April 18, 2017

By Bob Coleman
Editor, Coleman Report

SBA Hot Topic Tuesday — HSBC Settles SBAExpress Guaranty Purchase False Claims Act Lawsuit for $2.1 Million

hsbcBack in 2006 HSBC commissioned an internal review to identify default rates of its small business lending portfolio.

HSBC uncovered a number of SBAExpress loans where borrowers had submitted fraudulent information in order to obtain the loan — creation of a false commercial identity; check fraud; a business closing or filing for bankruptcy to avoid the debt with the intent of re-opening a similar business; and identity theft.

Common types of borrower submitted false information to a lender that would make a loan ineligible for an SBA guaranty also include:

  • Photoshopped equity injection documentation
  • Failure to disclose criminal history, e.g. the borrower is not of “good” character
  • Fraudulent tax returns or financial statements
  • Claiming the loan proceeds would be used for one purpose, e.g. working capital, but instead diverting funds to pay off personal or ineligible business debt.

Anyway, HSBC compiled the list, but made the mistake of not disclosing the list to SBA.

Last Friday, Manhattan Acting U.S. Attorney Joon H. Kim said “Lenders must disclose material information for our agency partners like the SBA, who administer federal loan programs. When they fail to do so – as HSBC did here, by submitting loans for repayment on SBA guarantees without disclosing that the loans had been identified as potentially fraudulent – they need to be held to account. This settlement reflects the Office’s continuing commitment to keep lenders who participate in federal lending programs honest.”

“The submissions made to SBA in connection with seeking reimbursement on many of these loans contained half-truths and material omissions by failing to disclose facts about fraud or potential fraud by borrowers when the Loans were originated,” say the DOJ.

From the original civil lawsuit

18. After the Loans defaulted, HSBC sought reimbursement from SBA for the guaranteed amount on each of these Loans (i.e., up to fifty percent of the principal of the Loans), without telling SBA that many of the Loans were fraudulent or potentially fraudulent.

19. In requesting the payment of the guaranteed amounts on the Loans, HSBC submitted a Purchase Demand Kit for each of these Loans.

20. The Purchase Demand Kit contained the certifications from HSBC that the “loan has been serviced and liquidated using generally accepted commercial banking standards employed by prudent lenders;” that the “lender has obtained SBA’s written consent for all actions where required;” and that the “lender used appropriate diligence to ensure that disbursements were used exclusively for business related purposes.”

21. In submitting the Purchase Demand Kit and the wrap up report for many of the Loans, HSBC did not inform SBA of all of the facts indicating that borrowers may have submitted false information to HSBC in connection with the origination of these Loans, or that HSBC had included these Loans on an internal list of fraudulent or potentially fraudulent loans.

22. HSBC’s failure to disclose that it had determined that many of the Loans were fraudulent or potentially fraudulent rendered HSBC’s reimbursement requests for losses incurred in connection with such Loans false, misleading, and/or fraudulent. The wrap up reports contained half-truths and material omissions by failing to disclose facts about fraud or potential fraud by borrowers when the Loans were originated.

23. The presence of fraud in loans guaranteed by the SBA is material to SBA’s decision on whether the lender is entitled to reimbursement of lender losses incurred in connection with such loans.

24. SBA regulations make clear that SBA is released from liability on its guarantee when, among other things, the lender “has failed to make, close, service, or liquidate a loan in a prudent manner,” the lender “has failed to comply materially with any Loan Program Requirement for 7(a) loans,” or the lender “has failed to disclose a material fact to SBA regarding a guaranteed loan in a timely manner.” 13 C.F.R. § 120.524(a). HSBC’s failure to disclose that it had identified certain loans as fraudulent or potentially fraudulent deprived SBA of information that would have enabled it to evaluate whether HSBC had engaged in prudent lending and loan servicing practices, and whether HSBC accurately certified that it used appropriate diligence to ensure that disbursements were used exclusively for business related purposes.

25. As a result of HSBC’ s submission of its Purchase Demand Kit, wrap up report, and signed certification, SBA paid the guaranteed amounts on the Loans.

False claims act exposure is significant. There is a $20,000 penalty per claim (there are 42 claims in this lawsuit, plus treble damages.

Whistleblowers earn 15% to 20% of the settlement.

HSBC’s whistleblower, Jan Orlando, I don’t know the relationship with the bank, sued in 2011.

A little background. Legislation was passed in 2009 as part of the Wall Street bailout that made it easier to prevail in False Claims Act lawsuits.

Since then, several SBA lenders have been ensnared and have settled false claims act allegations.

Previously, PNC Bank settled for $7 million, Saehan Bank paid $2 million and Pinnacle Bank in Wyoming paid $3 million. Ciena Capital, formerly BLX, settled its false claim act allegations in 2010 for $26 million.

One report says Orlando will receive $360,000 in whistleblower compensation.

P.s. Coleman has a webinar scheduled for Wednesday, May 3 about preparing the SBA 7(a) purchase demand kit — for loans above, and less than $350,000. Click here for more information!