A newly enacted California mortgage law, AB 130, signed by Governor Gavin Newsom on June 30, 2025, is set to have a severe impact on lenders operating in the state of California. While primarily intended to address “zombie second mortgages,” the new law establishes California Civil Code 2924.13, which adds new hurdles for foreclosing on subordinate liens.
We’ll break down how this California mortgage law could impact your business below.
What the Law Does
Section 2924.13 targets the foreclosure process for subordinate mortgages, which are loans that are junior to a first mortgage on a residential property. It is important to note that the statute does not further define residential property, so the new law currently would affect any junior lien secured by residential property.
The statute also does not distinguish between consumer or business purpose loans. Before foreclosing or threatening to foreclose on a second, a lender must record and mail to the borrower a certification under penalty of perjury that it did not commit any of several listed “unlawful practices,” which are defined as:
- Failing to communicate in writing with the borrower for more than three years.
- Failing to send any required notices of servicing or loan ownership transfers.
- Attempting to foreclose after claiming the loan was discharged or sending an IRS 1099-C.
- Initiating foreclosure after the statute of limitations has expired.
- Failing to provide periodic account statements when legally required.
Otherwise, the lender must list all instances of “unlawful practices” committed by the current or any prior servicer, again, under the penalty of perjury. The lender must also notify the borrower to petition a court for a restraining order before the foreclosure sale.
Post-Sale Litigation Risk
The new California mortgage law now permits a borrower to request that a court set aside the nonjudicial foreclosure if:
- The certification was not recorded, or
- If the lender identifies any “unlawful practice” or
- If the borrower claims that the lender misrepresented its compliance history.
This does not affect past trustee’s sale or any sale to a bona fide purchaser, so this is limited to new nonjudicial foreclosures.
Courts are also empowered to strike all or a portion of the arrears claim, barring foreclosure, or permitting foreclosure subject to future compliance and a corrected arrearage claim.
Further, the law states that courts are now required to stop any foreclosure sale for a subordinated mortgage solely based on the borrower’s complaint to the court until the entire litigation has been resolved.
Pre-Foreclosure Hurdles Under California Mortgage Law
The new law adds multiple layers of compliance for lenders seeking to initiate nonjudicial foreclosure:
- Certification Requirement: The servicer must record a sworn certification confirming compliance with the law by itself and all past servicers.
- Borrower Notification: The borrower must receive a copy of the certification and a notice of their right to petition the court to stop the foreclosure sale.
- Litigation Pause: If the borrower files a petition before the sale, the foreclosure is paused until the court reaches a final decision.
Why This Is a Problem for Lenders
Private lenders, especially those purchasing distressed or seasoned second liens, are particularly vulnerable under this new framework:
- Historical Compliance Burden: Lenders may now be accountable for the actions of all previous servicers, which is often impossible to confirm, especially for older loans or those acquired from entities that are no longer in business.
- Document Gaps: Missing servicing transfer notices or account statements from years ago could disqualify a lender from foreclosing.
- Litigation Explosion: Borrowers and their attorneys now have powerful tools to delay or invalidate foreclosures, significantly increasing legal costs and risk.
- Chilling Effect on Loan Acquisitions: The law may stifle the secondary market for second liens in California, as the compliance burden and litigation risk make these loans far less attractive.
Get Legal Guidance Before You Foreclose
This new California mortgage law fundamentally changes the foreclosure process for subordinate liens, not in favor of lenders. With new risks, heightened documentation burdens, and expanded borrower rights, private lenders must proceed with extreme caution.
For strategic guidance, compliance audits, or foreclosure risk assessments, contact our team today.
