Ah yes, the ever-popular "self-reporting" principle first introduced by Ronald Reagan, who genially reassured us that businesses would never lie about anything important "because if they did, they'd be out of business and that would be against their own self interest." See how well that all worked out?

As foreclosures began to mount across the country three years ago, a group of state bank regulators suspected that some borrowers might be losing their homes unnecessarily. So the state officials asked the biggest national banks for details about their foreclosure operations.

When two banks - J.P. Morgan Chase and Wells Fargo - declined to cooperate, the state officials asked the banks' federal regulator for help, according to a letter they sent. But the Office of the Comptroller of the Currency, which oversees national banks, denied the states' request, saying the firms should answer only to inquiries from federal officials. In a response to state officials, John Dugan, comptroller at the time, wrote that his agency was already planning to collect foreclosure information and that any additional monitoring risked "confusing matters."

But even as it closed the door on state oversight, the OCC chose itself not to scrutinize the foreclosure operations of the largest national banks, forgoing any examination of their procedures and paperwork. Instead, the agency relied on the banks' in-house assessments. These provided no hint of the problems to come until they had tripped the nation's housing market, agency officials later acknowledged.

"Based on what we were seeing and what we were concerned about, it felt like a chronic underreaction at the federal level," said John Ryan, a senior official with the Conference of State Bank Supervisors.

Even when the mortgage industry itself identified possible flaws in foreclosure paperwork, the agency was slow to act. In September, Ally Financial suspended foreclosures after discovering problems with tens of thousands of cases. But even then, the OCC did not begin to examine the operations of other major banks. Instead, the agency asked them to undertake internal reviews and told them it would conduct its own examination later, an OCC official said.

Over the following weeks, most of the major national banks announced one after the next that they were reviewing their foreclosure practices and putting thousands of cases temporarily on hold. While the freeze offered new hope to thousands of distressed borrowers, it also threatened to undermine the real estate market, which was already struggling to recover from crisis.

Two weeks ago, for the first time, the OCC began sending its staff into the banks to examine their foreclosure operations, interview bank employees and review paperwork.