California sued for diverting mortgage settlement cash

by Ryan Smith17 Mar 2014
The state of California has been slapped with a lawsuit for paying down state debt with money earmarked to help struggling homeowners.

Three nonprofit groups are suing California Gov. Jerry Brown for the return of $369 million the state received as part of 2012’s $25 billion national mortgage settlement, according to a New York Times report. In that settlement, California and other states won huge chunks of cash from some of the nation’s largest banks after allegations that the lenders were using shady mortgage lending practices and making errors that resulted in some people being foreclosed upon unnecessarily.

That money was supposed to fund programs to help troubled homeowners. However, cash-strapped California diverted money from the settlement to pay down state debt issued by low-income housing authorities, according to the Times.

The state’s finances are looking considerably sunnier lately. In fact state officials are projecting a $4.2 billion budget surplus in 2014. But Brown hasn’t shown that he’s in any rush to replenish the money the state siphoned from the mortgage settlement, the Times reported.

That reluctance has brought a lawsuit filed by the National Asian American Coalition, the COR Community Development Corporation and the National Hispanic Christian Leadership Council. The plaintiffs contend that Brown had no legal right to divert the money in the first place, the Times reported.

“To this day, countless California victims of the mortgage and foreclosure crisis and their supporters are waiting to receive any benefit, much less the full benefit, of the settlement the attorney general obtained for the state of California as compensation for the harms the victims suffered and continue to suffer,” the lawsuit said.

But California is hardly the only state to use settlement funds for distinctly non-mortgage-related purposes. Several state legislatures decided they could find better uses for the cash, according to a list compiled last year by the National Conference of State Legislatures:
  • Virginia received more than $66.5 million in the settlement. Of that, only $7 million went to a housing trust fund. The remainder of the money was dumped into the state’s general fund.
  • Nebraska received more than $8.4 million. The entire amount was placed in the state’s “rainy day” fund; none of it was earmarked specifically for housing relief.
  • South Carolina got more than $31.3 million. The legislature gave $10 million to the Department of Commerce and dumped the rest in the state’s general fund.
  • Georgia received almost $99.4 million. None of that went to housing relief. Instead, the entire amount has been earmarked for “economic development” such as business assistance grants.
  • Texas received more than $134.6 million. Of that, $10 million was placed in the state’s judicial fund, and the rest went into the general fund.
“The state attorney generals and banks finally put money aside to help homeowners and where did the money go? Somewhere else,” Faith Bautista, chief executive of the National Asian American Coalition, told the Times. “They always have other priorities for their money.”


Should CFPB have more supervision over credit agencies?