Run a Google news search on “mortgage fraud” or “loan fraud” and you’ll get literally scores, if not hundreds, of hits.  For example, our search turned up this CNN/Money story on “The Top 10 Mortgage Fraud States” in which Florida, New York, and California were the “Top Three” states.  Loan fraud is considered one of the significant contributing causes of the recent economic malaise.  Even though banks and underwriters are more conscious of potential fraud, this article reports that “incidents of residential mortgage fraud” increased 7 percent in the past year.  Clearly, such fraud is rampant and the citizenry is looking to law enforcement officials to catch the wrongdoers.

It is in this context that we found the following story to be of interest.  According to a May 6, 2010 press release, a lender based in the state of New York agreed to a settlement in which it will pay $26.3 million to resolve allegations that it violated the False Claims Act.  The False Claims Act applies to Federal contractors that knowingly submit inaccurate invoices to the U.S. Government.  So how can a lender violate the False Claims Act?  The press release provided an interesting answer.

The press release stated—

Ciena Capital LLC, a private, non-depository lender located in New York City … and a subsidiary, Business Loan Center (BLC), a small business lending company licensed to originate and service loans under Section 7(a) of the Small Business Act, are alleged to have submitted false claims for payment on loans made through the Small Business Administration (SBA). The SBA, through various lending programs, provides financial assistance to small businesses by guaranteeing up to 85% of the value of loans made by private lenders.

Okay.  We can see that Ciena Capital and BLC were making loans connected with the SBA, so that links them to the Federal government.  Where do the false claims come in?

… Ciena and BLC falsely certified that they complied with SBA regulations when they submitted claims for payment on loans they originated, underwrote, and serviced. Some of these loans defaulted shortly after they were made as a result of Ciena’s and BLC’s disregard of SBA rules, regulations, and underwriting requirements.

Now the picture becomes clearer.  Apparently, these lenders were paid by the SBA for making loans to small businesses, but they had to vet the businesses in accordance with SBA rules, and they (allegedly) failed to do so.  When they submitted their requests for payment, they (allegedly falsely) certified that they had followed the SBA’s rules.

What else does the DOJ press release say?

Other loans were originated by former BLC Executive Vice President Patrick Harrington, or his office, during his tenure. Harrington pleaded guilty to conspiracy to defraud the United States and was sentenced to 10 years in prison for his prominent role in the fraudulent loan scheme, which included falsifying loan documents, inflating property appraisals, and using straw purchasers to engage in sham transactions.

The relators will receive $4.3 million as their share of the government’s recovery.

When is loan fraud not loan fraud?  When it’s fraud committed in the Federal contracting context.  Then it’s a false claim.