California's AB 130: What Real Estate Note Investors Need to Know
California's AB 130, effective July 1, 2025, imposes strict new requirements on anyone seeking to foreclose on a subordinate mortgage. The law targets zombie second mortgages but affects all junior lien holders, requiring a signed certification under penalty of perjury before foreclosure can proceed. Note investors holding California second liens face heightened due diligence burdens, increased legal costs, and new borrower defenses that did not previously exist.
What AB 130 Does
California Assembly Bill 130, signed by Governor Gavin Newsom on June 30, 2025, and effective July 1, 2025, adds Section 2924.13 to the California Civil Code. The law was written to address zombie second mortgages -- subordinate liens that were abandoned or written off by lenders but never officially discharged. These loans would resurface years or decades later, sometimes after a borrower had received an IRS 1099-C indicating the debt was canceled, and the new holder would attempt to foreclose.
The legislative intent was narrow: protect homeowners from predatory enforcement of debts they reasonably believed were resolved. The law's actual scope, however, is broad. AB 130 applies to all subordinate mortgages and deeds of trust on residential property in California -- not just zombie loans. Whether you hold a recently originated HELOC, a seasoned second mortgage purchased from a bank, or a non-performing second lien acquired from a distressed debt seller, the new requirements apply.
The law creates two primary mechanisms: a mandatory pre-foreclosure certification and a defined list of unlawful servicing practices. Together, these mechanisms give borrowers powerful new tools to challenge, delay, or block foreclosure on any junior lien in California.
The Pre-Foreclosure Certification Requirement
Before a lender, servicer, or foreclosure trustee can record a notice of default on a subordinate lien -- the first formal step in California's nonjudicial foreclosure process -- they must now file a signed certification under penalty of perjury. This certification must state one of two things:
- Neither the current mortgage servicer nor any prior servicer committed any of the unlawful practices defined by the statute, or
- The servicer lists all instances in which an unlawful practice was committed.
The critical phrase is "any prior servicer." The certification does not cover only the current note holder's conduct. It reaches back through the entire servicing history of the loan. If the loan has been transferred multiple times -- common in the secondary market -- the current holder must certify the compliance of every entity that ever serviced the loan.
For note investors, this is where the operational burden becomes significant. You are being asked to certify, under penalty of perjury, the conduct of organizations you may have never interacted with and whose records may be incomplete, unavailable, or nonexistent. A loan servicing company that went out of business in 2012 may have failed to send a required periodic statement in 2010. Under AB 130, that failure -- even if the current investor had no knowledge of it and no way to discover it -- could be used to block foreclosure.
The Six Unlawful Practices
AB 130 defines six specific servicing failures that constitute "unlawful practices" in connection with a subordinate lien. If any current or prior servicer committed any of these practices at any point during the life of the loan, the certification requirement is triggered and the borrower gains grounds to challenge foreclosure.
| Unlawful Practice | What It Means for Investors |
|---|---|
| No written communication for 3+ years | If the servicer failed to send any written correspondence to the borrower for a continuous period of three years or more, this constitutes an unlawful practice. Gaps in servicing records are common on aged loans. |
| Failed to provide a servicing transfer notice | When loan servicing transfers from one company to another, federal law (RESPA) and California law require written notification to the borrower. A missed transfer notice at any point in the loan's history triggers this provision. |
| Failed to provide an ownership transfer notice | Similar to the servicing transfer notice, but applies when the loan itself (not just the servicing rights) changes hands. Every assignment in the chain of title must have been accompanied by proper borrower notification. |
| Foreclosure threat after indicating debt was discharged | If any servicer sent a form to the borrower indicating the debt was written off or discharged -- including an IRS 1099-C -- and then a subsequent holder attempts foreclosure, this constitutes an unlawful practice. This is the core "zombie mortgage" scenario. |
| Foreclosure after statute of limitations expired | If the applicable statute of limitations on the debt has run, any attempt to foreclose is now expressly unlawful under AB 130, in addition to whatever defenses already existed under existing limitation law. |
| Failed to provide required periodic statements | Federal law requires servicers to send regular account statements to borrowers. A missed statement at any point in the loan's history -- even years before the current investor acquired the loan -- is now a basis for challenging foreclosure. |
Any single violation from any servicer at any point in the loan's history is sufficient. The violations are not limited to recent conduct, not limited to the current holder's conduct, and not limited to intentional acts.
