The Office of the Comptroller of the Currency failed to spot widespread problems in the foreclosure practices of major banks between 2008 and 2010 because the agency’s examiners underestimated the mounting risks and were given outdated guidance that did not address how the industry had changed, according to a report issued Friday by the Treasury Department’s inspector general.

As foreclosures skyrocketed across the country in the wake of the financial crisis, banks routinely filed flawed and fraudulent legal documents in a rush to keep up with the wave of defaults. But officials at the Office of the Comptroller of the Currency largely missed the fact that the mortgage servicers were cutting legal corners on such a large scale, according to Friday’s report.

“During this time OCC did not consider foreclosure documentation and processing to be an area of significant risk and, as a result, did not focus examination resources on this function,” the report stated. Rather, it said, the OCC relied too heavily on the banks’ internal auditing and quality-control reports. “We believe this reliance was misplaced,” the report stated.

In addition, the report notes that the Mortgage Banking Comptroller’s Handbook used by bank examiners had not been updated since the late 1990s. The mortgage securitization business has grown far larger and more complex during that period, and the way in which loans are serviced has changed in fundamental ways.

“We believe that the lack of updates to this kind of basic examination guidance increases the risk of ineffective supervision,” Friday’s report stated.

Revelations about the rampant use of “robosigned” documents, backdated loan assignments and other flawed and fraudulent foreclosure practices at the nation’s biggest banks triggered a national uproar in the autumn of 2010.

In February, after more than a year of negotiations, government officials and five of the country’s largest banks signed a $25 billion settlement over abusive foreclosure practices. That deal also put in place new mortgage servicing standards aimed at stemming
robosigning and other shoddy foreclosure practices.

Current Comptroller Thomas J. Curry told the inspector general in a May 15 letter that the OCC intends to update its manual by early next year, but he noted that examiners had received supplemental guidance in 2006 and 2007 — when the housing boom was turning to bust — as well as in 2011. In addition, Curry said, examiners have been instructed to pay particular attention to internal risk management and mortgage servicing procedures within large banks.