Christopher A. Gorman, New York Law Journal
October 19, 2016
Most institutional lenders, trusts and large financial institutions that loan money to borrowers or acquire distressed loans use loan servicers to service their loans after the loans are originated or otherwise assigned to them. Loan servicing is the process by which a lender uses a third party to, among other things, collect principal, interest and escrow payments from the borrower in connection with a loan.
Following a default on a loan, a lender will often rely upon its loan servicer to oversee the process of foreclosing on the mortgage securing the loan. In such instances, the foreclosure lawsuit will often be brought in the name of the lender holding the promissory note and the mortgage, but affidavits that need to be submitted to the court in order to prove the lender’s standing or the borrower’s default, among other issues, are submitted by a representative of the loan servicer that is involved in servicing the loan.
Until recently, this process by which the loan servicer oversees and manages the foreclosure litigation on behalf of a lender holding the defaulted note and mortgage that is the named plaintiff was not the subject of much controversy. Indeed, there are literally thousands of cases currently pending in New York State where a loan servicer, acting on behalf of the lender that is the named plaintiff that commenced the foreclosure action, submits affidavits and documents to the court in order to prove that the lender should be awarded a judgment of foreclosure and sale.
A number of recent decisions of the Appellate Division, Second Department, however, may cause lenders to re-think the arrangement by which a loan servicer that is not a party to the foreclosure action acts on behalf of a lender in overseeing and managing mortgage foreclosure litigation. Indeed, the court has held that documents and information attached to an affidavit of a representative of a loan servicer are inadmissible unless the loan servicer’s representative can attest to being familiar with the record-keeping practices and procedures of the lender (i.e., the plaintiff in the foreclosure action).
The statutory foundation for the recent Second Department decisions, of course, is the business records exception to the hearsay rule, which is embodied in CPLR 4518(a). CPLR 4518(a) states that “[a]ny writing or record, whether in the form of an entry in a book or otherwise, made as a memorandum or record of any act, transaction, occurrence or event, shall be admissible in evidence in proof of that act, transaction, occurrence or event, if the judge finds that it was made in the regular course of any business and that it was the regular course of such business to make it, at the time of the act, transaction, occurrence or event, or within a reasonable time thereafter.”
‘Royal’ and Other Cases
The Appellate Division, Second Department’s most recent pronouncement concerning the business records exception to the hearsay rule in the context of mortgage foreclosure litigation can be found in HSBC Mortgage Services v. Royal, — A.D.3d —-, 37 N.Y.S.3d 321 (2d Dept. Sept. 14, 2016). The facts of Royal are similar to the facts underlying literally thousands of foreclosure actions pending in New York State, thereby suggesting that the decision could have a wide-ranging impact on mortgage foreclosure litigation currently pending in New York State.
In Royal, the plaintiff-lender commenced a foreclosure action on the basis of an alleged default by the borrower under a promissory note and mortgage. In support of its motion for summary judgment, the lender submitted the affidavit of a representative of “the loan servicer for the plaintiff’s successor in interest.” The representative of the lender’s loan servicer averred in his affidavit “that his knowledge of the relevant facts was based on his ‘examination of the financial books and business records made in the ordinary course of business maintained by or on behalf of the successor in interest to the Plaintiff,’ and that he was ‘familiar with the record keeping systems that [the] successor in interest to the Plaintiff and/or its loan servicer use[d] to record and create information related to the residential mortgage loans that it services.’” On the basis of the information and documents submitted through the loan servicer’s affidavit, the Supreme Court granted the lender’s motion for summary judgment.
On appeal, the Second Department reversed. The court concluded in Royal that “[t]he plaintiff failed to demonstrate the admissibility of the records relied upon by” the representative of the loan servicer “under the business records exception to the hearsay rule…, and, thus, failed to establish the appellant’s default in payment under the note.” Specifically, the Second Department concluded that because the representative of the loan servicer “did not allege that he was personally familiar with the plaintiff’s record keeping practices and procedures,” he “failed to lay a proper foundation for the admission of records concerning the appellant’s payment history…and his assertions based on these records were inadmissible.”
