U.S. banks received a proposal from state attorneys general and several federal agencies that could require them to reduce loan balances of troubled mortgage borrowers, the Wall Street Journal said, citing people familiar with the matter.

The 27-page document, sent to the nation's largest mortgage lenders, does not specify penalties or fines but instead represents a detailed code of conduct for how they must treat borrowers throughout the loan modification process, the sources told the paper.

The proposed code of conduct would require banks to first consider reducing loan balances of mortgage borrowers in certain instances before modifications or foreclosure, the paper said.

(Reporting by Sakthi Prasad in Bangalore; Editing by Tomasz Janowski)