By Roland P.
Reynolds of The Wolf Firm (California Finance Magazine, January 1994 - California Mortgage Bankers Association)
By Roland P.
Reynolds of The Wolf Firm The second most asked question about the optical storage of records,after "what is the cost?", is "is it legal?" Although the law has not yet completely caught up with the technology, the good news is the mortgage industry may optically store their documents with a high degree of confidence that those documents will be not considered inadmissible before courts and regulatory bodies merely because they came from an electronic imaging (EI) system. An important caveat is that a poorly designed or operated EI system may not produce documents that will withstand legal challenge.
In the 1970's the computer futurists preached the advent of the paperless office as not a mere prediction but a certainty that would revolutionize the service industry with the same significance as Henry Ford's division of labor on mechanical industry. Then, in the early 1980's, the wide availability of personal computers were viewed as sure harbingers that rooms full of files would soon be a sight of the past. Yet, today, paper still abounds and, indeed, has multiplied due to the ease of replication and modification afforded by the word processor. Increasingly, however, with recent technological advances, lowering costs and standardization, it appears that electronic imaging systems will finally take the place of paper and other media and indeed revolutionize the operation of the service industries.
This revolution is already beginning in the mortgage servicing industry. Today you can walk into the offices of one very large servicer and see rows of workers at terminals without a scrap of paper. Another California savings bank has imaged literally millions of documents. Clearly the future for some is already here.
But, for the uninitiated, there remains a high degree of unease as to the legality of optical storage. That is, the storage of documents on a CD format disk. The unease is usually linked to uncertainty about the capabilities of the new technology. The question of legality of optical storage is principally one of admissibility. That is, will the documents be allowed as evidence in whatever the forum may be? There are four major forums where admissibility will be an issue: state and federal courts and regulatory bodies. Each of these forums have different rules of evidence which govern what will be admissible. Most of these rules were written before the advent of EI systems as a standard records management practice. Nevertheless, the experience we have with the admissibility of microfilm and magnetic storage makes the exclusion of optically stored documents from the courts appear highly improbable. And, in fact, imaged documents are widely used in trial courts.
In terms of the greatest number of documents used, lenders will probably be before the bankruptcy courts more than any other venue. The bankruptcy courts are governed by federal laws and rules, particularly the Federal Rules of Evidence. Like all rules of evidence the Federal Rules, in their broadest scope, address two main concerns:
1) Is the evidence relevant, i.e.., does it tend to make more or less probable an important material fact to be proven in the case?
2) Is the evidence accurate, reliable, and trustworthy?
The first question goes to the information in the document, not themedium on which it is recorded. The issue of accuracy, reliability and trustworthiness is the crux of the matter. On this score, optically stored records offer a much higher degree of confidence than paper or microfilm. The write-once read-many (WORM) CD format stores an imaged document that is virtually unalterable, as compared to paper which is much more susceptible to subterfuge. Notwithstanding these attributes of the imaging technology, few rules or case law have yet developed which specially endorse the use of optically stored documents. This is due the slow development of the law, rather than any hostility to optical storage.
Traditionally, documents come under some suspicion by a court before being admitted because a document, unlike a live witness, cannot be cross-examined. The document appears to stand for the truth of the matter asserted in it, but how reliable is it? Certain types of documents have a higher degree of trustworthiness because of the circumstances under which they were made. An important category of such trustworthy documents are business documents. Such documents, when made in the regular course of business, are considered less likely to be fabricated for the purposes of advantage in litigation. The important question is will an optically stored document be considered a business record as defined under the rules? Federal Rules of Evidence, Rule 803(6) describes the type of business documents which meet the first hurdle to admissibility:
"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 the business activity to make the memorandum, report, record, or date compilation..."
Courts have held that "data compilation" includes computer records. In a 1980 decision in a case called Rosenberg v. Collens, 624 F.2d 659 (5th Cir. 1980) the United States Court of Appeals held that "computer data compilations...should be treated as any other record of regularly conducted activity." Although the Rosenberg case involved the magnetic storage of documents, its holding appears wide enough to include optical.
