U.S. banks, seeking to avoid $17 billion in court claims over faulty foreclosures, are discussing a settlement framework with state attorneys general that may let firms choose from a menu of options for helping borrowers, two people briefed on the talks said.

Under the proposal, Bank of America Corp. (BAC), Wells Fargo & Co. (WFC), JPMorgan Chase & Co. (JPM), Citigroup Inc. (C) and Ally Financial Inc. would pay penalties and pledge billions of dollars in relief to home buyers, one of the people said, asking not to be named because the talks are private. Firms may fulfill obligations to borrowers over time, choosing among options such as reducing loan principal, cutting fees or paying moving costs, the people said.

Stitching flexibility into settlements may help defuse opposition from a group of Republican attorneys general, who object to principal reductions sought by other states, one of the people said. The pace of talks is accelerating, with parties also nearing agreement on an industrywide overhaul of procedures for handling mortgages, that person said.

State and federal officials have been meeting with the largest U.S. loan servicers to resolve a nationwide probe into documentation lapses during home seizures. Earlier this week, attorneys general told the banks they will face an estimated $17 billion in claims if the inquiries result in civil lawsuits, according to a person with knowledge of the talks. The banks had previously offered to pay $5 billion.

Consent Decrees

Under the proposal, banks would pay the penalties to the states, which would determine how to use the funds, according to the people briefed on the talks. The separate relief funds, which lenders could decide how to provide, are expected to account for a majority of the companies’ costs, one of the people said.

The banks are reluctant to sign a deal with the states without a global settlement from federal agencies as well, said a person with direct knowledge of the banks’ position. U.S. lenders want the agreement to also cover current and future claims from Housing and Urban Development, which provides government insurance on mortgages through the Federal Housing Administration, this person said.

Federal Claims

The Department of Justice and HUD are suing Germany’s Deutsche Bank AG for more than $1 billion for allegedly lying “repeatedly” to obtain FHA insurance on risky loans. Federal prosecutors are suing under the False Claims Act, which allows the government to triple the amount of damages for fraudulent FHA claims. HUD General Counsel Helen Kanovsky said the U.S. may pursue similar cases against other banks.

“We go where the evidence takes us, and if it takes us to the larger players on Wall Street, so be it,” Kanovsky said in a May 3 interview.

New York Attorney General Eric Schneiderman is concerned about a settlement that provides “broad amnesty” to servicers, his spokesman Danny Kanner said in an earlier statement. Any agreement should preserve the ability of attorneys general to “follow the facts where they lead and not be precluded from conducting comprehensive investigations,” Lauren Passalacqua, a Schneiderman spokeswoman, said in April.

State Negotiations

State officials and banks are negotiating the liability releases and haven’t yet reached an agreement, one of the people said.

Dan Frahm, a spokesman for Charlotte, North Carolina-based Bank of America, and Sean Kevelighan, a spokesman for New York- based Citigroup, declined to comment. Vickee Adams of San Francisco-based Wells Fargo and Gina Proia of Detroit-based Ally also declined to comment. A representative of New York-based JPMorgan didn’t respond to a request for comment.

Agreements with states would follow consent decrees that the 14 largest mortgage servicers reached last month with federal regulators including the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. Firms pledged to pay back homeowners for losses from foreclosures or loans that were mishandled.

Iowa Attorney General Thomas J. Miller, a Democrat who is leading the talks on behalf of the states, said at the time that the federal accords wouldn’t halt efforts to extract financial penalties and overhaul procedures for home seizures.

To contact the reporters on this story: Dakin Campbell in San Francisco at dcampbell27@bloomberg.net; David McLaughlin in New York at dmclaughlin9@bloomberg.net.

To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net; John Pickering at jpickering@bloomberg.net

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