Federal Reserve Chairman Ben Bernanke announced today that the banking regulator would investigate foreclosure fraud, looking at the procedures used by mortgage servicers and whether they lead to illegal evictions. This investigation would be the largest of those announced by any federal agency: the 50 state Attorneys General have an ongoing investigation in the early stages. Bernanke expects a preliminary report next month. This is kind of a road test for Dodd-Frank, the financial reform bill, and whether it will lead to stronger regulation of the financial sector.

Meanwhile, after Bank of America induced laughter in the financial world by claiming to have reviewed 102,000 foreclosure cases in 2 1/2 weeks, which essentially is precisely the issue of too-quick reviews of documents that they’re actually accused of, they finally admitted errors found during the review, presumably to convince everyone that there was an actual review.

Bank of America acknowledged some mistakes in foreclosure files as it begins to resubmit documents in 102,000 cases, the Wall Street Journal said.

The bank found errors in 10 to 25 out of the first several hundred foreclosure it examined starting last Monday, the newspaper said.

The problems included improper paperwork, lack of signatures and missing files, as well as cases in which information about the property and payment history being unmatched, the Journal said.

This means BofA is admitting to as high as a 3.5% error rate, assuming “several hundred” to mean around 700. But even this admission is tempered by the bank’s insistence that the defects are “relatively minor.”

A New York Daily News report finds far more problems than that just in the five boroughs of New York City:

Thousands of foreclosures across the city are in question because paperwork used to justify the seizure of homes is riddled with flaws, a Daily News probe has found.

Banks have suspended some 4,450 foreclosures in all five boroughs because of paperwork problems like missing and inaccurate documents, dubious signatures and banks trying to foreclose on mortgages they don’t even own [...]

Judges are also seeing banks foreclosing on homes they don’t yet own – a problem that concerns Brooklyn Supreme Court Justice Arthur Schack.

Schack said it’s become increasingly “murky” trying to determine who holds a mortgage at the time of foreclosure because they’re often passed from one lender to another.

One excerpt from the article claims that banks try to foreclose even after the owners sell the house and pay off the mortgage.

Yves Smith extrapolates that, given the numbers involved in New York, 163,000 foreclosures underway nationwide have “significant documentation problems.” The NYDN story has several examples of judges disinclined to have their courtrooms turned into eviction factories, challenging the banks’ assertions that all is well.

Point being, the Fed has a lot of areas available for investigation. And the judges haven’t rolled over and given the banks what they want, at least not yet.