New Regulation Proposals Every Note Investor Should Watch

Why Regulatory Monitoring Is Not Optional

Note investors are secured creditors. That status comes with rights -- the ability to collect on a debt, to foreclose on a property, and to enforce the terms of a promissory note. But those rights exist within a regulatory framework that is constantly shifting. Federal agencies propose new rules. State legislatures pass licensing requirements. Courts issue rulings that redefine what investors can and cannot do in specific jurisdictions.

This expert session with Matt Kelley -- a veteran note investor, portfolio manager, and operator whose firm maintains in-house legal counsel and lobbyist relationships across multiple states -- covers the most consequential regulatory developments affecting the note investing space. The discussion spans federal proposals, state-level legislation in California, Nevada, Washington, and Arizona, and several court cases that establish important precedents for everyday operations.

The information below is educational, not legal advice. Regulations evolve, and investors should verify current rules with licensed attorneys in each state where they hold assets.

Federal: The CFPB Foreclosure Moratorium Proposal

The single largest regulatory threat discussed in the session is the CFPB's proposal to halt all foreclosures until the end of 2031. This is not a temporary COVID-era pause -- it is a proposed rule that would prevent secured creditors from exercising their fundamental right to collect against collateral for an extended period.

The proposal includes narrow exemptions, but they are not expected to cover most note investors. The critical detail: if you use a third-party loan servicer -- and most investors do -- your servicer's volume almost certainly disqualifies you from any small-servicer exemption. Only self-servicing investors with portfolios under 5,000 loans may qualify, and even that exemption is untested and open to legal challenge.

The call to action is direct: submit public comments opposing or modifying the proposal. The CFPB accepts public comment during the rulemaking process, and investor voices are underrepresented relative to consumer advocacy groups. Comments can range from detailed economic analysis to straightforward explanations of why blocking all foreclosures for a decade harms both creditors and the broader housing market.

Federal: The Bankruptcy Reform Act

The Bankruptcy Reform Act of 2020 was still pending at the time of this session, but its proposed changes would fundamentally alter the bankruptcy landscape for note investors. The key provisions include:

The elimination of credit counseling requirements is particularly significant. Under existing law, debtors who fail to complete mandatory financial management courses see their bankruptcies dismissed -- which restores the creditor's ability to pursue collection. Removing that requirement means fewer dismissals, longer stays of action, and more completed discharges.

For note investors, the practical effect is longer timelines, reduced leverage in workout negotiations, and the potential loss of the current prohibition on modifying first mortgages on primary residences.

California: Debt Collection Licensing (SB 908)

California Senate Bill 908 -- the Debt Collection Licensing Act -- took effect on January 1, 2022. Before this law, California had no licensing requirement for purchasing, holding, or collecting on mortgage notes. That is no longer the case.

The licensing process itself is straightforward and inexpensive. The consequences of operating without a license are not.

The critical nuance is the definition of debt collector under SB 908. The law explicitly includes debt buyers -- meaning anyone who purchases notes, mortgages, or other debt instruments. Even if your servicer handles all borrower communication, the investor retains final authority over decisions like whether to approve a loan modification. That decision-making authority may be considered part of the debt collection process, subjecting the investor to licensing requirements.

Bottom line for California investors: get licensed. The cost is minimal. The risk of operating without a license is not.

California: Post-Foreclosure Sale Rights (SB 1079)

California's SB 1079 created a new legal mechanism that allows qualified owner-occupants and nonprofit organizations to purchase a property after a foreclosure sale. This is a departure from the traditional auction model where the highest bidder at sale takes the property outright.

Similar mechanisms exist in other states -- particularly judicial foreclosure states where former homeowners have statutory redemption rights -- but California's version specifically targets owner-occupants and nonprofits. The implications for note investors who foreclose and plan to acquire the property as REO are significant: there is now a post-sale window in which third parties can intervene, potentially disrupting exit strategies that depend on acquiring the property at auction.

Nevada: Extended Eviction Timelines (AB 41)

Nevada Assembly Bill 41 dramatically extended eviction timelines in the state. Under the prior framework, eviction could proceed within a few weeks. Under the new law, timelines are tied to how long the occupant has been in the property:

Most borrowers subject to a foreclosure sale have lived in their homes for well over three years, which means note investors foreclosing in Nevada should plan for eviction timelines of four months or more after the sale. This directly affects holding costs, cash flow projections, and overall return calculations.

A separate Nevada proposal (SB 159), which would have created post-sale purchase rights similar to California's SB 1079, did not pass.

