Federal authorities announced Tuesday they have reached a $1.25 million settlement with a Melville bank that officials said secretly paid its clients’ home loans to boost the bank’s successful lending record and allow it to continue to participate in a federally backed mortgage program.
U.S. Attorney for the Eastern District Robert Capers said Franklin First Financial, a participant in the federal Direct Endorsement Program, made payments on 111 loans that likely would have fallen into default within two years of loan origination and hiked the bank’s default record. Too many bad loans could make the bank ineligible for participation in the program that allows it to offer loans insured by the Federal Housing Administration.
The bank agreed to pay $1.25 million to settle the lawsuit filed in September 2015 against several lending institutions that federal authorities said used a bogus charity, the Rainy Day Foundation, to fraudulently place money into mortgages that were in arrears to conceal the institutions’ default rate.
“This resolution demonstrates our office’s vigorous pursuit of those who would abuse federal mortgage programs, whether they be companies or individuals,” Capers said in a news release about the case. “The significant penalty and defendants’ admissions to wrongdoing help to restore the integrity of the FHA mortgage insurance program.”
Officials had argued that by inflating the bank’s performance record, Franklin First had deprived the federal Department of Housing and Urban Development of information that would allow the agency to determine whether the bank was eligible for participation in the program.
The Direct Endorsement Program requires banks to maintain a loan default rate of less than twice that of other lenders in the same geographic area.