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California Has to Repay $331 Million to Homeowners Fund, Court Rules

California Has to Repay $331 Million to Homeowners Fund, Court Rules

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California Sued Over Diversion of Money From National Mortgage SettlementMARCH 14, 2014
Judge Timothy M. Frawley agreed with the plaintiffs that $331 million of that was misused. In his ruling, he enjoined the state to return that amount to the special homeowner fund “as soon as there is sufficient appropriation ‘reasonably’ and ‘generally’ available for such purpose.”

H. D. Palmer, a spokesman for the California Department of Finance, said that the state was reviewing the ruling and had not yet decided on its next step.

When the mortgage settlement was completed, Kamala Harris, the California attorney general, was a lead negotiator, pushing hard for borrower assistance programs to be covered under its terms.

But California faced financial difficulties at the time, and state finance officials used the settlement funds for other purposes from 2012 to 2014, such as retiring debt issued by low-income-housing authorities.

The three plaintiffs that won the case are the National Asian American Coalition, the COR Community Development Corporation and the National Hispanic Christian Leadership Conference. Robert Gnaizda, general counsel to the National Asian American Coalition, praised the judge’s ruling as evidence that Mr. Brown, the state’s governor, is not above the law.

The National Mortgage Settlement earmarked a total of $2.5 billion for troubled borrower assistance. Mr. Gnaizda said that the California ruling could lead to similar lawsuits in other states where officials funneled settlement money away from specified uses.

“We’ve identified about a dozen states where it might be appropriate to take action,” he said. “We decided not to go forward with other actions until this case was decided.”

More than 800,000 borrowers are in distress in California, said Faith Bautista, chief executive of the National Asian American Coalition. “We thank Attorney General Kamala Harris for creating this fund and call upon her to help lead the effort to return these funds to homeowners in distress,” Ms. Bautista said in a statement.

Neil Barofsky, the former special inspector general of the Troubled Asset Relief Program and a partner at Jenner & Block, represented the plaintiffs in the case.

“The governor and his administration took money they weren’t supposed to have taken,” Mr. Barofsky said in an interview after the ruling was issued. “It might have been for a noble purpose, but there were restrictions on that money. Now it’s time for the money to be put to use for the people who were supposed to benefit from it.”