If settlement talks between the states and residential servicers break down, the nation's megabanks will face the prospect of lawsuits from up to 30 state attorneys general, according to Sen. Jack Reed, D-R.I.

Mortgage bond holders and even homeowners harmed by foreclosures also will pursue additional litigation, the Senator warned during a hearing Tuesday morning.

"The legal process would take several years to determine multiple cases of liabilities and responsibilities," Reed said at a Senate Banking Committee hearing. "That itself would have a significant impact on the market – both the value of these companies and their ability to move forward and more robustly contribute to the recovery."

Testifying before the committee, Treasury secretary Timothy Geithner chimed in that, "All the parties have a stake in bringing this to resolution as quickly as possible."

A settlement would help clear up the "legal uncertainty around the mortgage servicing process," the Treasury secretary told Reed.

Under questioning, Geithner confirmed that Elizabeth Warren, who is in charge of setting up the Consumer Financial Protection Bureau (CFPB), is advising federal regulators on servicing standards that should be part of the settlement. However, the upstart CFPB "will not be a party to the formal settlement with the mortgage servicers," Geithner said.

Once the CFPB is up and running on July 21, it will have the authority to set standards for the mortgage servicing industry. "For this reason, I invited Elizabeth Warren to advise the other agencies that are part of this process on how to design appropriate servicing standards," the secretary testified.

As reported by National Mortgage News, several states are now requiring servicers to have licenses, a trend that has been gaining steam over the past two years. In years past, no license was needed to service residential loans in most states.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.