How AB 130 Affects Note Investors
The practical impact of AB 130 on the California non-performing loan market falls into several categories.
Foreclosure Is Harder on All California Junior Liens
AB 130 does not distinguish between a zombie mortgage that resurfaced after 15 years of silence and a second lien that has been actively serviced since origination. The certification requirement applies to both. Any note investor holding a California second lien -- performing or non-performing -- must now navigate the certification process before initiating foreclosure.
The certification itself requires knowledge of the entire servicing history. For loans that have passed through multiple servicers, acquiring complete and accurate records is a significant due diligence challenge. Gaps in the record create uncertainty, and uncertainty under a perjury-backed certification creates legal risk.
Borrowers Have New Defenses
If the certification is not filed, the borrower can challenge the foreclosure in court. If the certification is filed but the borrower believes it contains misrepresentations, the borrower can challenge the foreclosure in court. If the certification admits to an unlawful practice, the borrower can challenge the foreclosure in court.
The remedies available to the court are broad. A judge may:
- Strike all or a portion of the arrears claim -- reducing the amount the borrower owes
- Bar foreclosure entirely -- eliminating the investor's primary enforcement mechanism
- Permit foreclosure subject to conditions -- such as requiring future compliance and a corrected arrearage calculation
For note investors who rely on the foreclosure process as the backstop that gives their promissory note value, these remedies represent a fundamental shift in the risk profile of California junior liens.
Due Diligence Costs Increase
Before AB 130, due diligence on a California second lien focused on the standard factors: property value, unpaid principal balance, borrower ability to pay, lien position, and title condition. Now, investors must also reconstruct the complete servicing history of the loan and evaluate whether every servicer in the chain complied with all six requirements at all times.
This means requesting and reviewing servicing transfer records, borrower correspondence logs, periodic statement histories, and 1099-C records from every prior servicer. For loans that originated during the 2005-2008 era and have been through multiple transfers, this research is time-consuming and expensive -- and the records may simply not exist.
Pricing Should Reflect the New Risk
California junior liens that would have been priced at one level before July 2025 should now be priced at a deeper discount to account for:
- The cost of the additional due diligence required to assess certification risk
- The possibility that foreclosure may be barred or delayed
- Higher legal costs associated with defending the certification if challenged
- The potential for arrears to be reduced by court order
Investors who fail to adjust their pricing for AB 130 risk are overpaying for assets with diminished enforceability.
Credit Availability May Contract
The lawsuit and industry commentary surrounding AB 130 raise a broader concern: lenders may reduce or eliminate subordinate lending in California. If a lender believes that a single missed periodic statement or a gap in written communication could render the loan unenforceable through foreclosure, the risk-reward calculation for originating HELOCs and second mortgages shifts dramatically.
According to the California Association of Realtors, only 15% of California households could afford to purchase a median-priced home in the second quarter of 2025, far below the 34% national affordability rate. HELOCs and junior liens are tools homeowners use for debt consolidation, home improvements, and supplementing first mortgage down payments. If AB 130 discourages lenders from offering these products, the law intended to protect homeowners could paradoxically reduce their financial options.
The Constitutional Challenge
AB 130 is not going unchallenged. In September 2025, a coalition of industry groups filed suit in federal court -- California Mortgage Association v. Bonta, Case No. 2:25-at-01197 (E.D. Cal.) -- seeking to block enforcement of portions of the law. The plaintiffs include the California Mortgage Association, the California Credit Union League, the United Trustees Association, financial institutions, and individual investors and small business owners. The law firm Wright, Finlay & Zak is representing the plaintiffs.
