Homeowners facing foreclosure could gain a measure of debt relief from a proposal negotiated this week during ongoing settlement talks between banks and state attorneys general.

The proposal would allow banks to pay less in penalties for improper and sometime illegal business practices related to the financial crisis, including foreclosure and mortgage-related wrongdoing, in exchange for an agreement to cut the loan balances of mortgage holders.

The proposal comes as banks and a coalition of state attorneys general attempt to reach a settlement agreement as the result of investigations into widespread fraud and deception by mortgage lenders in the wake of last fall’s robo-signing and home foreclosure scandals. As a result of the scandals, banks were accused of falsely attesting in affidavits as to the nature and ownership of consumer debts and then using the fraudulent legal documents to improperly foreclose on borrower’s homes.

The proposed principal reduction plan would be joined by a second agreement that would require banks to provide funding to states to pay for their own foreclosure-rescue programs that would presumably to a better job of providing consumer with mortgage debt relief than the banks’ own programs, which have been severely criticized for failing to approve significant numbers of customers for permanent mortgage loan modifications.

However, the proposed settlement didn’t sit well with California Attorney General Kamala Harris, one of the eight state attorneys general representing the core team involved in negotiating the proposal. Harris said Friday that she was leaving the negotiating team because the proposal lets banks off the hook and doesn’t go far enough to punish lenders for their unethical and illegal business practices.

In a letter to Iowa Attorney General Tom Miller, who is leading the attorneys general group, Harris said that it “became clear to me that California was being asked for a broader release of claims than we can accept and to excuse conduct that has not been adequately investigated. In return for this broad release of claims, the relief contemplated would allow too few California homeowners to stay in their homes” (“Principal Reduction Plan for Struggling Homeowners Could Be Part of Settlement Between Lenders and States,” The Palm Beach Post, Oct. 4, 2011).

Washington Attorney General Rob McKenna, one of the members of the negotiating team, disagreed with Harris’ evaluation of the proposal. “Our settlement will provide huge benefits — estimated in the tens of billions of dollars — for borrowers,” McKenna said. “The deal we are negotiating will not give banks a get out of jail free card.”

Representatives of the attorneys general, banks, and federal agencies met this week in Washington, D.C., to continue settlement negotiations.

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