The Settlement Slush Fund

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From: Lurk More

Between 2013 and 2016, the Obama DOJ negotiated $36.65 billion in bank settlements over mortgage fraud. Congressional investigators found that $880 million to $1 billion was diverted to third-party nonprofits -- not victims, not the Treasury. They found the emails.
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In 2017, the House Judiciary Committee published a report containing an email from Elizabeth Taylor, Principal Deputy Assistant Attorney General of the DOJ’s Civil Division. The email read: “Can you explain to Tony the best way to allocate some money to an organization of our choosing?”

That is a senior Department of Justice official asking a colleague how to direct settlement funds to a politically preferred recipient. The email was not leaked by a whistleblower. It was not obtained through a FOIA request from a partisan organization. It was produced in response to a congressional subpoena, entered into the public record, and published by the House Judiciary Committee.

Representative Bob Goodlatte, then chair of the House Judiciary Committee, stated: “It is not every day in congressional investigations that we find a smoking gun. Here, we have it.”

The mechanism those emails described – converting regulatory enforcement into a funding pipeline for political nonprofits – is not a conspiracy theory. It is administrative procedure. It was documented, investigated, temporarily banned, and restored. The procedure is legal again. Here is how it worked.

The Mechanism

When the DOJ settles a case with a corporation, the settlement agreement specifies how the money is to be paid. Some goes to the federal Treasury. Some goes to state governments. Some goes to direct victim restitution. And some – in the settlements negotiated between 2013 and 2016 – went to mandatory donations to third-party nonprofit organizations.

The key feature was the 2-for-1 credit. For every dollar a bank donated to an approved third-party nonprofit, it could claim $2 against its settlement obligation. A $1 million donation to La Raza reduced the bank’s settlement debt by $2 million. The bank got a discount. The nonprofit got funded. The victims – the homeowners who had been defrauded – got nothing from that particular tranche of money, because it went to an organization rather than to them.

The nonprofits were not randomly selected. They were specified in the settlement agreements, or selected from an approved list maintained by the DOJ. The question that the House Judiciary Committee spent two years investigating was: who compiled the list, and on what basis?

The Three Big Settlements

Three settlements form the core of the record:

JPMorgan Chase: $13 billion, November 2013. The largest bank settlement in American history at the time. Resolved claims related to the packaging and sale of toxic mortgage-backed securities.

Citigroup: $7 billion, July 2014. Same general category of conduct – fraudulent residential mortgage-backed securities.

Bank of America: $16.65 billion, August 2014. The largest civil settlement with a single entity in American history.

Combined: $36.65 billion. Congressional investigators, including the House Judiciary Committee’s Subcommittee on Regulatory Reform, found that between $880 million and over $1 billion was directed to third-party organizations rather than to victims or the Treasury.

The Smoking Gun Emails

The emails produced in the congressional investigation revealed the internal mechanics.

Elizabeth Taylor’s email – “Can you explain to Tony the best way to allocate some money to an organization of our choosing?” – was the most quoted, but it was not the only one. The House Judiciary Committee report documented a pattern of DOJ officials actively shaping which organizations would receive settlement funds.

In one exchange, a senior DOJ official rephrased provisions in the Citigroup settlement specifically to prevent Citigroup from directing its mandatory donations to the Pacific Legal Foundation – a conservative public interest law firm focused on property rights. The original language would have allowed the bank to choose its own recipients. The revised language restricted the list to organizations acceptable to the DOJ.

The distinction is critical. If the bank chooses the recipient, it is a settlement condition. If the DOJ chooses the recipient, it is a government appropriation disguised as a settlement condition. Appropriations are supposed to be made by Congress. The DOJ is part of the executive branch. The Constitution’s Appropriations Clause – “No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law” – exists precisely to prevent the executive branch from directing public funds without legislative authorization.

The money was not technically drawn from the Treasury. It was directed to flow from the settling bank to the designated nonprofit, bypassing the Treasury entirely. This was, according to Federalist Society analysis, the entire point: by structuring the payments as bank-to-nonprofit transfers rather than bank-to-Treasury-to-nonprofit transfers, the DOJ avoided the Miscellaneous Receipts Act (which requires federal agencies to deposit all funds into the Treasury) and the Antideficiency Act (which prohibits spending in excess of appropriations). The constitutional requirements were not violated. They were routed around.

The Named Recipients

The third-party organizations that received settlement funds included:

National Council of La Raza (now UnidosUS): received $1.5 million from the Bank of America settlement alone. La Raza is the largest Hispanic civil rights organization in the United States. It is also a politically active organization that has endorsed candidates and lobbied on immigration policy.

National Urban League: received approximately $1.1 million.

NACA (Neighborhood Assistance Corporation of America): received approximately $53 million total across settlements. NACA is led by Bruce Marks, who has described himself as a “bank terrorist” – his term, used proudly, referring to his aggressive tactics in forcing banks to modify predatory mortgages. NACA does substantive housing counseling work. It also received the single largest share of third-party settlement funds.

LISC (Local Initiatives Support Corporation): received approximately $4.3 million. LISC’s board was chaired by Robert Rubin – Bill Clinton’s Treasury Secretary, later a senior adviser at Citigroup. The same Citigroup that was paying the settlement. The same settlement that was directing funds to LISC. The revolving door did not bother to revolve. It stood open.

