Banks accused of fraud in foreclosure probe-report

* HUD inspector general targets 5 large lenders-report

* Audits accuse lenders of defrauding taxpayers

* Audits being used in foreclosure probe settlement talks

WASHINGTON, May 16 (Reuters) - A U.S. housing watchdog has concluded that five large banks defrauded the government in seeking reimbursements for mortgages on properties they improperly foreclosed upon, according to a report in the Huffington Post on Monday.

The findings by the inspector general of the Department of Housing and Urban Development (HUD) target Bank of America (BAC.N), JP Morgan Chase (JPM.N), Wells Fargo (WFC.N), Citigroup (C.N) and Ally Financial, according to the report.

The findings have been referred to the Justice Department.

The IG's audits conclude the banks violated the False Claims Act, a law dating back to 1863 that is designed to protect the federal government from fraudulent bills, the Huffington Post website reported.

The banks filed to have the Federal Housing Administration reimburse them for federally insured loans on foreclosed properties that were sold for less than the remaining balance for the mortgages, according to the report.

The issue is that the foreclosures were done using improper or faulty paperwork, according to the report.

Federal regulators and state attorneys general have been investigating bank mortgage practices that came to light last year, including the use of "robo-signers" to sign hundreds of unread foreclosure documents a day.

The five banks are currently negotiating with state attorneys general, HUD, the Justice Department, the Federal Trade Commission and the Treasury Department over how to settle charges that they took shortcuts when foreclosing on homes.

The attorneys general and federal agencies are using the HUD inspector general's findings to pressure the banks during the talks, according to the report.

A spokesman for Iowa Attorney General Tom Miller, who is leading the states' efforts, declined to comment.

A spokeswoman for HUD declined to comment as well and a representative for the HUD IG's office, which is an independent agency, was not immediately available for comment.

Bank of America and Wells Fargo declined to comment. Representatives for the other servicers were not immediately available for comment.

Earlier this month, the U.S. government sued Deutsche Bank AG (DBKGn.DE) for more than $1 billion, accusing the German bank of fraud for repeatedly lying to obtain federal guarantees on mortgages it issued. (Reporting by Dave Clarke, Editing by Tim Dobbyn)