The District Court of Appeal of the State of Florida, Fourth District, recently reversed a trial court’s dismissal of a mortgage foreclosure action, ruling that the testimony of a successor loan servicer’s records custodian was sufficient to lay a proper evidentiary foundation to admit payment records over the borrower’s lack of foundation and hearsay objections.
A copy of the opinion is available at: Link to Opinion
The mortgagee sued to foreclose its mortgage in 2008. The matter eventually went to trial in May of 2013. At trial, the mortgagee relied on one witness, a litigation foreclosure specialist for the mortgagee’s servicer, whose main purpose was to authenticate the servicer’s business records in order to get them admitted into evidence.
The servicer’s employee testified that the servicer became the fourth such entity for the subject loan in 2012, more than 5 years after the borrower defaulted in 2007. In order to effectuate the change in ownership of the loan, the prior servicer transferred the borrower’s original loan documents as well as its business records showing the payment history. Upon receipt, the fourth servicer scanned the information into its computer system.
At trial, the mortgagee’s witness tried to introduce into evidence a payment history document and another document showing the transaction and transfer details of the loan. The borrower’s counsel objected on the basis of lack of foundation and, during “voir dire” questioning, the witness admitted that because the fourth servicer had acquired the servicing rights five years after borrower’s default, the payment history records were derived from the prior servicer’s records.
The witness also conceded that she never worked for the prior (3rd) servicer and did not know how it recorded its payment information, who at the 3rd servicer input the records, whether that information was entered in the regular course of business and whether the person who input the information did so with knowledge of its contents.
The borrower’s counsel argued the proffered documents were inadmissible hearsay and did not fall under the Florida Evidence Code’s business records exception to the hearsay rule because the mortgagee’s witness did not have personal knowledge of the prior servicer’s processes for obtaining and recording loan information.
The trial court sustained the borrower’s hearsay objection, reasoning that the mortgagee needed testimony from a witness familiar with the prior servicer’s recordkeeping methods. This effectively left the mortgagee with no evidence supporting its case. The borrower moved for involuntary dismissal at the close of the evidence, which the trial court granted, because it could not determine what the loan balance was. The mortgagee moved for rehearing, which was denied, and this appeal ensued.
The Appellate Court explained the rationale behind the business records exception to the hearsay rule -- that such documents have a high degree of reliability because businesses have a built-in incentive to make sure their own records are accurate records, because the businesses rely on them to operate.
Where a business acquires custody of another business’ records and makes them part of its own business records, the records become those of the successor business. However, because such second-hand records are not as inherently reliable as self-generated ones, the proponent must not only meet the formal requirements of the applicable Florida Evidence Code provision, subsection 90.803(6), Florida Statutes, but must also show that the records are trustworthy by, for example, explaining that the business or contractual relationship between the two companies provides a substantial incentive for accuracy.
As an alternative, the successor servicer itself can independently verify that the business records it acquired are trustworthy by, for example, stating that, in order verify the accuracy of information it receives in connection loan transfers, its employees go through the files, check them for accuracy and then contact the borrower.
The Appellate Court held that the mortgagee’s witness provided sufficient evidence of trustworthiness by testifying that the fourth servicer reviewed the prior servicer’s payment records for accuracy before integrating them into its records.
However, even if she had not, the facts of the loan transfer itself, as testified to by the mortgagee’s witness, sufficed to establish trustworthiness because of the business relationships and common practices of lenders and other financial institutions buying and selling loans.
Given the prevalence of lenders and other financial institutions buying and selling loans, the Appellate Court noted it is the normal business practice to maintain accurate records and provide them to a buyer of the loan. Thus, the mortgagee does not have to provide testimony from a witness with personal knowledge of how the predecessor kept its business records, because to hold otherwise would impair the ability of assignees of debt to collect the debt because the assignee’s records are based on the predecessor servicer’s records.
The Appellate Court rejected the borrower’s argument that the fourth servicer’s payment records were inaccurate and thus untrustworthy, because the borrower testified some payments were not accounted for, holding that as long as a servicer’s records obtained from a prior servicer are trustworthy, i.e., they are what they purport to be and went through the customary internal practices and procedures to ensure accuracy, the records are admissible and satisfy the business records exception to the hearsay rule.
In the Appellate Court’s words, “[m]inor discrepancies in calculations, given the volumes of records transferred from one business entity to another, should not render business records of a successor servicer untrustworthy for purposes of laying a foundation for the business record exception given that the trustworthiness of the records has been established.”
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
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Chicago, Illinois 60602
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Admitted to practice law in Illinois
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