Most servicers have probably encountered situations where the records custodian dispatched to provide testimony at the trial of a foreclosure case, or a case challenging a servicer’s right to foreclose, has been prevented from either introducing loan records created by the prior servicer, or from testifying about those records. The problem is the common law concept prohibiting hearsay testimony at trial, codified in most states and the federal courts in the rules of evidence the parties must follow when they try cases.
Without diving too deeply into the intricacies of the rule against hearsay, in the context of introducing loan servicing records and testifying about the borrower’s loan history, the servicer’s witness must be able to qualify her testimony as an exception to the rule against hearsay, usually under what is known as the business records exception.
Some basic concepts, taken from the North Carolina Evidence Code:
“Hearsay” is a statement, other than one made by the declarant while testifying at the trial or hearing, offered in evidence to prove the truth of the matter asserted.
N.C. R. Evid. 801(c).
And, the business records exception:
Records of Regularly Conducted Activity.--A memorandum, report, record, or data compilation, in any form, of acts, events, conditions, opinions, or diagnoses, made at or near the time by, or from information transmitted by, a person with knowledge, if kept in the course of a regularly conducted business activity, and if it was the regular practice of that business activity to make the memorandum, report, record, or data compilation, all as shown by the testimony of the custodian or other qualified witness, unless the source of information or the method or circumstances of preparation indicate lack of trustworthiness. The term “business” as used in this paragraph includes business, institution, association, profession, occupation, and calling of every kind, whether or not conducted for profit.
N.C. R. Evid. 803(6).
In State v. Hamlin, 2015 WL 4429684 (N.C.App., July 21, 2015), the Court of Appeals held that the trial court did not commit reversible error when, over defendant’s objection, it allowed the director of security for Ingles grocery stores to introduce a screenprint from computer records and testify about the contents of the printout that contained details of the purchase and use of Ingles gift cards, when those records were made and maintained not by Ingles, but by a third party data service provider under contract with Ingles to keep track of the usage of the gift cards.
Our Supreme Court has held that business records stored on computers are admissible if they can be authenticated as follows:
- the computerized entries were made in the regular course of business, (2) at or near the time of the transaction involved, and (3) a proper foundation for such evidence is laid by testimony of a witness who is familiar with the computerized records and the methods under which they were made so as to satisfy the court that the methods, the sources of information, and the time of preparation render such evidence trustworthy.
State v. Crawley, 217 N.C.App. 509, 516, 719 S.E.2d 632, 637, (2011) (quoting State v. Springer, 283 N.C. 627, 636, 197 S.E.2d 530, 536 (1973)).
Moreover, “[t]he authenticity of [business] records may, however, be established by circumstantial evidence.... There is no requirement that the records be authenticated by the person who made them.” State v. Wilson, 313 N.C. 516, 533, 330 S.E.2d 450, 462 (1985) (citations omitted). The business records exception recognizes the “impossibility of producing in court all the persons who observed, reported and recorded each individual transaction [.]” Springer, 283 N.C. at 634, 197 S.E.2d at 535.” Hamlin, at 3.
Defendant challenged the third of the Supreme Court’s requirements, arguing that the State “was required to produce testimony from someone with knowledge about whether First Data maintained its system such that it produced reliable results. Defendant specifically argues the Ingles witness “did not provide any information on [ ] how often First Data maintained or serviced its servers to ensure the reliability of the data collected.” Id. The Court noted that the computer printouts were “of electronic records that evidenced the stolen gift cards’ serial numbers, a timestamp, and the card balances.” Id., at 4. The security chief “testified as to the electronic system employed to maintain this information [ ] specifically that Ingles maintained ownership of and access to the electronic records, but it utilized the third-party server company First Data to store this information on a secure server. Mr. Howell testified that he had computer access to First Data’s information.” Id. With respect to the challenged computer printout exhibit, Mr. Howell testified it “consisted of a printout of a screenshot showing First Data’s record of the missing gift cards usage history and card balances.” Id.
