AB 130 is reshaping the foreclosure process for California lenders, creating new compliance hurdles and litigation risks that cannot be ignored. In July 2025, following the initial passing, many questions arose about who and what would be impacted by this law. The statute itself contains unclear verbiage, leaving many lenders at risk of serious violations.
In August 2025, Fortra Law Partner and Banking and Finance Department head Melissa Martorella led a comprehensive webinar on AB 130, covering need-to-know information and answering questions from viewers about what they can expect.
This guide from Melissa Martorella, aims to cover everything from our August 2025 webinar. From detailed answers on frequently asked questions to strategic guidance on remaining compliant, learn all about the ins and outs of AB 130 below.
Who and What AB 130 Covers
AB 130 applies to junior liens secured by residential property in California. This includes both consumer and business purpose loans, meaning that private lenders funding investment properties are not exempt.
Commercial-only loans fall outside the statute, but mixed-use properties with residential units, as well as construction loans on residential projects, may still be subject to AB 130.
In short, if you are holding or servicing a junior lien on a California residence, AB 130 compliance applies to you, regardless of whether you are a small private lender or a large institution.
The Certification Requirement
One of the most challenging aspects of AB 130 is the certification requirement. Before recording a Notice of Default (NOD), lenders must record and mail a sworn certification under penalty of perjury that:
- The loan has been serviced properly, including communications and notices.
- All ownership and servicing transfers were disclosed.
- No unlawful practices, such as foreclosure after a 1099-C, expired statute of limitations, or missing account statements, have occurred.
Borrowers are then notified of their right to petition the court to restrain foreclosure, which can immediately halt the process.
Key Compliance Pitfalls
1. Historical Servicing Gaps
Private lenders often acquire loans from prior servicers. Under AB 130, you may be responsible for missing documentation from years past, including periodic statements or ownership transfer notices. Borrowers can allege violations even if the gaps occurred long before you acquired the loan.
2. Foreclosure Threats in Demand Letters
AB 130 prohibits threatening foreclosure in pre-NOD communications. Demand letters should instead reference “appropriate legal remedies” without naming foreclosure. Certification must be recorded right before the NOD, essentially blindsiding borrowers.
3. Borrower Notification Proof
Courts may pause or unwind foreclosures if borrowers claim they did not receive the required certification. Lenders must keep meticulous records of delivery.
4. Expanded Litigation Risk
Borrowers can file lawsuits alleging misrepresentation or unlawful practices. Courts are obligated to halt foreclosure until the case is resolved, giving borrowers leverage to delay or derail sales.
Frequently Asked Lender Questions
- Does AB 130 apply to construction loans? Yes, if they are junior liens secured by residential property.
- What about modified loans? A modified second remains a junior lien subject to AB 130.
- Is self-servicing permitted? Yes, but you must still provide written communications and ownership transfer notices.
Strategic Guidance for California Lenders
Audit Loan Files
Conduct thorough compliance reviews of servicing history, including borrower communications and ownership transfers. Gaps should be identified and addressed before foreclosure begins.
Strengthen Title Protection
Work closely with title companies. Always secure title insurance to avoid disputes over lien priority, which can trigger AB 130 complications.
Expect and Budget for Litigation
Assume that borrowers or their attorneys will use AB 130 as a defensive tool. Build extended timelines and legal budgets into your strategy.
Explore Alternatives to Foreclosure
Consider buying out the first lien, negotiating with senior lenders, or acquiring the property at auction. Each may reduce AB 130 risk compared to initiating foreclosure on a junior lien.
The Market Impact of AB 130
AB 130 has introduced a chilling effect on California’s secondary market for second liens. Many private lenders are hesitant to acquire distressed junior liens, given the increased compliance burden and uncertainty. The law effectively arms borrowers with procedural defenses that can stall or unwind foreclosures, making risk management essential for anyone operating in this space.
Final Thoughts
For private lenders, AB 130 is more than just another compliance requirement. It is a structural shift in California foreclosure law. By holding lenders accountable for past servicers’ actions, restricting foreclosure communications, and enabling borrower litigation, the statute adds complexity and cost to every junior lien foreclosure.
To protect your rights, private lenders must take proactive steps: audit files, refine communications, document every borrower interaction, and seek legal counsel before proceeding with foreclosure.
If you have questions about AB 130 or need tailored compliance strategies, contact the Fortra Law team today. Our attorneys are ready to help you navigate California’s evolving mortgage laws with confidence.
