State Squabbling Diverts AG Settlement Funds

Written by: Steve Cook   Mon, October 22, 2012 Beyond Today's News, Foreclosure Situation

Squabbling between governors, legislatures and the attorneys general who negotiated the National Mortgage Settlement with major lenders has tied up more than $588 million of the $2.5 billion paid by lenders as a result of the agreement and diverted $988 million more into states’ general funds for non-housing uses, according to a study by Enterprise Community Partners. The terms of the agreement allowed states to use their shares of the $ 2.5 billion settlement for non-housing purposes.

An analysis of state activities shows that the while the majority of states are using or plan to use most, if not all, of their funds for housing-related activities, the largest recipients are not currently doing so. Twenty-three states are using all or substantially all their funds for housing. The settlement, signed last March between leading lenders and attorneys general, ended a lawsusit brought by states against lendes for their foreclosure processing practices.

Though the settlement was negotiated by attorneys general, legislatures and governors have often weighed in heavily on how the funds will be spent, the study said.. This has led to some very public disputes over who has the actual authority to allocate the money. Not surprisingly, perhaps, this struggle has come to the fore in California and Florida, by far the two largest individual recipients of settlement funds, accounting for almost 30 percent of all money flowing to the states. In California, the dispute is between the attorney general and the governor, while in Florida, the attorney general and legislature are at odds.

Florida’s $334 million remain in escrow, awaiting the outcome of the dispute. Attorney General Bondi has argued that she has the authority to distribute the funds because they were the result of a court order while Senator Alexander, who chairs the Budget Committee, has stated expenditures must be authorized by the legislature.i Unlike in California, where Governor Brown and Attorney General Harris had two very different views on how to spend the money, in Florida, the question seems to be solely one of legal authority. Until that question is resolved, however, we consider Florida open. We describe California’s use of the funds below, among the states that have deviated from the uses stated in the settlement.

Texas is another state to allocate funds outside the control of the attorney general. According to the settlement, $124 million will go to Texas’s general fund with $10 million in civil penalties allocated to the judicial fund. However, even the dollars earmarked for the judicial fund, a fund established to provide legal services for very low income people, might not ultimately serve its intended purpose. According to the settlement, the state will deposit $10 million into the judicial fund established under Texas Government Code Section 402.007. However, this same code caps biennial funding for that fund at $10 million and credits all civil penalties stemming from business and commerce cases in Texas to the fund.v To the extent that previous cases already applied payments to the fund, those amounts would be deducted from the $10 million in the settlement. Moreover, the same section of the Texas Government Code creates a loophole that allows the state to redirect civil penalties if another law requires it. Since the legislature has the opportunity to vote on the use of the share of the money allocated to the general fund, it may also choose to pass legislation directing the $10 million for the judicial fund to other purposes.

The settlement directs funds to states’ attorneys general in most cases. However, even when the settlement enumerates intended uses, the attorneys general have considerable leeway in determining how to use the funds. Some eight states have deviated from the agreed upon uses, beginning with California, which obtained the largest share and is home to numerous cities hard hit by foreclosures. Under the settlement, California stated that it would set aside 10 percent of direct state funds as civil penalties and use the remaining 90 percent (approximately $360 million) for housing counseling, legal aid, consumer financial protection investigations, and other similar programs to mitigate the damage caused by the mortgage foreclosure crisis. in May, the governor decided to use the funds primarily to plug the state’s $15.7 billion budget gap. While some of the settlement funds’ use within the budget will be to pay the debt service on affordable housing bonds, the bonds being paid with the settlement funds were issued four years ago and were already part of the state’s general obligations.

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