Under the settlement, which states are currently reviewing to decide whether they will join, the states and a separate "monitoring committee" will have the authority to go to court to enforce the terms and seek penalties of up to $5 million per violation.
A strong enforcement mechanism could help the states and the Obama administration sell the deal to the public, after left-leaning activist groups have questioned whether the negotiations were too lenient on the banks.
Negotiations between state and federal officials to resolve allegations of misconduct in servicing home loans have stretched into their second year.
The delay is partly due to some states trying to extract a bigger settlement from the banks and to reserve their ability to file more mortgage-related suits in the future.
However, the deal now looks imminent.
States have just a few more days to make a decision on whether they will sign on. And U.S. Housing and Urban Development Secretary Shaun Donovan said during a White House briefing on Wednesday that a final legal settlement will be reached "in the coming days."
The settlement, expected to be filed as a consent judgment in federal court in Washington, D.C., will last for 3-1/2 years, according to documents laying out the pending deal's enforcement terms.
Joseph Smith, the banking commissioner in North Carolina, is expected to serve as the monitor on the settlement, people familiar with the matter told Reuters on Monday.
In exchange for up to $25 billion, much in the form of cutting mortgage debt for distressed homeowners, the banks will resolve state and federal lawsuits about servicing misconduct and faulty foreclosures, and some lawsuits about how they made the loans.
Banks have been accused of robo-signing documents and other sloppy paperwork in unlawfully rushing to deal with a flood of foreclosures triggered by the 2007-2009 financial crisis.
The core group of banks involved in settlement talks are Bank of America Corp, Wells Fargo & Co, JPMorgan Chase & Co, Citigroup Inc. and Ally Financial Inc.
The final value of the settlement will depend on which states it includes, and could drop sharply if states like California, one of the hardest hit by the foreclosure crisis, do not join.
On Wednesday, Oregon Attorney General John Kroger said his state will join the settlement. He said Oregon can expect to receive around $30 million from the settlement, and its distressed homeowners can expect around $100 million to $200 million in relief.
The mortgage settlement is just one piece of a larger plan that the Obama administration hopes will get relief to home buyers and help boost the economy. Also on Wednesday, the Obama administration introduced a $5 billion to $10 billion package to help homeowners refinance their loans.
GIVING THE STATES SOME MUSCLE
Some states have raised concerns that banks have not adequately followed through on prior settlements, a concern that has pushed government negotiators to establish more forceful enforcement mechanisms in this deal than have been used in the past.
"I'd like to see very detailed, specific regulations on mortgage servicers and what they can and cannot do," said Max Gardner, a nationally known consumer bankruptcy attorney in Shelby, North Carolina. "Not just the proverbial 'we will obey the law from now on.'"
The enforcement terms mark progress in states' ability to directly monitor mortgage servicing at national banks. For decades, big banks fought state efforts to enforce consumer protection laws by arguing that national banking laws pre-empted their authority.
Under the settlement, the banks will set up internal quality control groups to assess their mortgage servicing units' compliance with the terms of the agreement, and turn over quarterly reports to the monitor about servicing complaints.
If the monitor concludes the group "did not correctly implement" the reviews, the monitor can have a third party review the work.
If the monitor finds information that a servicer "may be engaged in a pattern of noncompliance," he can undertake a more thorough review, and impose even tougher standards.
Servicer compliance will be measured through detailed information about unlawful foreclosure sales and incorrect denials of loan modifications, according to the documents.
If the servicer continues to violate any of the terms, any of the states or a monitoring committee can go to court and seek penalties of up to $1 million for the first "uncured" violation and up to $5 million for a second.
Servicers will pick up the tab for the monitor, the documents said.
The monitoring committee is comprised of representatives of state attorneys general, the U.S. Justice Department, and the U.S. Department of Housing and Urban Development, who will review the work of the monitor.
The document says that all the terms are subject to approval by federal banking regulators.
(Reporting By Rick Rothacker in Charlotte and Aruna Viswanatha in Washington, D.C.; Editing by Tim Dobbyn)
By Rick Rothacker and Aruna Viswanatha