A coalition of nonprofit organizations sued the state last week for absconding with money from California's share of a $25 billion national settlement two years ago meant to help victims of the mortgage and foreclosure crisis.

California's $410-million-share of the settlement, engineered by attorneys general in 49 states and the District of Columbia with five national banks, was designated for counseling and assistance to homeowners whose homes were threatened by foreclosures. The settlement directed 10% of that money to the State’s Unfair Competition Law Fund as a civil penalty and the rest for assistance to borrowers. 

Instead, the governor and Legislature used the money to pay down the state's huge budget deficit.

Now that the state is posting enormous budget surpluses, more than $4 billion at last count, the COR Community Development Corporation, the National Asian American Coalition and the National Hispanic Christian Leadership Council want that money restored.

So far, there is no indication that the state intends to do that.

The lawsuit contends, “The Governor had no legal right to divert these funds in the first place and, even if he did, he certainly has the statutory duty to replenish them in this year of surplus.”

According to the settlement, “To the extent practicable, such funds shall be used for purposes intended to avoid preventable foreclosures, to ameliorate the effects of the foreclosure crisis, to enhance law enforcement efforts to prevent and prosecute financial fraud, or unfair or deceptive acts or practices.”

California is not the only state not using the money for its intended purpose, although it is the worst offender by virtue of having received the lion's share of the settlement. A 2012 study found that more than half the $2.5 billion portion of the settlement that went directly to the states to prevent foreclosures, prosecute fraud and “stabilize communities” was spent on other things.

Another $588 million was still in the pipeline at the time, mostly to Texas and Florida. Twenty-three states did the right thing, but 14 states put less than half toward the intended purpose.

California Attorney General Kamala Harris, a prime mover behind the settlement, opposed redirecting the money at the time, but the independent state Legislative Analyst's Office supported it with certain reservations. The Analyst reasoned that the Legislature could snatch the money because it used most of it to pay down debt issued by low-income housing authorities.

That housing connection was good enough for the Analyst, although he did find a problem with money that was diverted for fighting organized crime, gangs and drug trafficking.

The lawsuit's plaintiffs disagree with any diversion:

“There is no question that this sum was supposed to be devoted to the specific  purposes for which the Special Deposit Fund was created, as expressly recited in the pertinent settlement documents co-signed by the California Attorney General’s Office. There is no question that most of the money was instead diverted to the State’s General Fund to pay off the State’s general debts. And there is no question that the Governor has projected a large budgetary surplus for 2014 and beyond, but has given no indication in his budget that he intends to replenish the diverted funds, now or ever.”

‒Ken Broder

To Learn More:

California Sued over Diversion of Money from National Mortgage Settlement (by Gretchen Morgenson, New York Times)

Brown, Chiang Sued for Diverting $369 Million in Mortgage (by Jeremy B. White, Sacramento Bee)

Homeowners Sue Arizona over Diverted Foreclosure Settlement Funds (by Noel Brinkerhoff, David Wallechinsky, AllGov)

States Fall Short on Help for Housing (Andrew Jakabovics & William McHale, Enterprise)

Complain Against State (Sacramento County Superior Court of California) (pdf)