Court: Mortgage settlement money must help California homeowners

The state Supreme Court turned down arguments by two California governors Wednesday and left intact a ruling requiring the state to use $331 million, obtained from a nationwide bank settlement, to help homeowners who were victimized by foreclosures during the last recession.

The money was part of California’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 included 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 200809.

Sen. Kamala Harris, who was state attorney general at the time, negotiated terms for California that directed $331 million to programs such as hot lines 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.

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. A state appeals court ruled last year that the payments violated the mortgage settlement and the 2012 law, but legislative Democrats promptly rewrote a budgetrelated bill to declare that Brown had cleared his funding decisions with lawmakers and complied with the 2012 law.

Told by the state’s high court to review the new legislation, which Brown had signed, the Third District Court of Appeal in Sacramento reached the same conclusion in April that it had in July 2018: The $331 million must be used to help homeowners, not state agencies.

“Money was unlawfully diverted from a special fund in contravention of the purposes for which that special fund was established,” Justice Andrea Hoch said in a 30 ruling.

Gov. Gavin Newsom then appealed to the state Supreme Court. His lawyers said the Legislature had redirected the funds to state housing and consumer programs “in light of the desperate budget shortfall then facing the state,” though that shortfall no longer exists. They argued that the appeals court had improperly “ordered a judicial appropriation” of funds, authority that actually belongs to the Legislature.

But the appellate ruling became final Wednesday when the Supreme Court denied review.

“While we are disappointed in the outcome of the ruling, we will now prepare to comply with it,” said Newsom’s deputy finance director, H.D. Palmer.