The lawsuit advances several constitutional arguments:
| Legal Argument | Basis |
|---|---|
| Impairment of contracts | AB 130 retroactively changes the terms under which existing loans can be enforced, violating the Contract Clause of both the U.S. and California Constitutions |
| Deprivation of property rights | The law strips lenders and investors of the ability to foreclose -- effectively depriving them of the security interest that gives the loan value |
| Due process violations | Holding current investors responsible under penalty of perjury for the conduct of prior servicers they never controlled and whose records they may not have |
| Equal protection violations | The law treats junior lien holders differently from senior lien holders without sufficient justification |
| Federal preemption | AB 130 may conflict with the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA), which already establish federal standards for the same servicing conduct |
Bradley Ladusaw, president of the California Mortgage Association, stated that the bill will "destabilize real estate financing and prevent consumers and small businesses from obtaining loans to meet housing renovation and business needs."
As of early 2026, this case is still building. Note investors should monitor the litigation closely. A ruling that enjoins or limits AB 130 would change the compliance calculus; a ruling that upholds the law would confirm that the new requirements are here to stay.
Practical Compliance Steps for Note Investors
AB 130 is law today, regardless of the pending litigation. Investors holding or acquiring California junior liens need to adjust their operations now.
1. Audit your California junior lien portfolio. Identify every subordinate mortgage or deed of trust you hold on California residential property. For each loan, determine whether the servicing history is complete and whether any of the six unlawful practices may have occurred.
2. Request complete servicing records. Before acquiring any California junior lien, request the full servicing history from the seller. This includes borrower correspondence logs, periodic statement records, servicing transfer notices, ownership transfer notices, and any 1099-C forms issued. If the seller cannot provide complete records, price the loan accordingly -- or walk away.
3. Evaluate the certification risk on every loan. For each loan, assess whether you can truthfully sign the certification under penalty of perjury. If the servicing records show gaps in written communication exceeding three years, missing transfer notices, or prior issuance of a 1099-C, the certification is either impossible to sign truthfully or must disclose the violation -- which gives the borrower grounds to challenge foreclosure.
4. Work with California-licensed counsel. The certification is signed under penalty of perjury. The legal consequences of a false certification are serious. Retain counsel experienced with California Civil Code Section 2924.13 to review your servicing records and advise on whether the certification can be filed. Do not attempt to navigate this without legal guidance.
5. Adjust your bid pricing. Factor AB 130 risk into your pricing models for California junior liens. Loans with incomplete servicing histories, multiple prior servicers, or any indication of a 1099-C issuance should be discounted more aggressively than pre-AB 130 pricing would suggest. The discount should reflect the realistic probability that foreclosure may be delayed, barred, or conditioned by a court.
6. Prioritize non-foreclosure exit strategies. For California junior liens where the certification is questionable, shift your resolution strategy toward exits that do not require foreclosure. Loan modifications, discounted payoffs, short sales, and deeds in lieu of foreclosure remain available regardless of AB 130, because they do not involve recording a notice of default. These workout strategies have always been the preferred approach for ethical note investors -- AB 130 makes them operationally essential for California junior liens.
7. Monitor the litigation. Track the progress of California Mortgage Association v. Bonta and any related state court challenges. A preliminary injunction could temporarily suspend enforcement of the certification requirement. A final ruling could reshape or invalidate portions of the law. Subscribe to updates from the California Mortgage Association, industry legal blogs, and your California counsel.
8. Verify your California debt collection license. AB 130 is not the only California law affecting note investors. Senate Bill 908, the Debt Collection Licensing Act effective January 1, 2022, requires anyone purchasing or collecting on mortgage notes in California to hold a state license. Ensure your license is current and that your loan servicer is also properly licensed.
What This Means for the Secondary Market
AB 130 adds a new layer of risk and complexity to the California non-performing note market. It does not eliminate the market. Deals are still closing. Homeowners are still being helped through workout strategies. Banks are still selling distressed California assets.
But the law changes the economics. California junior liens are now harder to enforce, more expensive to diligence, and subject to borrower defenses that did not exist before July 2025. Investors who understood the California market before AB 130 need to update their playbook. Investors entering the California market for the first time need to understand that the rules for junior liens in this state are now materially different from the rest of the country.
The investors who will navigate AB 130 successfully are the ones who already approach note investing with meticulous documentation, thorough due diligence, licensed servicing, and a preference for cooperative borrower resolutions over adversarial foreclosure. AB 130 did not invent the need for these practices -- it raised the consequences of ignoring them.
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