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Question:  How does California Assembly Bill 130 affect originators and servicers of subordinate liens secured by California properties?

Answer:   California Assembly Bill 130 was signed into law on June 30, 2025 and forbids mortgage servicers from engaging in the certain “unlawful practices” while servicing subordinate lien mortgages.  This portion of the bill addresses “Zombie” subordinate mortgages which are second mortgages homeowners believe were discharged long ago (for example, in a Bankruptcy scenario) only to have the lender appear years later demanding payment and threatening foreclosure.  Many times, consumers have not heard from these lenders for several years.

The following practices are deemed unlawful under the new law:

• Not providing written communication to the borrower for at least three years;
• Failing to provide a transfer of loan servicing notice as required by the Real Estate Settlement Procedures Act (RESPA) or investor/grantor requirements;
• Failing to provide a transfer of loan ownership notice as required by the Truth-in-Lending Act (TILA) or investor/grantor requirements;
• Conducting or threatening to conduct a foreclosure sale after providing a form indicating the debt had been written off or discharged;
• Conducting or threatening to conduct a foreclosure after the statute of limitations expired; or
• Failing to provide a periodic statement as required by TILA or investor/grantor requirements

Servicers of subordinate lien mortgage loans in California must ensure that they are fully compliant with federal and California law applicable to the servicing of loans, such as providing borrowers timely servicing transfer notices and periodic statements.  Servicers should review their foreclosure procedures to ensure they do not run afoul of California’s new standards.

A certification needs to be completed by a foreclosing lender prior to commencing a foreclosure action which certifies that none of these unlawful practices occurred during the servicing of the loan.