The states have agreed on some terms while failing so far to reach an accord on monetary payments by lenders, a person familiar with the talks said last week. Eight Republican attorneys general have publicly challenged the concept of principal reductions as part of a 50-state settlement.

Last month, state officials and federal agencies, including the Justice Department, submitted settlement terms to five mortgage servicers, including Bank of America Corp. and JPMorgan Chase & Co. They called for a “substantial portion” of an unspecified monetary amount to go toward a loan modification program.

Virginia Attorney General Kenneth Cuccinelli and six other Republican attorneys general assailed the proposal as overreaching, with four calling principal reduction a “moral hazard.”

“You’re declaring in advance who the winners and losers are,” Georgia Attorney General Sam Olens said in an interview. “I’m a little concerned that this process disengages the normal market forces.”

Oklahoma Plan

Oklahoma Attorney General Scott Pruitt is seeking an alternative settlement with banks that respects “the appropriate role of attorneys general,” his office said in a statement. The settlement could be a model for other states, Pruitt said.

The six-month probe by the states was triggered by claims of faulty foreclosure practices following the housing collapse, which state officials said may violate their laws. Geoff Greenwood, a spokesman for Iowa Attorney General Tom Miller, a Democrat who leads the investigation, said in an interview that the states haven’t presented a dollar figure to the banks, declining further comment.

Another person familiar with the talks said state negotiators are discussing what form a financial component may take, and that there will be no settlement without a monetary payment. The person, who declined to be identified because the talks are private, said it may take four months to reach a deal.

Five Banks

Bank of America, JPMorgan, Wells Fargo & Co., Citigroup Inc. and Ally Financial Inc. are the five companies involved in the talks with the 50 states.

In his March 22 letter to Miller, Cuccinelli said the settlement proposal, or term sheet, given the five lenders “appears to reach well beyond the scope of our enforcement role, and, in some instances, far exceeds the scope of the misconduct which was the subject of our original investigation.”

The letter was also signed by Greg Abbott of Texas, Pam Bondi of Florida and Alan Wilson of South Carolina. The attorneys general of Oklahoma, Alabama and Nebraska sent Miller a letter with their objections March 16.

The proposal to reduce homebuyers’ loans “rewards those who simply choose not to pay their mortgage,” some of the attorneys general told Miller.

Last month, mortgage servicers agreed with U.S. banking regulators to a series of reforms, including conducting a review of loans that went into foreclosure in 2009 and 2010 and improving procedures for modifying loans and seizing homes.

Set Requirements

The 50 states and the Justice Department seek to set requirements for how banks service loans and conduct home foreclosures.

Any state agreement with servicers or banks on principal reductions will depend on the size of the writedowns, the incentives for the servicers built into the settlement and other details, which continue to be sorted out, said the first person familiar with the negotiations.

“Our position has been that principal reductions are one tool in the toolbox, and should only be used in appropriate circumstances,” Iowa’s Miller said yesterday in an e-mailed statement. “We have never advocated broad-based principal reductions that would pick winners and losers or trigger strategic defaults.”

Miller has said that the states and the banks have “a long way to go” to reach an agreement.

Not in Accord

Though not in accord on financial penalties or loan reductions, significant progress has been made on other settlement terms, said that person, who declined to be identified because the talks are private. Agreements in principle have been reached on several issues, said the person, who didn’t specify the areas of accord as they may change as talks proceed.

Dan Frahm, a spokesman for Charlotte, North Carolina-based Bank of America, and Thomas Kelly, a spokesman for New York-based JPMorgan, didn’t return calls seeking comment.

In a speech to a group of attorneys general earlier this month, Bank of America Chief Executive Officer Brian Moynihan said “broad-based” principal reductions aren’t “a sound policy decision for America.”

“Fairness is a major concern,” he said, according to the prepared text of the speech. “It’s hard to see how we could justify reducing principal for many delinquent customers who represent a small portion of borrowers, but not for the vast majority of our customers who have stayed current on their loans.”

Regulator Agreements

In their agreements earlier this month, federal banking regulators including the Office of the Comptroller of the Currency said the “consent decrees” entered into with the 14 banks won’t prevent them from issuing fines later.

In addition to Bank of America and JPMorgan, also taking part in those agreements were San Francisco-based Wells Fargo, New York-based Citigroup, the GMAC unit of Detroit-based Ally Financial, Aurora Bank FSB, EverBank Financial Corp., HSBC Holdings Plc, OneWest, MetLife Inc., PNC Financial Services Group Inc., Sovereign Bank, SunTrust Banks Inc., and US Bancorp.

Iowa’s Miller said earlier this month that the state effort to reach a nationwide agreement would continue “unabated.”