Junior Mortgages Doomed After AB 130?
On July 1, 2025 California AB 130 became operative law in California. Intended to remedy “zombie loans¹,” it goes further. Formally, it creates California Civil Code Section 2924.13. It targets “subordinate mortgages,” but does not define that term. If property taxes and PACE/HERO liens were included, all mortgages would in that sense be subordinate to a superior lien. However, the common meaning of a “subordinate mortgage” is a mortgage that is junior in lien priority to one or more other mortgages on the same property, and the law is likely to be interpreted that way.
The law prohibits conducting or threatening a foreclosure, judicial or non-judicial, on residential subordinate mortgages until the servicer (which includes owners who self-service)² records a Certificate of Compliance with the statute and mails it by certified mail, return receipt requested, to the last known mailing address of the borrower or borrowers.
The certificate must state that:
- The mortgage servicer did not engage in any unlawful practice described in the statute, or
- The mortgage servicer did violate it and must provide a list of its violations. The notice shall inform the borrower of their right to petition a court for relief before the foreclosure sale.
If the latter is true, the law affords the borrower an affirmative defense for foreclosure and enables a court to apply its equitable powers to bar foreclosure, adjust the amount owed, or even permit the foreclosure subject to future compliance and a corrected arrearage claim. If the sale has already taken place, it can be set aside if the borrower can prove the certificate was false or incomplete.
There are five (5) possible violations that the certification must address. I will list each and explain its applicability to types of junior mortgages:
- Three Years of Silence. If true, the certificate must state the mortgage servicer did not provide any “written communication” regarding the loan for three (3) years. This section applies to all junior mortgages, regardless of collateral and regardless of purpose. It is, in a sense, a new form of statute of limitations on junior mortgages.
- No Servicing Transfer Notice on 1-4 SFR Loans. If true, the certification must disclose that the mortgage servicer did not provide a timely notice of servicing transfer as required by law. Federal law, in the form of Regulation X of RESPA, Section 1024.33, requires a servicing transfer notice on consumer mortgage loans made by a “creditor” but only applies to consumer 1-4 loans. Business purpose loans are exempt. California law, in Civil Code Section 2937, requires notice of “change of servicing” on all 1-4 SFR loans, business and consumer. Thus, the servicing transfer notice requirement will not apply to loans on 5+ unit loans, loans secured by commercial property, land loans, agricultural loans, and industrial loans.
- No Notice of Ownership Change on 1-4 SFR Primary Residence Consumer Loans. If true, the certification must disclose any changes of ownership required by law without timely notice to the borrower. Federal Regulation Z, Section 1026.39, requires notice of change of ownership as to consumer, primary residence loans. Exempt are business purpose loans and consumer loans not on the primary residence of the borrower. We found no equivalent provision in California law.
- Prior Write-Off Notice or 1099. If the lender had previously given notice to the borrower that the loan had been written off or had issued an IRS Form 1099 reflecting the write-off, the foreclosing lender must disclose that fact.
- Failure to Provide Monthly Billings. If true, the certification must disclose that the mortgage servicer failed to provide periodic billing statements when required by law. The applicable law is Regulation Z, Section 1026.7, applicable only to consumer loans made by “creditors.” We found no legal requirement to provide monthly billing on non-consumer mortgages.
Thus, at the end of day, junior priority business loans in California are not “doomed” as foretold. As to business purpose loans, if the servicer provided notices of change of ownership as required by Civil Code Section 2937, a violation is not possible unless the loan has been dormant for three (3) years. As to all business purpose junior liens, there is the nuisance of recording and mailing a Certificate of Compliance before threatening, commencing or continuing a foreclosure. In short, life will go on.
[1] Dormant loans, usually junior lien, many of which were piggyback loans before the last recession.
[2] Under Civ Code 2920.5 “Mortgage servicer” means a person or entity who directly services a loan, or who is responsible for interacting with the borrower, managing the loan account on a daily basis including collecting and crediting periodic loan payments, managing any escrow account, or enforcing the note and security instrument, either as the current owner of the promissory note or as the current owner’s authorized agent. “Mortgage Servicer” also means a subservicing agent to a master servicer by contract. “Mortgage Servicer” shall not include a trustee, or a trustee’s authorized agent, acting under a power of sale pursuant to a deed of trust.
