The Government Accountability Office said federal banking regulators failed to catch the recent foreclosure issues at the nation's largest banks and challenged the upcoming Consumer Financial Protection Bureau not to repeat the mistake. Late in 2010, problems emerged inside mortgage servicing shops. Employees were found to be mishandling documentation and cutting corners in judicial foreclosure states. Federal regulators and the 50 state attorneys general launched investigations, leading up to consent orders signed last month to correct the problems. In a report released Thursday, the GAO examined the aftermath and pointed out federal laws did not govern the foreclosure process, and regulators did not consider these practices to be a high risk for the banks they oversaw. "Although various federal agencies have authority to oversee most mortgage servicers, past oversight of their foreclosure activities has been limited, in part because banking regulators did not consider these practices as posing a high risk to banks’ safety and soundness, and some servicers have not been under direct federal oversight," the GAO said. When the CFPB opens its doors July 21, it will become the de facto regulator for the entire mortgage industry, including servicer shops that were previously classified as nondepository institutions and therefore lacked federal oversight. But the GAO said it is still unclear if the bureau will be up to the task. "How regulators and CFPB will interact and share responsibility for ongoing oversight of servicers is yet unclear, leaving the potential for continued gaps and inconsistency in oversight until final plans are developed," the GAO said. Elizabeth Warren, the special adviser to the Treasury Department and the architect of the still forming CFPB, assured Congress in March that mortgage servicing would be of particular focus to the bureau. "Recent revelations of mortgage servicers’ haphazard and questionable practices have further demonstrated the need for a new cop on the beat," Warren said at the time. The GAO recommended the bureau work with other agencies and include proper foreclosure practices into upcoming national servicing standards. It also pushed regulators to begin assessing the risks documentation problems pose for the institutions they oversee. Warren, though, recently pushed back against lawmaker attempts to dilute the bureau's regulatory powers to do so. Meanwhile, lawsuits challenging loan transfers in the securitization process persist. Foreclosures continue to be held up as courts across the country work to determine the legitimacy of a practice previously ignored. "Regulators did not always verify these transfer practices during their reviews or assess the potential risks of transfer problems to institutions," the GAO said. "The potential financial costs resulting from these issues for investors, institutions that create MBS, and the overall financial system likely will remain uncertain until sufficient numbers of courts render decisions on the appropriateness of these practices." Write to Jon Prior. Follow him on Twitter @JonAPrior.