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States said to be weighing $25-billion settlement with big banks

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State attorneys general have received drafts of a $25-billion settlement with the nation’s biggest banks that would overhaul foreclosure and mortgage servicing practices, according to two people familiar with the negotiations who aren’t authorized to speak publicly.

No deal has been officially reached among the states, federal agencies and the nation’s five largest mortgage servicers. Individual states must decide whether they will join a settlement or pursue independent lawsuits and investigations.

California, which many analysts consider to be a key participant of any strong deal, has yet to signal whether it will accept a deal. State Atty. Gen. Kamala D. Harris walked away from talks with the banks last year, saying not enough was being offered by the financial institutions for California homeowners.

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Since then, certain terms have been added to lure the Golden State back to the table, and Harris has opened separate inquiries into the mortgage business.

“Attorney General Harris has consistently and repeatedly expressed concern about protecting her ability to investigate wrongdoing in the mortgage arena, and that remains a key lens through which she will evaluate any proposals,” Shum Preston, a spokesman for Harris, said in a statement.

Officials negotiating on behalf of the state attorneys general met Monday with federal officials in Chicago to discuss the progress of the settlement talks.

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Liberal activists and some lawmakers have criticized the ongoing settlement talks, arguing that the Obama administration should launch a broad investigation into the mortgage practices of big banks and push for a settlement that is tougher on the banks.

“In a world of Occupy Wall Street, activists across this country are going to be looking at this deal very closely,” said Bob Borosage, co-director of Campaign for America’s Future. He said there should be no “sweetheart deal” with major banks and said a $25-billion agreement would be just a “slap on the wrist.”

Sen. Sherrod Brown (D-Ohio) said the mortgage servicing problems were “part of a long-standing ugly pattern of homeowner abuse” by large banks that warranted a thorough investigation and prosecutions.

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“In many ways, Wall Street isn’t just too big to fail, it’s too big to jail,” Brown said. “When laws are broken, there needs to be a full investigation. Victims must be compensated.”

Brown urged the Obama administration to join with the attorneys general of California, New York and several other states in seeking tougher terms in the settlement.

alejandro.lazo@latimes.com

jim.puzzanghera@latimes.com

Christi Parsons in the Washington bureau contributed to this report.

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