CA Governor Sued over Appropriating Servicing Settlement Proceeds

Three non-profit homeowner counselingrnorganizations have sued California Governor Jerry Brown, charging that thernstate had diverted 369 million dollars intended to assist distressed homeownersrnto other purposes. The monies were from that portion of the $25 billion NationalrnServicing Settlement earmarked for homeowership counseling to avoid foreclosure.  California and 48 other states as well asrnseveral federal agencies reached agreement with the mortgage servicing units ofrnfive large banks in February 2012 over alleged abusive practices by servicersrnagainst mortgage loan borrowers. </p

But many of the states, most with serious recession-relatedrnfinancial problems, took the counseling funds for other uses.  In the case of California the disputed moneyrnwas used to pay down debt issued by low-income housing authorities.</p

California’s budgetary situation has improvedrnsubstantially since the settlement funds were disbursed and the staternanticipates a budget surplus of over $4 billion this year, but the suit, filedrnon behalf of COR Community Development Corporation, the National HispanicrnChristian Leadership Council, and National Asian American Coalition, contendsrnthat Brown has given no indication he intends to replace the counselingrnmoney.  </p

Robert Gnaizda, representing the National AsianrnAmerican Coalition, said his group had disagreed with the governor’s decisionrnto divert the settlement money but did not want to bring suit while the staternwas in crisis.  However as the Governorrnhas talked about possible surpluses of 10 billion over the next five years,rnGnaizda said, it seemed appropriate to now demand a payback. </p

The lawsuit also names Michael Cohen, the state’srndirector of finance, and John Chiang, its controller.  Plaintiffs argue that the state ignored clearrnrestrictions on use of the funds and that California law specifies that money placedrnin a special deposit fund, as the earmarked monies were, can only be shifted tornthe general fund if the transfer does not interfere with the objective forrnwhich the special fund was created and if the money is transferred back whenrnfeasible. </p

It appears that half of the 49 states in thernsettlement have used roughly $1 billion of the $2.5 billion designated for homeownerrncounseling for other purposes.  It isrnunclear whether any other states are planning to replace the counseling moneyrnor if they too may be sued.  </p

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