Mortgage investors, who have been complaining for months about the costs they will bear under the national servicing settlement, presented a list of proposed remedies at a congressional hearing Thursday.

The settlement between 49 state attorneys general, the federal government, and the nation's five largest servicers requires the servicers to dedicate at least $20 billion to mortgage relief, including principal reductions. It resolves allegations of robo-signing and other servicing abuses.

But the terms allow the servicers — Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM), Citigroup Inc. (C), Wells Fargo & Co. (WFC) and Ally Financial Inc. — to get partial credit for principal reductions on mortgages owned by bond investors.

"In the AG settlement, the government is allowing banks to use investor funds to pay for their own wrongdoings," Laurie Goodman, a senior managing director at Amherst Securities, said in written testimony before the House Financial Services subcommittee on capital markets.

The hearing illustrated that in the five years since the foreclosure crisis began, mortgage investors have developed a deep distrust of the servicing industry.

Under the settlement, the five large banks get credit for modifications of investor-owned mortgages that they were already allowed to make under the contractual agreements that define their relationship with the investors.

But the investor groups argued Thursday that there is potential for abuse by the banks. Under one scenario, banks might grant larger modifications in order to get more credit under the settlement when smaller modifications would make more economic sense to the investors who own the loans.

Another scenario raised by the investors involved banks hiding from investors the size of various fees charged to borrowers, including fees for force-placed insurance.

"Shouldn't investors, who ultimately pay these fees through a lower recovery on their loans, have the right to disclosure about these costs?" Goodman said in her written testimony.

Another gripe from groups representing investors is that they were excluded from the settlement's negotiations.

"Our clients and the general public are important stakeholders in this settlement," Vincent Fiorillo, of Doubleline Capital, LP, said in written testimony on behalf of the Association of Mortgage Investors. "Yet we were excluded from the negotiations over its 15-month process."

The investors' specific requests included that the settlement be amended to consider investors' concerns. But they also proposed more targeted solutions.

Among the ideas they proposed were a monetary cap on the amount that specific investors will have to pay; detailed monthly public reporting on the modifications made under the settlement; and that banks be barred from getting credit for write-downs of investor-owned loans in any future settlements with smaller servicers.

The hearing was convened by GOP Rep. Scott Garrett, R-N.J., who last month sponsored legislation to bar the Justice Department from engaging in mortgage settlement talks with additional servicers without giving bond investors a seat at the negotiating table.

Garrett, who chairs the capital markets subcommittee, echoed the investors' complaints.

"So, in this case, we actually have the administration advocating policies that directly take money from investors that committed no wrongdoing in order to pay, at least partially, for the problems admitted by the banks," he said at the hearing.

But it was not just Republicans who expressed concern about the settlement. Democratic Rep. Maxine Waters made remarks similar to those of Garrett.

And another witness, Adam Levitin, a Georgetown University law professor who has frequently defended the Obama administration, also criticized the government's decision to exclude investors from the negotiations.

"Regardless of how one believes that the cost of principal reduction — and thus ultimately responsibility for the housing bubble — should be allocated, if at all, the process of allocating the costs must be done fairly," he said in written testimony.

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