane, stems for alleged deceptive and abusive acts or practices and violations of the Truth in Lending Act.

According to the Bureau’s complaint, Horizon Card Services purported to offer what appeared to be a general purpose credit card with a specified credit limit that required no credit check.

In reality, the CFPB says, Horizon charged a monthly membership fee to access the line of credit that could only be used to make purchases from the company’s Horizon Outlet store, which offered “a paltry, rotating selection of often overpriced or off-brand goods, and ancillary products, like a prescription card and roadside assistance, that had limited value and were rarely used by consumers.”

Horizon operated websites and marketed the card under numerous brand names, including Boost Platinum Card, Freedom Gold Card, Group One Platinum Card, Horizon Gold Card, Independence Gold Card, Innovation Platinum Card, Merit Platinum Card, Net First Platinum Card, Principal Platinum Card, and Focus Gold Card.

According to the complaint, 94% of users who signed up for the Horizon card never made a single purchase from the store, and 97-99% of users never used a single one of the ancillary products.

Instead, when users realized the card was not, in fact, a general purpose credit card, users overwhelmingly sought to cancel their membership and obtain the promised refund, which the company marketed as taking less than one minute to obtain.

In reality, the company, according to the CFPB, “routinely made consumers endure a series of offers for discounted pricing and third-party products. And even after consumers survived this gauntlet, Reliant refused to provide full refunds unless consumers threatened to seek relief from their banks or the Better Business Bureau.”

The CFPB argues that Horizon’s and its executive’s actions misled consumers into believing it was offering a general purpose credit card, when it was not, and that users could cancel their membership and receive a refund in as little as one minute, when this generally wasn’t possible, constituting a violation of the CFPA’s prohibition on unfair, deceptive, and abusive acts or practices.

The complaint also argues that Horizon violated the Truth In Lending Act’s provisions designed to prohibit “fee harvester” cards, as the company charged users fees totaling $299.40 in the first year for a credit line of $500 — well above TILA’s prohibition on charging fees totaling more than 25% of the credit line during the first year after account opening.

TD Bank: How NOT To Furnish Data To Credit Reporting Agencies

Last week, the CFPB reached a consent order with TD Bank, stemming from the bank’s violations of the Fair Credit Reporting Act and its implementing regulations, Reg V.

The consent order reads like a laundry list of what not do when furnishing data to credit bureaus, including that TD:

failed to promptly correct information furnished to CRAs, even after it had determined the information was incomplete or inaccurate
failed to conduct reasonable and timely investigations of consumer disputes
in some cases, failed to conduct any investigation in response to consumer disputes
failed to report account statuses correctly for the accounts of consumers who sought accommodations under the COVID-era CARES Act
failed to report correct dates of first delinquency
failed to properly notify consumers when the bank deemed their disputes to be frivolous or irrelevant
failed to establish and implement reasonable written policies and procedures governing the bank’s data furnishing practices
for deposit account products, failed to correct information reported to specialty bureaus after it determined the accounts had been or were likely to have been opened fraudulently
for deposit account products, failed to implement reasonable written policies and procedures governing the bank’s data furnishing practices

The consent order requires TD Bank to pay $7.76 million redress to impacted users and $20 million civil money penalty.

Navient: A Proposed Settlement More Than Seven Years In The Making

Last but not least, the CFPB reached a proposed stipulated final judgment and order in its long-running case against student loan servicer Navient (formerly known as Sallie Mae.)

The Bureau’s allegations against Navient include that it:

engaged in abusive and unfair acts and practices by steering borrowers into more costly forbearance plans rather than income-driven repayment plans
engaged in unfair acts and practices by failing to adequately notify borrowers in income-driven repayment plans of the need to re-certify their income and family size annually
engaged in deceptive acts and practices by misleading borrowers about the consequences of submitting an incorrect or incomplete application to re-certify their income and family size under an income-driven repayment plan
engaged in deceptive acts and practices by misleading private student loan borrowers about requirements to release their co-signer from the loan
engaged in unfair acts and practices by making numerous payment processing errors, including by misallocating and misapplying borrower payments
violated the Fair Credit Reporting Act’s implementing Regulation V by failing to establish and implement reasonable written policies and procedures to furnish accurate information to credit reporting agencies regarding borrowers who had received a discharge on their federal loans due to a total and permanent disability
engaged in deceptive acts and practices in violation of the CFPA and Fair Debt Collections Practices Act by misleading borrowers about the effect of loan rehabilitation on their credit reports and the collection fees that would be forgiven in the federal loan rehabilitation program

The order, if accepted by the court, would also see Navient pay $100 million in redress to impacted borrowers and a $20 million civil monetary penalty. The order would also ban the company from servicing Direct Loans or conducting consumer-facing activities Federal Family Education Loan Program loans.

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