In finding no error, the Court concluded:
Regardless of the fact the Mr. Howell did not generate the electronic data himself by entering it into the computer or otherwise demonstrate extensive knowledge of First Data's server maintenance history, he sufficiently demonstrated his understanding of the computer system, the method by which the data was gathered and transmitted, and the business record that was submitted into evidence. Accordingly, we hold that Mr. Howell's testimony provided a sufficient foundation for the admission of the computer printouts as a business record. State v. Hall, 220 N.C.App. 417, 725 S.E.2d 474 (2012) (holding that while the witness “did not program the computers or enter the data into the computer himself, he demonstrated his knowledge of the computer system, the business records and the method by which the data was gathered and the records created .... [his] testimony provided a sufficient foundation for the admission of the computer printouts as business records”).
Hamlin, at 4.
Adopting the Court’s reasoning in Hamlin, the Court should similarly find no error in the event a trial court were to allow a servicer’s records custodian to introduce a screenprint from the records maintained by the prior servicer, and to testify as to its contents. As with the Ingles witness, the loan servicer’s witness would not have to demonstrate that she generated the electronic data herself, or that she had extensive knowledge of the maintenance history of the prior servicer’s server. Rather, if the witness could sufficiently demonstrate her understanding of the prior servicer’s computer system, the method by which the loan records were gathered and transmitted, and the business record submitted into evidence, then this would provide a sufficient foundation for the admission of the computer printouts as business records. The ideal servicer witness would be someone who: (a) is experienced in the variety of different computer systems servicers use to gather and maintain loan servicing information and records, (b) was involved in onboarding the servicing transfer, in particular reviewing the transferor servicer’s loan file records for completeness and content; and, (c) has a good command of the contents of the relevant printouts. As with any corporate records custodian witness, she should also be comfortable giving testimony, articulate, and well-prepared by counsel.
A growing body of case law outside North Carolina supports a more direct approach to the qualification of a prior servicer’s loan records as a business records exception to the hearsay rule, what is termed the “adoptive business records doctrine”. Perhaps not surprisingly, given the sheer volume of foreclosure activity and resulting litigation, Florida courts have led the way in allowing a servicer to rely on a prior servicer’s records. In WAMCO XXVII, Ltd. V. Integrated Electronic Environments, Inc., 902 So. 2d 230 (Fla. 2d DCA 2005), the servicer’s witness had personal knowledge of how his company kept its records and was personally involved in servicing loans. He was familiar with the computer record keeping system of the prior servicer and the generally accepted policies and procedures of servicing companies. He reviewed the records being transferred and was involved in checking for errors and omissions when the records were transferred. His testimony, relying on information gathered and maintained by the transferor servicer, was found admissible under the business records exception. See, also, Sas v. Federal National Mortgage Association, 165 So.3d 849, 2015 WL 3609508 (Fla. 2d DCA 2015, June 10, 2015) (Seterus’ records custodian testified that he was familiar with its business practices in making and maintaining business records, Fannie Mae's record-keeping requirements for mortgage loan servicers, and the servicer industry's general practices in making and maintaining business records. He explained that prior servicer, Chase, was bound by the same Fannie Mae requirements in maintaining mortgage loan records and that Seterus thoroughly reviewed Chase's records at the time of transfer and found no discrepancies.) And, Nationstar Mortgage, LLC v. Berdecia, 2015 WL 3903568 (Fla. 5th DCA 2015) (although witness did not personally participate in the “boarding” process to ensure the accuracy of the records acquired from CitiMortgage when Nationstar took over servicing the subject loan, she demonstrated a sufficient familiarity with the “boarding” process to testify about it. Her testimony not only satisfied the requirements for admitting the mortgage documents under the business records exception to the hearsay rule, her testimony also demonstrated knowledge of the accuracy of the records).
However, a poor choice of witness or a poorly prepared witness can lead to the exclusion of the testimony. E.g., Holt v. Calchas, LLC, 155 So.3d 499 (Fla. 4th DCA 2015) (WAMCO distinguished because in Holt the witness lacked sufficient detailed knowledge about how the prior servicers kept their records). Also, see, Burdenshaw v. Bank of New York Mellon, 148 So.3d 819 (Fla. 1st DCA 2014); and Hunter v. Aurora Loan Services, LLC, 137 So.3d 570 (Fla. 1st DCA 2014), review denied, 157 So.3d 1040 (Fla. 2014). In these two cases the servicer's records custodian failed to testify that the successor servicer of the loan independently verified the accuracy of the payment histories received from the prior servicer or to detail the procedures used for such verification.
