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Will Veto of Mortgage Fraud Millions for Commerce Agency Stand?

South Carolinians who were supposed to benefit from the state’s multimillion-dollar share of a national mortgage fraud settlement perhaps already know it:

The General Assembly left them out in the cold on that one.

The question now is: Will a corporate welfare slush fund controlled largely by the S.C. Department of Commerce be a big beneficiary of the settlement instead?

The Legislature, returning to Columbia today to take up 81 budget vetoes by Gov. Niiki Haley, is likely to answer that question in the next 36 hours.

Overriding a veto requires a two-thirds vote by both chambers. The House goes first, starting today. The Senate is scheduled to take its turn Wednesday.

One of Haley’s budget vetoes erased an extra $10 million for the Department of Commerce’s deal-closing fund. The Legislature allocated that $10 million to the fund out of the state’s portion of the mortgage settlement.

Commerce, an agency of the governor’s cabinet, uses the deal-closing fund for incentives for companies to locate or expand in South Carolina.

Yet regardless of what happens on the vetoed $10 million, this fiscal year will still be a good one for the fund, thanks to Haley and the great majority of legislators.

The fund received $5 million last fiscal year, according to Office of State Budget records.

In the 2012-13 fiscal year that began July 1, the Legislature increased the deal-closing fund five-fold – to $25 million.

Of that, $8 million is recurring tax money and $7 million is nonrecurring, plus the vetoed $10 million from the mortgage settlement.

Haley, in her executive budget for this fiscal year, doubled the deal closing fund, earmarking $10 million for it.

The mortgage fraud settlement totals $25 billion nationally.

The federal government and 49 state attorneys general, including Alan Wilson of South Carolina, reached the agreement earlier this year with five of the nation’s largest banks: Citi, Wells Fargo, JPMorgan Chase, Ally (formerly GMAC), and Bank of America.

The settlement stems from allegations that the lenders engaged in widespread fraudulent mortgage practices. The accusations include “robo signings” in foreclosures, or “fraud-closures” in which affidavits are signed without a review of their veracity.

A tsunami of foreclosures was a primary cause of the Great Recession.

Through the S.C. Attorney General’s Office, the state received $31.3 million from the settlement agreement, according to Mark Plowden, spokesman for the office. “It (the money) had to come through this office per the settlement,” Plowden says.

The Attorney General’s Office retained 10 percent of the $31.3 million for legal fees, a standard ratio, and put the rest – $28.2 million – in a special account as required by state law, according to Plowden.

“So that’s where it literally went,” he says. “So, that’s it. We have absolutely nothing to do with it (anymore).”

However, instead of using the $28.2 million to help victims of fraudulent mortgage practices, as the money was intended, the Legislature put $10 million of it into the deal-closing fund and put the rest in the state’s general fund.

The Legislature allocated the money that way even as lawmakers had more than $1 billion extra to spend this fiscal year as a result of higher tax collections in an improving economy.

Loose guidelines in how the settlement dollars could be spent allowed the Legislature to redirect them, according to a report on how states are spending their settlement funds. Enterprise Community Partners, a national nonprofit affordable housing group based in Maryland, produced the report.

The General Assembly is not alone in diverting South Carolina’s share of the settlement, the report says; and some House Democrats fought against allocating part of it to the deal-closing fund.

In any case, the Legislature did so through a one-year budget edict called a proviso.

But Haley, while hardly a critic of the deal-closing fund, vetoed the proviso.

“Certainly tools such as the Closing Fund are useful for financing the infrastructure that helps us to attract and retain businesses,” Haley wrote in explaining the veto, “but at the same time, I consider it inappropriate to raid the proceeds of the national mortgage settlement in order to generate more resources for the closing fund.”

If the veto stands, the General Assembly must decide what to do with that $10 million.

In such a case, the Legislature could use it to help victims of fraud-closures.

Although doing so would mark a reversal by most lawmakers, that is the intent of the settlement, according to the report by Enterprise Community Partners.

The review says the settlement documents lay out these general guidelines for using the money:

“To the extent practicable, such 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 States for costs resulting from the alleged unlawful conduct of the Defendants.”

Through the settlement, a third-party claims administrator is distributing another estimated $16 million – in $1,500 to $2,000 increments – to South Carolinians individually, according to Plowden.

Nevertheless, if Palmetto State people harmed by fraud-closure scams are looking to the Legislature for help from the mortgage settlement, they might have better luck looking for someone who wants to sell them some land – like – in Dust Bowl Oklahoma.

Reach Ward at (803) 254-4411 or eric@thenerve.org.

State Agencies Legislation Incentives General Assembly Economic Development Budget Corporate Welfare

S.C. General Assembly S.C. Department of Commerce Enterprise Community Partners deal-closing fund Gov. Nikki Haley