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State Sued for Diverting $50 Million from its Foreclosure Settlement Fund

The state with the highest foreclosure rate, Arizona, is being sued for violating the settlement’s federal consent judgment by not using the funds for helping homeowners.


According to one of the articles cited in the last blog, nearly a billion dollars of the $2.5 billion paid in the national foreclosure settlement by the major banks to the states has been diverted by certain states for purposes other than the homeowner-assisting ones specified in the court documents.  But in one of those states, Arizona, the distressed homeowners are fighting back.

Arizona’s share of the $2.5 billion is $98 million. In early May the Arizona legislature passed, and the governor signed, a budget which directed the state’s attorney general to transfer $50 million of this $98 million from the settlement trust fund to the state’s general fund. Within a few weeks a lawsuit on behalf of homeowners was filed to stop this transfer. Here is the lawsuit’s complaint, and its motion for a temporary restraining order to prevent the transfer until the court would rule on this.

Besides language in the consent judgment about the appropriate uses of this money as quoted in the last blog, this lawsuit also relies on additional language in the judgment that applied only to Arizona. The consent judgment gave each state’s attorney general the right to “designate the uses of the funds… .” (See p. 138 of that pdf document.) Arizona’s specific directions in the judgment are, first, that “[t]he Attorney General shall direct the use of the Funds in Arizona,” (not the state legislature or governor). Second, “the Funds shall be held in a separate Court Ordered Trust Fund account and… used only for the purposes set forth herein.” And third:

 “The Funds shall be used for purposes intended to avoid preventable foreclosures, to ameliorate the effects of the foreclosure crisis, to enhance law enforcement efforts to prevent and prosecute financial fraud, or unfair or deceptive acts or practices and to compensate the State for costs resulting from the alleged unlawful conduct of the Defendants. Such permissible purposes for allocation of the funds include, but are not limited to, supplementing the amounts paid to state homeowners under the Borrower Payment Fund, funding for housing counselors, state and local foreclosure assistance hotlines, state and local foreclosure mediation programs, legal assistance, housing remediation and anti-blight projects, funding for training and staffing of financial fraud or consumer protection enforcement efforts, and civil penalties.”

Notice that each part of these court-ordered directions used the word “shall,” indicating that they are mandatory, not advisory or optional.

The results of the lawsuit so far:

  • Arizona has agreed not to transfer the $50 million until at least after December 31, 2012, to give the state court judge the opportunity to make a ruling on the lawsuit.
  • The judge presiding over the lawsuit has scheduled a hearing on the case for August 22, 2012.  

What difference would $50 million dollars make? According to the Arizona Housing Alliance, “$50 million could provide 75,000 troubled homeowners with housing counseling and 10,000 homeowners with legal assistance.”

This doesn’t necessarily tell us how many homes that money would save. And there is room for argument about the best uses of the money for helping struggling homeowners. But there should be no argument that the money was intended to be used for that purpose, and that siphoning off that money for anything else is just plain wrong. And the state government’s attempt to do that is that is just one more expensive insult heaped onto those who have been most hurt by the banks’ behavior, and who were supposed to have been helped by the settlement.

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