The Second Department concluded in Royal, therefore, that “[i]nasmuch as the plaintiff’s motion was based on evidence that was not in admissible form, the plaintiff failed to establish its prima facie entitlement to judgment as a matter of law” and held that the lender’s motion “should have been denied…regardless of the sufficiency of the appellant’s opposition papers.”
Of course, Royal—standing alone—would be a significant decision for mortgage foreclosure practitioners. However, Royal is not a stand-alone decision, and the Second Department has articulated principles very similar to those underlying the Royal decision in a number of other recent mortgage foreclosure cases.
For instance, in Deutsche Bank National Trust Company v. Brewton, 142 A.D.3d 683, 37 N.Y.S.3d 25(2d Dept. 2016), the Second Department held that the lender “failed to demonstrate that the records relied upon by” the representative of the lender’s loan servicer “were admissible under the business records exception to the hearsay rule (see CPLR 4518(a)) because” the representative of the lender’s loan servicer “did not attest that she was personally familiar with the plaintiff’s record-keeping practices and procedures.” Similarly, in U.S. Bank National Association v. Handler, 140 A.D.3d 948, 34 N.Y.S.3d 463 (2d Dept. 2016), the Appellate Division, Second Department held that an affidavit from the vice-president of the lender’s servicing agent “who did not attest that he was personally familiar with the plaintiff’s record keeping practices with respect to the note…failed to establish, prima facie, that the plaintiff had physical possession of the note prior to the commencement of the action.”
Finally, in Citibank v. Cabrera, 130 A.D.3d 861, 14 N.Y.S.3d 420 (2d Dept. 2015), the Second Department expressly held that where the lender’s affiant “who was employed by the plaintiff’s loan servicer, did not allege that she was personally familiar with the plaintiff’s record keeping practices and procedures,” the representative of the lender’s loan servicer “did not lay a proper foundation for the admission of the defendant’s payment history.” As the Cabrera court stated: “[a] proper foundation for the admission of a business record must be provided by someone with personal knowledge of the maker’s business practices and procedures.”
Thus, decisions such as Royal, Brewton, Handler and Cabrera, stand for the proposition that where the lender is the named plaintiff in a mortgage foreclosure action, the lender can rely on the affidavit of its loan servicer to get documents admitted into evidence under the business records exception to the hearsay rule only if the loan servicer’s representative can attest that it is familiar with the lender’s (and not the loan servicer’s) record-keeping practices and procedures. This would seem to be a somewhat difficult burden to satisfy for loan servicers, since loan servicers are often third-party entities that are separate and distinct from the lenders that are the named plaintiffs in mortgage foreclosure cases.
Meeting New Requirements
Lenders will need to find ways in which to meet the new requirements imposed in order to satisfy the business records exception to the hearsay rule announced in decisions such as Royal. For instance, lenders may seek to avoid altogether obtaining affidavits from third-party loan servicers, and instead use representatives of the lender, who can attest to their familiarity with the lender’s record-keeping practices and procedures, in order to submit affidavits and documents to the court.
Alternatively, if lenders continue to insist, even after Royal and the other decisions of the Second Department discussed above, to use affidavits from third-party loan servicers in mortgage foreclosure litigation, then the best practice will be to have loan servicers (as opposed to lenders) be the party to act as the plaintiff in the foreclosure litigation. So long as the loan servicer is authorized to do so by the lender, courts have found that loan servicers have standing to present claims for foreclosure and sale on behalf of the lender that owns and holds the note and mortgage at the time of the commencement of the action. See, e.g., Flushing Preferred Funding Corp. v. Patricola Realty Corp., 964 N.Y.S.2d 58 (Sup. Ct. Suffolk Co. 2012).
Regardless of what steps lenders and loan servicers take going forward to respond to Royal and similar Appellate Division, Second Department, decisions discussed above, it is likely that Royal is going to be cited by borrowers in already pending foreclosure cases where the requirements imposed by Royal may not otherwise be satisfied. It remains to be seen whether Royal and other Second Department authority discussed above will cause further delay in processing the already substantial backlog of mortgage foreclosure cases pending in New York State.