Three non-profit homeowner counseling organizations have sued California Governor Jerry Brown, charging that the state had diverted 369 million dollars intended to assist distressed homeowners to other purposes. The monies were from that portion of the $25 billion National Servicing Settlement earmarked for homeowership counseling to avoid foreclosure.  California and 48 other states as well as several federal agencies reached agreement with the mortgage servicing units of five large banks in February 2012 over alleged abusive practices by servicers against mortgage loan borrowers.

But many of the states, most with serious recession-related financial problems, took the counseling funds for other uses.  In the case of California the disputed money was used to pay down debt issued by low-income housing authorities.

California's budgetary situation has improved substantially since the settlement funds were disbursed and the state anticipates a budget surplus of over $4 billion this year, but the suit, filed on behalf of COR Community Development Corporation, the National Hispanic Christian Leadership Council, and National Asian American Coalition, contends that Brown has given no indication he intends to replace the counseling money. 

Robert Gnaizda, representing the National Asian American Coalition, said his group had disagreed with the governor's decision to divert the settlement money but did not want to bring suit while the state was in crisis.  However as the Governor has talked about possible surpluses of 10 billion over the next five years, Gnaizda said, it seemed appropriate to now demand a payback.

The lawsuit also names Michael Cohen, the state's director of finance, and John Chiang, its controller.  Plaintiffs argue that the state ignored clear restrictions on use of the funds and that California law specifies that money placed in a special deposit fund, as the earmarked monies were, can only be shifted to the general fund if the transfer does not interfere with the objective for which the special fund was created and if the money is transferred back when feasible.

It appears that half of the 49 states in the settlement have used roughly $1 billion of the $2.5 billion designated for homeowner counseling for other purposes.  It is unclear whether any other states are planning to replace the counseling money or if they too may be sued.