Banks' failure in recent years to follow the laws and rules that govern how a delinquent borrower can be removed from their home has led to multi-billion-dollar settlements with federal regulators and states.

Banking regulators have come under fire as well for not picking up on the problem early enough.

The IG report is the latest effort to determine why the foreclosure processing, or mortgage servicing, problems were not detected earlier.

The servicing issue burst into public view in late 2010 when government agencies began investigating bank practices, including the use of "robo-signers" to sign hundreds of unread foreclosure documents a day.

In the years leading up that time, the IG found that the Office of the Comptroller of the Currency, the national bank regulator, did recognize the overall risks posed to banks by the rising rate of foreclosures.

"However, this did not prompt OCC to identify foreclosure documentation and processing by national banks as an area of significant risk during the 2008, 2009, or 2010 examination cycles," the report said.

Treasury's watchdog said that among the reasons why this problem was missed include that foreclosures are mostly governed by state laws while the OCC mostly focuses on federal laws.

"Notwithstanding these factors, we believe OCC could have been better equipped to identify the key risks in a bank's foreclosure documentation and processing function," the report said.

The OCC is an independent agency but it falls under the umbrella of the Treasury Department and its IG office.

In a response to the IG's report, the OCC said it has taken several steps to improve its oversight of how banks manage foreclosures. The IG agreed appropriate steps have been taken.

Regulators continue to deal with the fallout from the servicing problems.

In April 2011, 14 mortgage servicers, including Bank of America Corp and JPMorgan Chase & Co, entered into a settlement with the OCC, the Federal Reserve and the now defunct Office of Thrift Supervision on steps that have to be taken to correct and improve their mortgage servicing practices, such as providing borrowers with a single point of contact for questions.

As part of the agreement, these mortgage servicers have hired consultants to review foreclosures that took place in 2009 and 2010 to see if any were improper.

The reviews are ongoing and any borrower who feels they were wronged can notify officials through July 31 and have their case considered.

If problems are found banks may have to compensate borrowers for whatever harm was the result of a servicing error.

In February, five large U.S. banks also entered into a $25 billion settlement with state governments and the departments of Justice and Housing and Urban Development over problems with how they treated delinquent mortgage borrowers.

(Reporting By Dave Clarke; Editing by Tim Dobbyn)

• A Permanent Economic Emergency