A Florida court ruling could make it harder for mortgage servicers to use computer records as evidence for foreclosure without verifying the underlying information.
The Fourth District Court of Appeals ruled earlier this month that Ralph Orsini, an employee at mortgage servicer Home Loan Services Inc., relied on "inadmissible hearsay" when he used computer records to assess the mortgage debt of a delinquent homeowner.
Orsini got his information from computer records compiled by another servicer, Litton Loan Servicing, which had previously serviced the mortgage. He did not otherwise verify the information, the court found.
"Orsini did not know who, how or when the data entries were made," the appeals court judges wrote in their ruling. "He could not state if the records were made in the regular course of business. ... He had no knowledge of how the data was produced and he was not competent to authenticate that data."
The ruling calls into question a common practice by mortgage servicers seeking to foreclose on delinquent borrowers, at a time when regulators are already scrutinizing the paperwork and processes underlying the largest banks' foreclosure decisions. Last year many servicers' employees were found to be robo-signing hundreds of foreclosure documents a day without verifying the underlying information.
The Florida court ruling could have "broad sweeping application in the lending and loan servicing industries and affect thousands of foreclosure cases," wrote Michele Stocker, chair of the financial services litigation practice group at Greenberg Traurig, in a note to bank clients last week.
Plaintiffs' lawyers may use the opinion to depose servicing employees, "resulting in additional delays to and costs in the foreclosure process," Stocker wrote.
The appeals court reversed a Palm Beach County Circuit Court's judgment against homeowners Gary Glarum and Anita Glarum, whose home has been in foreclosure since 2008. They owe $422,677 on their home loan, for which LaSalle Bank is the trustee, but dispute the amount.
The Florida ruling strikes at the heart of what is known in legal terms as the "business records exception to the hearsay rule." Mortgage servicers and trustees have routinely relied on affidavits of indebtedness signed by servicing employees to prove the amount a borrower owes, without the need to additionally verify that amount or to testify to its accuracy in court.
Thomas Ice, a lawyer whose firm Ice Legal represents the Glarums, says the Florida appeals court decision exposes some of the same issues as last year's robo-signing scandal. In this case, the employee relied on a computer "screen shot" to verify information on the borrowers. But that information was compiled by a company that did not employ Orsini, and he had no personal knowledge of who made the data entries or how and when the information was obtained.
"Banks consider the hearsay rule — the cornerstone of due process — to be antiquated," Ice said. "It is apparently too troublesome for them to provide more than one affidavit to take someone's home."
Even if the Florida court ruling has a broad impact, homeowners in foreclosure would still have to hire an attorney and take a full deposition of the servicing employees signing the affidavits to prove the information servicers provided amounts to hearsay. The vast majority of foreclosure cases are uncontested.
Stocker suggested in her note that servicers may need to have such affidavits include "language addressing the procedures that the company takes to ensure that the information put into its computer system is accurate