It could take months, at least, for any settlement to be reached. But legal experts say lenders could be forced to accept an independent monitor to ensure they follow state foreclosure laws.
The banks also could be subject to financial penalties and be forced to pay some people whose foreclosures were improperly handled.
Even though Tennessee's foreclosure laws are more lenient on lenders than in those states where the worst allegations of bank shortcuts have surfaced, some borrowers here could still benefit from the banking industry's desire to devise one common set of rules to settle this dispute once and for all.
For banks, "the most efficient way for them to get out from under this is to settle across the board," said Kathleen Engel, a law professor at Suffolk University in Boston.
Employees of several major lenders have acknowledged in depositions that they signed thousands of foreclosure documents without reading them as required by state laws.
"This is not simply about a glitch in paperwork," said Iowa Attorney General Tom Miller, who is leading the probe. "It's also about some companies violating the law and many people losing their homes."
At a news conference, Miller said the states might be open to alternatives to financial penalties for the banks. They might, for example, agree instead to have lenders step up their efforts to help people reduce their loan payments so they can avoid foreclosure.
Tennessee is a nonjudicial foreclosure state, meaning there is no requirement that foreclosures go through the court system.
It wasn't clear Wednesday what kind of changes could take place at the local level.
"It's a complex issue,'' said Jeff Hill, senior counsel in the consumer protection division of the Tennessee Attorney General's Office. "It's not a straight-up simple scam. It's large institutions, and it's a complicated industry."
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