California AB 130 Reshapes Foreclosure Rules for Junior Liens: What Lenders Must Know
On July 1, 2025, California Governor Gavin Newsom signed Assembly Bill 130 (AB 130), Section 2, into law, marking a seismic shift in the rules surrounding the enforceability of junior liens.The law, which is retroactive, significantly raises the bar for lenders, servicers, and investors who wish to initiate foreclosure on second liens.
Under the new law, before a lender or investor can foreclose on a subordinate lien, they must sign an affidavit, under penalty of perjury, attesting that they have personally reviewed the loan's servicing history and borrower correspondence to confirm that no servicing violations or communication gaps occurred during the life of the loan.
This applies to all residential properties, including 1-4 unit homes, apartment buildings (5+ units), and mixed-use properties, and includes both consumer and business-purpose loans, such as home equity lines of credit (HELOCs).
According to T. Robert Finlay, Esq., Partner at Wright, Finlay & Zak, LLP, “Despite the hard work of our lobbyist Mike Belote, our General Counsel, and the efforts of the Legislative Committee, AB 130 passed and took immediate effect. Section 2 will dramatically change how subordinate liens are originated, serviced, and enforced in California.”
Under AB 130, a subordinate lien may become unenforceable if any of the following occurred during the life of the loan:
Issuing a document (such as a 1099-C) that suggests the loan has been written off.
Before initiating foreclosure, the current loan servicer must certify that none of these events ever occurred, even if they happened under a previous servicer. That’s a risky legal position for any servicer to take, particularly when they didn’t originate or service the loan from the beginning.
While the law was ostensibly designed to address "zombie" mortgages, loans long thought abandoned, it casts a much wider net. As Finlay notes, “It affects all subordinate lienholders, regardless of intent or loan type. The chilling effect on future originations could be significant.”
In response to the legislation, two clients of ProTitleUSA / One Diligence have formed a coalition to file a lawsuit against the State of California, aiming to challenge and potentially reverse AB 130. Stakeholders concerned about the impact of this law are being invited to join the legal effort.
If you are a lender, servicer, or investor and would like to participate in the lawsuit, please reach out for more information. To help servicers and lenders navigate these new legal requirements, One Diligence has launched a comprehensive solution:
AI-Driven Monthly Statement Analysis: Automatically indexes and verifies monthly statement delivery from the loan’s collateral file to ensure continuity.
Transfer Notice Verification: Confirms that all ownership and servicing transfer notices were properly issued and are documented.
Final Write-Off Review: Checks the file for any documentation (like 1099-C forms) that may indicate the loan was previously written off.
The result is a detailed compliance report identifying any red flags that could hinder a foreclosure under AB 130. With enforcement now a legal tightrope, tools like this will be essential for protecting against liability and ensuring operational integrity.
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On July 1, 2025, California Governor Gavin Newsom signed Assembly Bill 130 (AB 130), Section 2, into law, marking a seismic shift in the rules surrounding the enforceability of junior liens.The law, which is retroactive, significantly raises the bar for lenders, servicers, and investors who wish to initiate foreclosure on second liens.
Under the new law, before a lender or investor can foreclose on a subordinate lien, they must sign an affidavit, under penalty of perjury, attesting that they have personally reviewed the loan's servicing history and borrower correspondence to confirm that no servicing violations or communication gaps occurred during the life of the loan.
This applies to all residential properties, including 1-4 unit homes, apartment buildings (5+ units), and mixed-use properties, and includes both consumer and business-purpose loans, such as home equity lines of credit (HELOCs).
According to T. Robert Finlay, Esq., Partner at Wright, Finlay & Zak, LLP, “Despite the hard work of our lobbyist Mike Belote, our General Counsel, and the efforts of the Legislative Committee, AB 130 passed and took immediate effect. Section 2 will dramatically change how subordinate liens are originated, serviced, and enforced in California.”
Under AB 130, a subordinate lien may become unenforceable if any of the following occurred during the life of the loan:
- No communication with the borrower for three years;
- Failure to send required monthly mortgage statements;
- Omission of ownership or servicing transfer notices;
Issuing a document (such as a 1099-C) that suggests the loan has been written off.
Before initiating foreclosure, the current loan servicer must certify that none of these events ever occurred, even if they happened under a previous servicer. That’s a risky legal position for any servicer to take, particularly when they didn’t originate or service the loan from the beginning.
While the law was ostensibly designed to address "zombie" mortgages, loans long thought abandoned, it casts a much wider net. As Finlay notes, “It affects all subordinate lienholders, regardless of intent or loan type. The chilling effect on future originations could be significant.”
In response to the legislation, two clients of ProTitleUSA / One Diligence have formed a coalition to file a lawsuit against the State of California, aiming to challenge and potentially reverse AB 130. Stakeholders concerned about the impact of this law are being invited to join the legal effort.
If you are a lender, servicer, or investor and would like to participate in the lawsuit, please reach out for more information. To help servicers and lenders navigate these new legal requirements, One Diligence has launched a comprehensive solution:
AI-Driven Monthly Statement Analysis: Automatically indexes and verifies monthly statement delivery from the loan’s collateral file to ensure continuity.
Transfer Notice Verification: Confirms that all ownership and servicing transfer notices were properly issued and are documented.
Final Write-Off Review: Checks the file for any documentation (like 1099-C forms) that may indicate the loan was previously written off.
The result is a detailed compliance report identifying any red flags that could hinder a foreclosure under AB 130. With enforcement now a legal tightrope, tools like this will be essential for protecting against liability and ensuring operational integrity.
Subscribe to: