While they may be conducting their own investigations, federal prosecutors and national bank regulators for the most part aren’t the ones leading the investigation into the foreclosure mess. At least that's the perception—one that's reinforced when Elizabeth Warren, Obama's head of consumer financial protection, says her money is on a 50-state investigation by the states' attorneys general. The New York Times’ Joe Nocera, for instance, has said that the handful of federal investigations into the subject are “not going to amount to a hill of beans."



Why such low expectations for the feds? A piece in the Washington Post today may shed some light (emphasis added):

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.

In other words, state bank regulators—unable to get cooperation from the banks—warned federal regulators of problems with the banks’ foreclosure operations, and they were told to let the feds handle it.

Even when problems with robo-signing ignited a scandal in recent months, the Office of the Comptroller of the Currency ordered lenders to conduct their own reviews and only later—about two weeks ago, according to the Post—began its own examination. Here’s how the OCC explained its regulatory inaction:

"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."

Today’s story harkens back to a Bloomberg Businessweek report, which is set up almost identically—state officials met with the OCC, warning of an impending problem that they were subsequently told to leave to the feds. The difference was that this meeting occurred even earlier in the decade, when banks first began pushing consumers to take out risky mortgages—mortgages that in all-too-many cases would end in default, foreclosure, and lead into the current foreclosure crisis.

Taken together, the two pieces show how efforts by state regulators and attorneys general to protect consumers—first from the banks’ irresponsible lending and later from suspected mistakes in banks’ foreclosure operations—were “thwarted in many cases by Washington officials hostile to regulation and a financial industry adept at exploiting this ideology.” From Bloomberg Businessweek (emphasis added):

More than five years ago, in April 2003, the attorneys general of two small states traveled to Washington with a stern warning for the nation's top bank regulator. Sitting in the spacious Office of the Comptroller of the Currency, with its panoramic view of the capital, the AGs from North Carolina and Iowa said lenders were pushing increasingly risky mortgages. Their host, John D. Hawke Jr., expressed skepticism. Roy Cooper of North Carolina and Tom Miller of Iowa headed a committee of state officials concerned about new forms of "predatory" lending. They urged Hawke to give states more latitude to limit exorbitant interest rates and fine-print fees. "People out there are struggling with oppressive loans," Cooper recalls saying. Hawke, a veteran banking industry lawyer appointed to head the OCC by President Bill Clinton in 1998, wouldn't budge. He said he would reinforce federal policies that hindered states from reining in lenders. The AGs left the tense hour-long meeting realizing that Washington had become a foe in the nascent fight against reckless real estate finance. The OCC "took 50 sheriffs off the job during the time the mortgage lending industry was becoming the Wild West," Cooper says.

Hawke, the former head of the OCC, told Bloomberg Businessweek that blaming the feds is "bull----.” He blamed the risky lending on mortgage brokers and originators, which he said were under state purview. (In 2009, state regulators fought the OCC in court for the power to take enforcement action against national banks for violations of proper lending practices. The U.S. Supreme Court—in a case known as Cuomo v. Clearing House—sided with the states, ruling that they are not prohibited from enforcing state laws against national banks.)

The current OCC continues to defend the agency’s oversight of mortgage operations and told the Post that while the agency stayed hands-off in regard to banks’ foreclosure process, “we put emphasis on the modification process." As our reporting has shown, getting loan modifications—whether through the federal government's modification program or the banks' proprietary programs—hasn't been easy for homeowners either, and the process is also riddled with some of the same dysfunction and disorganization plaguing the foreclosure process.

The agency, as we've noted, has rarely taken formal enforcement action against the banks but has said this is because it works closely with the banks to resolve problems while they're still small.

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