Federal agencies and state attorneys general submitted to banks a proposal for resolving an investigation of foreclosure practices and mortgage servicing while continuing to talk about monetary penalties they will seek.

The 27-page document given March 3 to mortgage-servicers seeks “a binding legal requirement” for how they service loans and conduct home foreclosures, Geoff Greenwood, a spokesman for Iowa Attorney General Tom Miller, said yesterday in a telephone interview.

“This is a document that sets a foundation for negotiations with the nation’s largest servicers,” he said. Greenwood declined to identify the companies or say how many received the proposal, made by states and U.S. agencies including the Justice Department, Federal Trade Commission and Department of Housing and Urban Development.

The states and federal agencies haven’t yet agreed on the monetary penalties they will seek from the companies, according to a person familiar with the matter who declined to be identified because the talks are private. The government officials also are discussing a proposal for loan-modification procedures, the person said.

Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM) and Ally Financial Inc. said in their annual reports that they may have to pay fines and penalties. The payments may be “material,” Charlotte, North Carolina-based Bank of America and New York- based JPMorgan said.

‘Adverse Impact’

“Any of these potential actions could have a material adverse impact on us,” Detroit-based Ally said in its regulatory filing.

All 50 states began investigating banks’ foreclosure practices in October. The probe was triggered by complaints that banks were using faulty documents in seizing homes.

“We’ve had concerns for years about how they handle loan modifications or not handle loan modifications, and we want that changed,” Greenwood said.

The FTC is examining a “a variety of practices” among mortgage servicers, including whether they post payments on time and maintain accurate records, and methods they use to collect on defaulted debt, Joel Winston, associate director of the agency, said in an interview yesterday.

“It’s all unclear how it’s going to happen, if it’s going to be done in an orderly way or with different agencies pursuing separate relief,” he said about a settlement.

The Office of the Comptroller of the Currency separately sent cease-and-desist orders to mortgage servicers, according to a person familiar with the matter. Bank of America, JPMorgan and Citigroup Inc. (C) are among the eight national banks that are expected to get an enforcement document of some kind, the person said.

(Source: Bloomberg)