In a further effort to ensure accuracy, reliability and trustworthiness, courts apply the "best evidence rule", nominally requiring that only the original (with many exceptions) of a document be allowed to be introduced into evidence. The impact of the best evidence rule is particularly important for document holders who want to destroy their paper-based documents. Are they destroying the only original that will be admissible? In the recognition of common business practice, certain copies of the original are considered so reliable that they are admissible as if they were an original. On this point the Federal Business Records Act provides:
When "records are kept in the regular course of business and copied or reproduced by ... any photographic, photostatic, microfilm, microcard, miniature photographic, or other process which accurately reproduces or forms a durable medium for reproducing the original," the reproduction is as admissible as the original.
There are no reported court decisions directly applying the Federal Business Records Act to optical storage. (That is, no appellate court has made a ruling on the issue.) However, many courts have found that computer printouts should be admitted as business records. In United States v. Russo, 480 F.2d 1228 (6th Cir. 1973) the United States Court of Appeals held:
"The act was adopted for the purpose of facilitating the admission of records into evidence where experience has shown them to be trustworthy...[and it] should never be interpreted so strictly as to deprive courts of the realities of business and professional practices."
Such a broad holding is consistent with the use of a reliable EI system that is part of the regular records management practices of the business. The California rules of evidence are relatively up to date in their acknowledgment and acceptance of optical storage. California Evidence Code section 250 defines an "original" as including the following: "If data are stored in a computer or similar device, any printout or other output readable by sight, shown to reflect the data accurately, is an `original.'"
Further, the California law forsees the wide use of optical storage by public agencies. Any state agency may store its records on optical disk, and the county recorders are authorized to use optical for filing of documents. The State Registrar is empowered to destroy paper birth, death and marriage files and store the information on optical disk.
The good news for the mortgage banking industry is that the state and federal laws are widely consistent with allowing into evidence optically stored documents, even though most of those laws, written before the current technology was developed, do not specifically reference optical storage. However, there are two caveats. First, the law is still developing, and there are no reported decisions from an appellate court blessing the use of the optically stored documents. This is not to say that optically stored documents are not being widely used in trial courts. One federal court has even conducted a paperless trial, placing display monitors before the jury and on the judge's bench. But the challenge to this use has not been made on the appellate level. However, given the courts' wide acceptance of and the analogous favorable court decisions in microfilm and magnetic storage cases, there is little danger of an abrupt refusal by the courts to accept optically stored documents.
The more pressing danger in regard to admissibility is a challenge to the particular electronic imaging system itself. Is it secure? For instance, is the software from the graphic arts department kept separate from the records management department? A successful EI system must have a systems plan, operating policies and procedures and systems audits. And, even more importantly, the user must follow the procedures that are put in place.
Other than in the courts, the mortgage banker has to have documents that can be used before regulatory agencies and with purchasers of its loans or service providers. Given these uses, is it wise to destroy paper documents? Certain documents, for instance a note, cannot be destroyed. But one of the important benefits of optical storage is its potential for elimination of expensive warehouse storage of vast amounts of paper. Some federal agencies, such as the Nuclear Regulatory Commission, have promulgated regulations specifically endorsing storage on optical disk only. But the agencies affecting the mortgage industry have no such specific rules, and so some of the operators of otherwise successful EI systems feel uncomfortable destroying their paper. The next step in integrating EI systems into the mortgage banking industry will be the education of FANNIE MAE, HUD, etc., as well as state agencies, on the attributes of EI technology and working with those entities on creating sensible rules that endorse optical storage without creating costly technology-specific requirements, such as mandating disk size or other system capabilities.
For further information please contact:
The Wolf Firm, A Law Corporation, is an "AV" rated law firm which concentrates on providing superior legal services to the mortgage banking industry. The firm's national clientele includes many of the largest mortgage bankers in the country, as well as a variety of savings banks, commercial banks, commercial finance companies, credit unions, and the Resolution Trust Corporation. With a staff of approximately forty individuals, including attorneys, certified paralegals, legal secretaries, administrators, clerical personnel, and a full time computer systems analyst, the firm represents its clients on a wide range of matters including all aspects of both residential and commercial/multifamily mortgage loan origination and servicing, securitization, regulatory compliance, bankruptcy, and litigation related to the foregoing in both federal and state courts throughout California. For more routine matters, such as residential bankruptcies, evictions and receiverships, The Wolf Firm has developed extremely cost-effective and efficient programs using specially trained paralegals and computer technology to assist its attorneys in handling these matters at rates that are the most competitive in the State of California and, through its membership in the USFN, the Firm is able to arrange similar services in virtually every state in the nation.
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