California is wrongly holding on to $331 million from a nationwide bank settlement and must use the money for its intended purpose: to help homeowners victimized by foreclosures during the Great Recession, a state appeals court ruled Tuesday.
The money was part of the state’s share of a settlement in 2012 with the nation’s five largest mortgage servicers — Bank of America, Wells Fargo, Citigroup, JPMorgan Chase and GMAC — that had been accused of abusive lending practices. The settlement also contained more than $20 billion in direct aid to homeowners nationwide who had been harmed by a wave of foreclosures that started in the recession of 2008-09.
Sen. Kamala Harris, who was state attorney general at the time, negotiated the terms for California that directed $331 million to programs such as hotlines to help foreclosed homeowners, legal aid, consumer education and efforts to combat financial fraud. Legislators also passed a law in 2012 directing the settlement funds to programs directly helping the homeowners.
Funds Diverted to State Agencies
But the state Finance Department under Gov. Jerry Brown instead used the money to pay off state housing bonds and debts owed by state agencies that handle the bonds and consumer programs. Last July, the Third District Court of Appeal in Sacramento ruled that the payments to the agencies violated the 2012 law and the terms of the mortgage settlement. The court ordered the funds redirected to aid foreclosure victims.
In response, Democrats quickly rewrote budget-related legislation to declare that Brown had properly cleared his funding decisions with lawmakers and had complied with the 2012 law. The governor signed the legislation, and the state Supreme Court then told the lower courts to decide whether it was legal.
To no one’s surprise, the same appeals court panel in Sacramento examined the new law and reached the same conclusion.
“Money was unlawfully diverted from a special fund in contravention of the purposes for which that special fund was established,” Justice Andrea Hoch, author of last year’s appellate ruling, said in Tuesday’s 3-0 decision. Although legislators may have believed the Finance Department had legally redirected the $331 million to other housing-related programs, Hoch said, the courts have the last word on the meanings of laws and settlements.
The next step is up to Brown’s successor, Gov. Gavin Newsom, who can comply with the ruling or seek renewed review in the state Supreme Court. Newsom’s office is reviewing its options, said H.D. Palmer, deputy director of the Finance Department.
“We hope the governor doesn’t continue to waste taxpayers’ money,” said Neil Barofsky, lawyer for the National Asian American Coalition and other groups that sued the state over the funds. He had no estimate of the number of foreclosure victims who could benefit, but observed that “$331 million can help an awful lot of homeowners.”