Indeed, allowing a litigant to introduce records it relies on in its business operations, where those records were created by a third party is not a new phenomenon. Several federal circuit courts have ruled favorably on the subject:
U.S. v. Moore, 923 F.2d 910, 914-15 (1st Cir. 1991) (holding the head of a bank's consumer loan department was qualified to introduce a service bureau's computer generated “loan histories” as the bank's business records where the bank could and did retrieve information from the service bureau). Browner v. Allstate Indemnity Co., 591 F3d 984, 987 (8th Cir. 2009) (“a record created by a third party and integrated into another entity's records is admissible as the record of the custodian entity, so long as the custodian entity relied upon the accuracy of the record and the other requirements of Rule 803(6) are satisfied”). United States v. Irvin, 2011 U.S. App. LEXIS 18087 (10th Cir. Kan. Aug. 31, 2011) (“Put simply, if it can be established that a given document was relied on by a business and incorporated into that business’s records in the ordinary course, it is irrelevant that the record was generated by a third party so long as Rule 803(6) is otherwise satisfied.”). United States v. Adefehinti, 510 F.3d 319 (D.C. Cir. 2007) (“[S]everal courts have found that a record of which a firm takes custody is thereby “made” by the firm within the meaning of the rule (and thus is admissible if all the other requirements are satisfied). We join those courts.”) The Adefehinti opinion discussed a series of other federal cases supporting its holding, from the 2nd, 5th, 9th, 10th and 11th Circuits.
And the Supreme Judicial Court of Massachusetts ruled favorably on the subject ten years ago.
Given the common practice of banks buying and selling loans, we conclude that it is normal business practice to maintain accurate business records regarding such loans and to provide them to those acquiring the loan. Therefore, the bank need not provide testimony from a witness with personal knowledge regarding the maintenance of the predecessors' business records. The bank's reliance on this type of record keeping by others renders the records the equivalent of the bank's own records. To hold otherwise would severely impair the ability of assignees of debt to collect the debt due because the assignee's business records of the debt are necessarily premised on the payment records of its predecessors.
Beal Bank, SSB v. Enrich, 444 Mass. 813, 831 N.E.2d 909, 914 (Mass. 2005) (citations omitted).
Unfortunately, as with many developing legal concepts, there is no uniformity across the states. For example, in CACH, LLC v. Askew, 358 S.W.3d 58 (Supreme Court, Mo. 2012), the court observed:
The business records exception to the hearsay rule applies only to documents generated by the business itself.... Where the status of the evidence indicates it was prepared elsewhere and was merely received and held in a file but was not made in the ordinary course of the holder's business it is inadmissible and not within a business record exception to the hearsay rule under §490.680, RSMo 1986. A custodian of records cannot meet the requirements of §490.680 by simply serving as “conduit to the flow of records” and not testifying to the mode of preparation of the records in question.
Courts in Kansas and Nebraska have refused to follow the adoptive business records doctrine. State v. Guhl, 3 Kan. App.2d 59 (Kan. Ct. App. 1979). State v. Hill, 2003 Neb. App. LEXIS 156 (Neb. Ct. App. June 10, 2003).
This is a developing area of law. In many states, the issue is not particularly pressing. In non-judicial foreclosure states, because there is no court hearing ahead of the foreclosure sale there is no concern about complying with the hearsay rule. In North Carolina, there is a limited hearing before the Clerk of Superior Court. While it is not settled as to whether any of the rules of evidence are applicable in such hearings, as a matter of practice evidentiary objections are rare. In most counties, the Clerks and their deputies are not attorneys, and do not conduct hearings in accordance with formal evidentiary rules. The issue is important, however, in more formal legal settings, such as when borrowers file civil actions to challenge foreclosures or allege servicing errors. Following the reasoning in Hamlin, servicers are now better placed to argue in favor of the admittance of a prior servicer’s loan records.