Regulators flawed in foreclosure oversight Gallery

In monitoring the financial health of banks over the years, the OCC had been far more aggressive. Agency staff members have been assigned to work full time inside the largest banks, checking to see whether the banks are taking excessive risks, for instance, by analyzing their holdings.

But the agency did not look closely at how banks foreclose when borrowers don't make their mortgage payments. OCC officials treated foreclosures as the simple act of filing documents to seize ownership of a home once a borrower couldn't pay.

"We looked at the final stage of the process and thought of it as one that would be governed by standards and procedures in internal controls," said Julie Williams, the OCC's top lawyer. "You would only be able to know for sure if there was a problem with the document-signing process if you were standing in the room watching someone sign documents. That is not traditionally part of the bank examination process."

This about establish proper document requirements and procedures goes back to 2007.

A 2007 study by Kathleen Porter, a University of Iowa law professor, found that servicers often tried to seize people's homes improperly, adding new fees when borrowers wanted to try saving them. She found that many servicers "lack the required documentation necessary to establish a valid debt."

Her findings prompted a hearing by the Senate Judiciary Committee held in May 2008. Afterward, Sen. Charles E. Schumer (D-N.Y.), who chaired the hearing, concluded that mortgage servicers have "failed to keep even the most basic records to justify their claim."

Meanwhile, the Federal Trade Commission, which traditionally regulates non-bank financial companies, had been receiving complaints from consumers for several years. In 2003, the FTC reached a $40 million settlement with Fairbanks Capital over defrauding borrowers by not crediting them for payments.

Then in 2008, the FTC reached a $28 million settlement with EMC Mortgage, later bought by J.P. Morgan Chase, to resolve complaints about defrauding borrowers and failing to properly keep track of mortgage documents.

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