U.S. banks received a 27-page proposal late Thursday from state attorneys general and several federal agencies that could require them to reduce loan balances of troubled mortgage borrowers, according to people familiar with the matter.
The document, sent to the nation’s largest mortgage servicers, doesn’t specify penalties or fines but instead represents a detailed code of conduct for how they must treat borrowers throughout the loan-modification process.
Banks have yet to receive a separate settlement proposal to pay for damages prompted by the foreclosure-document handling crisis that began last fall.
Thursday’s document focuses instead on improving the way that banks treat borrowers who are seeking modifications or are going through foreclosure.
The proposal represents the clearest indication that the 50 state attorneys general are working hand-in-hand with the Obama administration and other regulators to pursue a significantly broader settlement against the banks than any of the federal agencies might be able to win by themselves.
Some state attorneys general and federal agencies are pushing for banks to pay more than $20 billion in civil fines or to fund a comparable amount of loan modifications for distressed borrowers.
The document sent to the banks came from the state officials, the U.S. Department of Housing and Urban Development, the Federal Trade Commission, the U.S. Department of Justice and the Consumer Financial Protection Bureau.
The proposal outlines formulas that would force banks to consider offering loan write-downs to troubled borrowers more regularly during the modification process.
Banks have resisted reducing loan balances in part because of concerns that it could encourage more borrowers to stop making payments in order to receive smaller loan.
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