California Gov. Unlawfully Diverted $331M from Mortgage Settlement: Judge

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California Gov. Jerry Brown violated state law by diverting more than $331 million in mortgage settlement funds for uses unrelated to housing, a Superior Court judge ruled.

The judge's decision was a victory for organizations representing blacks, Latinos and Asian Americans, which sued the Democratic governor in March 2014. While Judge Timothy Frawley stopped short of ordering that the housing funds be restored, he did rule that Brown and the state legislature are obligated to replenish the diverted money.

With California now holding a state budget surplus, the plaintiffs expressed optimism that officials will soon set aside funds to aid troubled homeowners. The plaintiffs hope to meet soon with key state officials — who are currently in the midst of budget negotiations — to work out an agreement.

"The Legislature, both Republicans and Democrats, are committed to homeowners in distress, as is the governor," Jesse Miranda, former chair of a Hispanic Christian group that was one of the plaintiffs, said Monday in a news release.

"It is our intention on behalf of every homeowner in distress to meet the legislature and the governor within the next week to restore the $331 million taken from the pockets of largely low-income homeowners across the state."

A spokesman for Gov. Brown’s administration, H.D. Palmer, said Monday that state officials are still in the process of reviewing the judge’s ruling.

Asked whether there’s an opportunity to resolve the dispute in the coming weeks as part of the state budget process, Palmer said: “I don’t feel comfortable getting in front of where the lawyers are going to go.”

The lawsuit involved a pot of cash that California received as part of the 2012 settlement between 49 states and the nation's five largest mortgage servicers — JPMorgan Chase, Citigroup, Wells Fargo, Bank of America and Ally Financial. At the time, California was facing a budget shortfall.

California created a special fund as a repository for $369 million in settlement funds, and the judge ruled that all but $38 million of that had been misspent. Other states besides California also used money they received from the national mortgage settlement for purposes unrelated to housing.

Robert Gnaizda, a longtime public interest lawyer who helped spearhead the California suit, said Monday that lawsuits against two or three other states are under consideration. He declined to name those states.

This article originally appeared in American Banker.
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