California Governor Sued for Diverting Housing Settlement Funds

It’s not just fraudsters and criminals who warrant mention in our scam of the day features; sometimes, state governments and their officials make the cut as well. In California, governor Jerry Brown and other government officials are being sued by three nonprofit home owner counseling organizations, claiming that $369 million of funds meant to help struggling homeowners was instead diverted to pay down the state’s debt. California was awarded a portion of the $25 billion national mortgage servicing settlement in 2012, with the funds to be used for home loan counseling and other educational services to help home owners avoid foreclosure.

The National Asian American Coalition (NAAC), along with the COR Community Development Corp. and the National Hispanic Christian Leadership Council (NHCLC) were all plaintiffs in the suit. Robert Gnaizda, general counsel to the NAAC said “We made it clear to the governor at that time that we did not agree with his decision.” Gnaizda further explained the delay in filing the suit: “But we didn’t want to bring a case when the state was in such an enormous fiscal crisis. With the governor now talking about possible surpluses of up to $10 billion before he finishes his second term, we decided to proceed with our case.”[1] California does not appear to be the only state guilty of diverting funds, as half of the 49 states in the settlement have used around $1 million of money earmarked for home owner counseling for other purposes.

The plaintiffs are making their displeasure with the lack of refunding the diverted funds known. Faith Bautista, chief executive of the NAAC said, “The state attorneys general and banks finally put money aside to help homeowners and where did the money go? Somewhere else. They always have other priorities for their money.” According to California law, funds can be transferred to the state’s general fund only “if the transfer does not interfere with the object for which the special fund was created and the transferred amount is repaid when feasible.”[2] It is not clear how California will respond to the suit, or how other states in the same position may try to make changes to avoid further suits.

What do you think? Did distressed homeowners get the short end of the stick again with states diverting funds in this manner?  Or was the state justified? You know how we feel about this already: sad to say, not a big surprised.