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California Must Pay Back $331 Million to Help Homeowners Hurt by Foreclosures

Gov. Jerry Brown has an accounting problem.

When California received $410 million as part of a settlement with banks accused of abusive foreclosures, the state used most of the money to offset state deficits. Now an appeals court says the state must return the funds to help homeowners hurt by the foreclosures -- like it was supposed to do in the settlement.

The Third District Court of Appeal said the money was "unlawfully diverted" in National Asian American Coalition v. Brown.

Offset General Costs

A trial judge said the same thing in 2015, but didn't think he had the authority to tell the state to put the money back. The appeals court did.

The settlement money was "unlawfully diverted from a special fund in contravention of the purposes for which that special fund was established," Justice Andrea Hoch wrote for the unanimous court.

The governor was not entirely to blame. After the settlement, the legislature appropriated the money and directed it to the director of finance. Then it was used to offset general fund costs for state housing bonds and related programs.

But that's not what the National Mortgage Settlement said, the Third District noted. The funds were supposed to be used to help affected homeowners.

Restore $331 Million

In a lawsuit by consumer groups, the state defendants responded that the Legislature allowed the finance director to use the money to offset "any General Fund expenditures." The appeals court said, in a word, no.

"We are not persuaded that this phrase was intended to untether the offsets from the purposes for which the money was received," the court said. "Indeed, defendants' reading of the statute would effectively defeat the purpose of creating a special deposit fund to house the money."

Ultimately, the appeals court said the Legislature should restore $331 million to the NMS fund and directed the trial judge to fashion an order for the payment to be made "as soon as there is a sufficient appropriation" available.

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