Hm, not sure if there is an actual disorder out there by psychiatrists. I guess I'd think about this. Is she psychotic where she really believes the child is hers and dangerous? OR, is she just loving the child and wishing the child was hers? Ha, this is true that I have an older sister that had kids before me. I adored her kids. I call them my first children (still do). I wanted to be with them all the time. I'd scoop them up and take them in the other room to have them all to myself. I was so close to them that I'd parent a bit when they acted up or needed help even if my sister was there. But she never minded or felt intimidated by me and appreciated my affection and love for her kids. I got a note from her oldest, a daughter that is now an adult. She wrote to me that some of her best childhood memories were with me, that she sees me as a significant person in her life having been so loving to her for all those (and these) years. That she so appreciated it! Well, that definitely warmed my heart!!
So, I guess I don't know your full situation so some examples would be helpful or details. If she is psychotic and living in an altered universe where she may kidnap a child . . . that would be a problem. but otherwise, a family member loving on another family member's kid, why is that an issue? More details would help.