NeighborWorks America: received approximately $487.3 million across multiple settlements. NeighborWorks is a congressionally chartered nonprofit, which makes its inclusion less controversial than the other recipients – but the dollar amount is extraordinary. Nearly half a billion dollars directed to a single organization through settlement agreements rather than through the normal congressional appropriations process.

The Federalist Society published a detailed legal analysis arguing that the settlement diversion mechanism violated three separate legal constraints:

The Appropriations Clause (Article I, Section 9, Clause 7): Only Congress can appropriate funds. By directing settlement money to specific organizations, the DOJ was effectively making appropriations – choosing who gets funded and how much – without congressional authorization.

The Miscellaneous Receipts Act (31 U.S.C. 3302): Requires federal officials to deposit money received on behalf of the United States into the Treasury. By structuring payments to flow directly from the banks to third parties, the DOJ ensured the money never touched the Treasury, avoiding the statute’s requirements.

The Antideficiency Act (31 U.S.C. 1341): Prohibits federal employees from making expenditures or obligations in excess of available appropriations. If the settlement directives constitute federal spending – and the Federalist Society argues they do – then they were unauthorized expenditures.

The DOJ’s counterargument was that the payments were conditions of private settlement agreements between the government and the banks, not federal expenditures. The money flowed from the bank to the nonprofit, not from the Treasury to the nonprofit. The government was not spending money. It was requiring the bank to spend money. This is a distinction that bears the weight of the entire constitutional argument, and whether it holds depends on whether you believe the government directing where private parties must send their money constitutes an appropriation.

The Congressional Response

In October 2017, the House of Representatives passed HR 732, the “Stop Settlement Slush Funds Act”, by a vote of 238-183. The bill would have prohibited the DOJ from including mandatory third-party donations in settlement agreements.

It died in the Senate. It never became law.

The pattern: the House investigated, documented the mechanism, found the smoking gun emails, passed legislation to ban the practice, and the Senate did nothing. The mechanism remained legally intact.

The Administrative Toggle

What Congress could not do through legislation, the executive branch did through administrative action – and then undid through administrative action.

In June 2017, Attorney General Jeff Sessions issued a memo prohibiting the practice. Sessions stated: “When the federal government settles a case against a corporate wrongdoer, any settlement funds should go first to the victims and then to the American people – not to bankroll third-party special interest groups or the political friends of whoever is in power.”

In December 2020, the Trump administration codified the ban as a formal regulation in the Federal Register, giving it more durability than a memo alone.

In May 2022, the Biden administration reversed the regulation, rescinding the prohibition. The practice of directing settlement funds to third-party nonprofits is once again legal.

Three administrations. Ban. Codify. Reverse. The mechanism is a toggle switch that changes position depending on who controls the executive branch. The constitutional questions raised by the Federalist Society remain unresolved. The congressional ban remains unpassed. The practice is available to any future Attorney General who wishes to use it.

The Broader Pattern

The DOJ settlement pipeline was not unique. The same structural mechanism – converting regulatory enforcement authority into funding for preferred organizations – appeared across multiple federal agencies during the same period.

The EPA’s Supplemental Environmental Projects (SEPs) allowed companies settling environmental violations to fund environmental projects – administered by organizations selected with input from the EPA – in lieu of paying full penalties to the Treasury.

The CFPB’s civil penalty fund collected penalties from financial institutions and distributed them to affected consumers – but the definition of “affected consumers” and the distribution mechanism were controlled by the CFPB with minimal external oversight.

HUD grants to ACORN successor organizations are the most politically charged example. Congress passed the Defund ACORN Act in 2009, prohibiting federal funding to ACORN after undercover videos revealed employees advising on tax evasion and other illegal activity. In 2011, HUD awarded $729,000 to ACORN Housing Corporation, which had rebranded as Affordable Housing Centers of America. The organization was different in name. The leadership, staff, and office space were the same. The defunding was cosmetic. The money continued.

The Thesis

The mechanism for converting regulatory enforcement into political funding infrastructure is documented. It was investigated by Congress. Emails were produced under subpoena. A senior DOJ official was caught on record asking how to direct money to “an organization of our choosing.” Settlement provisions were specifically rewritten to exclude conservative organizations. A bill to ban the practice passed the House and died in the Senate. An administrative ban was imposed, codified, and reversed across three administrations.

This is not a conspiracy theory. It is not speculation. It is not partisan narrative. It is administrative procedure, documented in the Congressional Record, the Federal Register, and the DOJ’s own internal emails.

The settlement slush fund is interesting not because it is unique but because it is typical. The mechanism – regulatory authority converted to funding authority, operating outside the normal appropriations process, directed to politically aligned recipients, documented when investigated, banned when politically convenient, restored when the politics change – is how institutional power operates when it has learned to route around constitutional constraints.

The Appropriations Clause exists because the Founders understood that the power of the purse is the most fundamental check on executive authority. When the executive branch discovers a way to fund its preferred organizations without going through Congress, it has discovered a way to spend money without democratic authorization. The discovery was documented. The fix was attempted. The fix was reversed. The discovery remains available.

That is not a scandal. That is a feature of the system, operating as designed by the people who designed it. The question is whether the design is acceptable, and the answer depends entirely on whether your preferred organizations are the ones receiving the money.

This essay draws from Lurk More, coming fall 2026.

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