U.S. banks being probed over their foreclosure practices expect to negotiate with state attorneys general, but they are unlikely to agree to forced loan modifications, lawyers for lenders said this week.

Big mortgage servicers such as Bank of America Corp. and JPMorgan Chase & Co. are under the microscope over the use of "robo-signers" — people who sign hundreds of affidavits a day.

U.S. attorneys general for all 50 states are jointly investigating whether bank units that foreclose on bad loans failed to review documents properly or submitted false information to evict delinquent borrowers.

Lawyers for big banks say servicers want to be cooperative with the AGs and clean up their procedures, but they do not want to be forced into modification programs that come with huge logistical headaches and limit banks' ability to handle delinquent mortgages on a case-by-case basis.

Attorney Andrew Sandler, who represents lenders at Washington, D.C. firm BuckleySandler, said settlement talks will get contentious if AGs seek such remedies as loan modifications.

"That's where servicers will draw a line in the sand," Sandler said Sunday.

Other lawyers involved in the AG probe also said banks would resist a settlement based on loan modifications. Alternatives could include fines or even a fund to help foreclosed families relocate.

Any settlement is likely to be complicated by the number of states involved and the position of individual banks.

Richard Gottlieb, a Chicago-based Dykema attorney who also has lender clients, argues that servicers do not have the authority to force modifications beyond what is allowed in contracts with investors.

"The servicer doesn't have the right to modify a loan, the owner does," Gottlieb said, adding that modifications are irrelevant if the house is vacant.

TRYING TO MOVE ON

The states' joint probe is still in the early stages, but banks are seeking to quickly put behind them the paperwork mess that sparked voluntary but temporary halts to foreclosures and made investors fearful about the impact on earnings.

So far some individual state attorneys general have issued narrowly focused requests for data from lenders, while others have cast a much wider net, said banking industry attorney Michael Mierzewski with Arnold & Porter in Washington, D.C.

However, Mierzewski said he has not yet seen any information requests from the joint 50-state investigation.

Ally Financial's GMAC unit and Bank of America said last week they were resuming some foreclosures after reviewing their procedures.

Ohio Attorney General Richard Cordray, a prominent player in the nationwide probe, said last week he was deeply concerned about the foreclosure resumption and renewed a call for the banks to aggressively pursue loan modifications.

Such relief has long been a priority for consumer advocates. Last week Cordray told Reuters that loan modifications would be a "good result" from the AG probe, but was unsure whether it would happen.

A Bank of America representative declined to comment for this story, while Ally spokeswoman Gina Proia said the company works to exhaust all home preservation options with borrowers, including loan modifications.

FINDING THOUGHT LEADERS

For banks, the key to negotiating a deal with the AGs is figuring out what appeals to a broad cross section of the group, said attorney John Beisner, who represented Countrywide in a recent multi-state probe over subprime lending but does not have clients in the current probe.

"The real trick of this is to try to find the leaders in the group who you think will persuade the others to the kind of conclusion you would like to reach," he said.

If an agreement can be reached, then other AGs who want more aggressive remedies will have to decide whether they want to reject the deal and go to court on their own, he said.

But that path carries risks for AGs, like questions from constituents about why they are not getting the same immediate benefits as states that settled.

States could pursue other remedies against lenders besides loan modifications. For instance, lenders could be forced to pay fines of $10,000 per violation of Arizona's consumer protection laws, said Susan Segal, chief counsel in Arizona Attorney General Terry Goddard's office.

Cordray has already asked in a lawsuit for penalties against GMAC of up to $25,000 per violation in Ohio.

States could also establish a fund for people who have suffered wrongful foreclosures, Segal said, which lenders would pay into.

Additionally, there could be a "cash for keys type of remedy" to help borrowers with relocation expenses, Segal said.