A subsidiary of American Home Mortgage Investment Corp. has agreed to pay $800,000 to settle civil allegations of fraud brought by the Department of Housing and Urban Development.
Columbia National Inc., which was based in Maryland, agreed to pay the settlement “and to change the way it reviews certain loan transactions for fraud,” according to a statement from U.S. Attorney Patrick L. Meehan of Philadelphia.
In 1999, employees at Columbia’s office in Bensalem, Pa., were fired for allegedly using phony documents to run a scam to defraud HUD, Meehan said.
Columbia was sold in 2002 for $37 million to Melville, N.Y.-based American Home Mortgage Holdings Inc. Following the acquisition, the name of the company was changed from Columbia to American Home Mortgage Servicing Inc. The alleged fraud occurred before the sale, according to prosecutors and American Home Mortgage Holdings.
American Home Mortgage spokeswoman Mary Feder said in an e-mail to MortgageDaily.com that the company does not comment on litigation.
But in a recent filing with the Securities and Exchange Commission, or SEC, the company said it is “cooperating fully” with the government’s civil investigation into the activities at the former Columbia National.
Meehan said that former employees of Columbia National “created false and fraudulent documents (associated) with the origination of government insured and government guaranteed loans.”
“According to the allegations these former employees … created false and fraudulent verification of employment documents, gift letters, credit references and income documents,” he said.
The fake documents were used to “qualify certain individuals” for loans, but the borrowers were unable to pay back the loans. That caused losses to Columbia National, which caused losses to the government because HUD had guaranteed the loans, Meehan said.
The employees were fired but have not been named by prosecutors because the investigation is continuing and no charges have been filed, Richard Manieri, a spokesman in Meehan’s office, said in an e-mail.
In its SEC filing American Home Mortgage said approximately 60 questionable loans were created between 1997 and 1999. HUD launched an investigation after Columbia “discovered the fraudulent loan activity” and notified the government, the company said in the filing.
The office was closed and the employees were fired, the company said. At the time Columbia agreed to pay a fine of $24,000 and agreed to “indemnify HUD for certain losses.”
Meehan said former Columbia National employees Cynthia Santore-Smith will receive $160,000 of the $800,000 for exposing the problems at the company.
“The civil action arose from a whistle blower … filed by Cynthia Santore-Smith,” Meehan said.
Meehan said the company is “now taking extra steps to ensure” that all loans originated from the problem office are legitimate.
“Before it submits any insurance claim on defaulted loans from the Bensalem office, the company will undertake a targeted review of those loans using a checklist of fraud ‘red flags.’ If there are indications of fraud in a loan, the company will not seek reimbursement from the government for that loan,” he said.
