State attorneys general are holding meetings with the nation’s largest mortgage servicers this week to negotiate a settlement agreement for the robo-signing issues that surfaced last fall. The most controversial piece of the AGs initial proposal – mandated principal write-downs – has reportedly been dropped from the discussions.

The primary issue now is the amount of fines to be levied, which according to a Washington Post report, the states want to use to help struggling homeowners avoid foreclosure.

The paper says one option being floated is to distribute the penalty money to various state-run programs, including mediation initiatives and foreclosure prevention hotlines.

A separate report by American Banker says attorneys general are considering using the money to start a “cash for keys” program to help delinquent borrowers relocate while speeding up the foreclosure process.

Speculation on the combined fine amount ranges from $5 billion to $20 billion.

The latter was the sum widely reported to be part of the initial settlement terms proposed by the states back in early March and still the figure to hit in the minds of some state counsels.

However, the Wall Street Journal reports that servicers say they are only willing to pay up to $5 billion.

Beyond the penalties expected, Bloomberg, citing “people familiar with the talks,” says the AGs’ revised settlement proposal reflects earlier discussions with servicers, in which they said they are open to other types of loan modifications, including changing interest payments, but will not agree to a principal write-down plan.

Federal agencies, including HUD and the Department of Justice, are reportedly taking part in the attorneys general’s settlement negotiations.

However, the primary federal banking regulators – including the Office of the Comptroller of the Currency (OCC), Federal Reserve, and the Office of Thrift Supervision (OTS), with the support of the FDIC – broke ranks last month to pursue their own deal with the servicers. Consent orders were handed down outlining reforms for handling foreclosures and loss mitigation efforts.

At the time, no monetary sanctions were announced, but the regulators said they do plan to impose penalties at a later date.