In Bank of New York v. Calloway , a decision that should prove beneficial to lenders and servicers, Florida’s Fourth District Court of Appeal offered to “shed some light” on “confusion among litigants and jurists” about the admissibility of a predecessor’s loan records under Florida’s business records exception to the hearsay rule. This case is significant because predecessor loan records — such as payment histories and transaction reports — are the backbone of a mortgage foreclosure action and the case may fail if these loan records are not accepted into evidence during trial.
The “confusion” about the admissibility of predecessor loan records results from the fact that the foreclosure action is often filed many years after a mortgagor’s default and, by the time that the case gets to court, multiple transfers of the loan and servicing rights have occurred. Notwithstanding these transfers, the current lender or servicer must produce the evidence necessary to prove the case, even though many relevant loan records were prepared by predecessor lenders or servicers.
Lenders, servicers and courts have long struggled with a “hearsay” problem created by multiple transfers of loan records prior to commencement of the foreclosure action. The problem arises because the law considers loan records to be hearsay — that is, the records are out of court statements, offered in court, to prove the content of the records. Since loan records are hearsay, if a mortgagor objects to admission of the records in the foreclosure action, then the records will not be admitted into evidence unless they fall within an established exception to the law’s general prohibition on hearsay evidence.
To overcome this hearsay problem, lenders and servicers rely on the business records exception to the hearsay rule. Predecessor loan records (or current loan records) that meet the requirements of the business records exception are admissible as evidence in a foreclosure action. The business records exception is founded on the sound belief that businesses have strong incentives to maintain accurate records and, therefore, a business’s records have a high degree of reliability. In Florida, a loan record is admissible under the business records exception when: (1) the record was made at or near the time of the event; (2) the record was made by or from information transmitted by a person with knowledge; (3) the record was kept in the ordinary course of a regularly conducted business activity; and (4) it was a regular practice of that business to make such a record.
Traditionally, lenders and servicers have established that the business records exception applies to their loan records by producing a records custodian (commonly a foreclosure litigation specialist or a loan servicing specialist) to testify as a witness. If properly prepared in advance of trial, the records custodian’s testimony will establish all four elements of the business records exception for the loan records at issue. When loan records have been prepared by a current lender or servicer, the records custodian’s testimony concerns firsthand knowledge and this testimony routinely provides a proper evidentiary foundation for admitting the records into evidence at trial under the business records exception. However, when loan records have been prepared or maintained by a predecessor lender or servicer, then the current records custodian’s knowledge of the procedures and practices of the predecessor may be lacking, leading a trial court to rule that the predecessor’s loan records are inadmissible hearsay.
In Bank of New York v. Calloway , the foreclosure action came to trial more than five years after the alleged default. By that time, the fourth successive loan servicer – a servicer who took over servicing the loan more than five years after the alleged default — produced a litigation foreclosure specialist to lay the evidentiary foundation for admitting a predecessor’s loan records under the business records exception. At trial, the witness testified that the four elements of the business records exception test were met by the current servicer for its own loan records and, additionally, the current servicer reviews the accuracy of all information transferred to it upon acquiring a loan. However, the witness conceded that the payment history contained within a document provided by the current servicer had been derived from information that the current servicer received from a predecessor lender – and the witness did not know whether or not the predecessor’s processes and procedures for loan records met the test for the business records exception. The Calloway trial court dismissed the case because of the hearsay problem, finding that the loan records were inadmissible hearsay because the current records custodian did not have knowledge of the predecessor’s record-making process. On appeal, the Fourth District Court of Appeal reversed the trial court’s ruling and provided lenders and servicers with some guidance for avoiding the hearsay problem associated with a predecessor’s loan records.
The Calloway the appellate court reasoned that the underpinning of the business records exception is the reliability or trustworthiness of a business’s records. As support for the admission of the predecessor’s loan records, the court found that where a business “takes custody of another business’s records and integrates them within its own records, the acquired records are treated as having been ‘made’ by the successor business, such that both records constitute the successor business’s singular ‘business record’”. However, the court noted that a predecessor’s records are not admissible under the business records exception simply because they have been integrated into a successor’s business records. Instead, the court found that a predecessor’s records may be found trustworthy, and properly admitted into evidence by a successor, when the successor business: incorporates the records into its own records, relies on the records, and provides evidence of a business relationship or contractual obligation between the parties that ensures a substantial incentive for accuracy; or, independently confirms the accuracy of the third-party’s business records upon receipt.
According to the Fourth District Court of Appeal, the predecessor’s loan records in Calloway were properly admitted under the business records exception because the servicer’s litigation foreclosure specialist testified that the current servicer reviewed its predecessor’s payment histories for accuracy before they were integrated into the current servicer own records – notwithstanding evidence of minor payment discrepancies in the records (the borrower testified at trial that early payments had not been annotated in the records).
In addition, the Calloway appellate court further held that even if the current servicer’s record custodian had not testified that the predecessor’s loan records were reviewed for accuracy prior to being integrated into the current servicer’s records, the circumstances of the loan transfer in the case were sufficient to establish the trustworthiness of the loan records because of the “business relationships and common practices inherent among lending institutions acquiring and selling loans.” In this regard, the Calloway court cited, with approval, authority in other jurisdictions that had recognized the common banking practice of buying and selling loans and, as a result, loan records are particularly trustworthy because the normal business practice is for a predecessor to maintain accurate business records for such loans and then provide the accurate business records to a successor.
In conclusion, Calloway offers some practical guidance for avoiding the hearsay problem when a records custodian is testifying in a foreclosure action.
First, when testifying about a lender or servicer’s own loan records, the records custodian should be well-prepared to testify about each of the four elements required to establish the business records exception, including testimony: (1) about how the data at issue was produced, (2) demonstrating familiarity with the record-keeping system at issue, and (3) that the witness is knowledgeable about how the loan data was uploaded into the current system.
Second, when testifying about a predecessor’s loan records, the records custodian should be able to: (1) confirm the trustworthiness of the predecessor’s loan records by testifying that the successor business reviewed the predecessor’s loan records for accuracy before integrating them into its own records, and, (2) testify that the circumstances of the loan transfer establish trustworthiness of the loan records because of the business relationships (including contractual requirements) and common practices among lenders acquiring and selling loans.