The Business Records Exception As It Applies to Prior Loan Servicer Records
January 2015 Fourth District Court Ruling Provides Much-Needed Clarity
Last week, in Bank of New York v. Andrew Calloway,1 the Fourth District Court of Appeals provided some long-awaited clarity to the business records exception as it relates to a prior loan servicer's records under Florida law. In doing so, the Fourth District held that a loan transfer itself was sufficient to establish the necessary trustworthiness required to meet the business records exception due to the "business relationships and common practices inherent among lending institutions acquiring and selling loans."2 Specifically, the Fourth District found that the key element of the transfer was the current loan servicer's transfer of the underlying original loan documents and payment history, which were reviewed for accuracy before incorporating that information into the current servicer's records. The decision should be important to mortgage lenders and financial institutions as it lays out a clear road map to meet the business records exception where a loan has been assigned. This does not require calling a records custodian or other witness from the prior servicer.
In an effort to meet the business records exception, the current servicer's witness testified in the below proceeding that the payment history records obtained from a prior servicer were: "1) a true and accurate representation of th[e] payment history, 2) kept in the regular course of regularly conducted activities by a person with knowledge of the event or activity, 3) the person making the record ha[d] a duty to accurately compile [the] information for th[e] record and (4) it is the regular practice of the servicer to make such a record."3 In sustaining a hearsay objection asserted by the borrower that the records in question failed to meet the business records exception, the trial court determined that although the witness was able to testify that the records were accurate to the extent they were obtained from a prior servicer, the current servicer failed to produce a witness with knowledge of the prior servicer's "record-making processes."4 Ultimately, the trial court entered a written order finding that the witness was "not familiar with the prior servicer's business practices and procedures."5 In reliance on its ruling, the trial court relied on Glarum v. LaSalle Bank National Association,6 a case that has created a considerable amount of confusion in Florida trial courts. In Glarum, the Fourth District generally held that there is no per se rule precluding the admission of prior servicer's records, but failed to delineate exactly what the standards for admission would be under Florida law.
In reversing the trial court, the Fourth District recognized that although the witness produced need not be the one that actually prepared the records in question, he or she "must be able to show each of the requirements for establishing a proper foundation."7 In addressing these requirements, the court noted that the hallmark of the business records exception is the degree of trustworthiness of the documents in question, determining that the purpose behind the exception was that such documents "have a high degree of reliability because businesses have incentives to keep accurate records."8 The court also addressed the practical considerations involved where records are acquired from another business. Under those circumstances, the records are integrated and "are treated as having been 'made' by the successor business, such that both records constitute the successor business's singular 'business record.'"9
The Fourth District went on to find that the witnesses' testimony met the business records exception under Florida law for a number of reasons. First, the witness confirmed the trustworthiness of the underlying records by testifying that the current servicer "reviewed the [prior servicer's] supplied payment histories 'for accuracy' before integrating them into its own records."10 Notably, the court found that, "even had [the witness] not so testified, the circumstances of the loan transfer itself would have been sufficient to establish trustworthiness given the business relationships and common practices inherent among lending institutions acquiring and selling loans." In sum, the court found that "as long as the business entities records obtained from prior servicers establish trustworthiness – i.e., that the records are what they purport to be and were subject to the business' internal practices and procedures to ensure accuracy of the records – the records are cleared for admission and satisfy the business records exception to hearsay."11
The Calloway decision provides welcome clarity to mortgage servicers, lenders and other financial institutions attempting to foreclose on loans which they did not originate and which are a large percentage of the loans being foreclosed in the state of Florida and elsewhere.12 Going forward, financial institutions, their legal departments and outside counsel should be cognizant of these requirements to ensure that witnesses produced at trial are familiar with the law as it currently stands. As such, witnesses should be prepared to testify that: 1) the document obtained from a prior servicer is a true and accurate representation of the information sought to be introduced, 2) the document is kept in the regular course of regularly conducted business activity, 3) the person making the record had a duty to compile the information, 4) that is it is a regular practice of the servicer to make such a record and 5) the information sought to be introduced has been reviewed by the current servicer for accuracy.
The Calloway decision clarifies the law as it relates to the business records exception and it provides financial institutions with relief from the attendant resources associated with locating, finding and producing witnesses from prior servicers. This is not only a difficult and costly exercise, but one that is often times impossible as many smaller servicers have gone out of business. The decision also takes into account the practical realities of the world in which we live, wherein billions of dollars of mortgages are bought and sold throughout the United States on a yearly basis. Although limited to the facts, the opinion also has broad application to the extent that its reasoning would apply to any successor financial institution relying on a predecessor's entities' records. Our financial institution clients should continue to pay attention to the warnings provided in Calloway and its progeny where they attempt to rely on records from other entities in litigation. Holland & Knight will continue to monitor how this case will be interpreted going forward, including any further appellate review.
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12012 WL 71815 (Fla. 4th DCA January 7, 2015)
2Id. at *6
3Id. at *1
4Id. at *2
683 So. 2d 780 (Fla. 4th DCA 2011)
7Id. at *3 (citations omitted)
8Id. at *5 (citations omitted)
9Id. (citations omitted)
10Id. at *6 (citations omitted)
11Id. at *7
12The Fourth District warns that the standards it has set forth does not give financial institutions cart blanche to use "robo witnesses" to establish the business record exception. Id.