Washington: Moratoriums, Tenant Protections, and Wage Liens

Washington State saw significant legislative activity affecting note investors in multiple areas:

Open-ended foreclosure moratorium. Washington updated its moratorium without setting an end date -- meaning there is no currently defined point at which foreclosures will resume under normal timelines. Second mortgages, conventional (non-GSE) first mortgages, and certain other loan types may still proceed, but investors must confirm eligibility with the foreclosure trustee before initiating action.

Enhanced tenant protections. New legislation penalizes the inclusion of unlawful lease provisions and limits the grounds for eviction. This matters because borrowers facing foreclosure sometimes claim tenant status or produce lease agreements of questionable authenticity. The law makes it harder to challenge these claims and easier for occupants to countersue.

Wage liens (effective January 1, 2022). Washington created an entirely new lien type: the wage lien. When an employee is owed unpaid wages, they can sue the employer and -- rather than just obtaining a judgment -- can create a lien that attaches to all properties held in the employer's name. This lien is subordinate as of the date of recording and can be foreclosed through a judicial process.

Matt Kelley highlighted wage liens as an opportunity, not just a risk. The holders of these liens -- employees owed back wages -- are typically not in the business of holding or enforcing liens. They want cash. This creates a secondary market where note investors can purchase wage liens from the original holders (or from the law firms representing them) and foreclose on the underlying property. The opportunity is most pronounced in commercial real estate, where second liens are rare and the wage lien creates a new entry point.

Key Court Cases and What They Mean for Operations

Credit Pulls After Bankruptcy Discharge (Mariano v. Aquin)

The Ninth Circuit affirmed that a servicer may pull a borrower's credit report after the borrower has been discharged from Chapter 7 bankruptcy -- even if the borrower surrendered the property. The court held that while the borrower's personal liability was discharged, the lien on the property survives, and the servicer has a permissible purpose under the Fair Credit Reporting Act to determine whether the borrower is eligible for alternatives to foreclosure.

Practical takeaway: always use soft credit pulls when setting up accounts with the credit bureaus. Hard pulls are visible to borrowers and trigger complaints. Soft pulls accomplish the same underwriting objective without the exposure. If your servicer is running hard pulls on defaulted accounts, fix that immediately.

Property Tax Reassessment After Foreclosure (Phyllis v. County of Humble)

The appellate court held that a purchaser at a foreclosure sale cannot use the sale price as the basis for reassessing property taxes at a lower value. The court reasoned that foreclosure sales are not open-market transactions -- the trustee's goal is to recoup the defaulted loan amount, not to maximize sale price. The buyer may get a bargain on the property, but they still owe property taxes based on the property's actual market value.

Practical takeaway: factor property tax liability into your bid at foreclosure sales. The tax basis will reflect fair market value, not the discounted price you paid. This is especially relevant in states where a purchase triggers a full reassessment.

Call Recording Consent (Smith v. Loanme)

The California Supreme Court granted review of a case involving whether all parties to a phone call must consent to recording, even if the recording party did not know the other person was using a cordless or cellular phone. A lender called a borrower, the borrower's spouse answered on a cordless phone, and the lender recorded the 18-second call without obtaining consent. The spouse sued on behalf of a putative class.

Practical takeaway: obtain explicit consent before recording any call. The legal standard varies by state, and California's two-party consent requirement is strictly enforced. Do not rely on a beep tone as implied consent. Do not assume you know what type of phone the other party is using. Build consent language into your call scripts and automated systems.

HOA Super Liens in Nevada (Citibank v. Riverwalk HOA)

In Nevada, HOA liens hold super-priority status, meaning an HOA foreclosure can wipe out even a first mortgage. In this case, Citibank -- the beneficiary of a first-position deed of trust -- attempted to set aside an HOA foreclosure sale, arguing that the HOA violated its duty of good faith. The court ruled against Citibank, holding that the HOA was not required to pursue judicial collection before foreclosing non-judicially, and that the mortgage-saving provisions in the CC&Rs did not override Nevada's super-priority statute.

Practical takeaway for Nevada investors: proactively verify HOA status on every property in an HOA-governed community. Contact the association directly to confirm whether dues are current. An HOA foreclosure can happen without notice to lien holders, because the HOA lien -- while recorded after the mortgage -- has statutory priority that supersedes recording order.

Deficiency Judgments and Anti-Deficiency Statutes (Arizona)

Arizona's anti-deficiency statute generally prevents lenders from pursuing a deficiency balance after foreclosure on residential property. However, the Arizona Supreme Court examined whether a home improvement loan (as opposed to a construction loan or purchase money loan) is subject to the anti-deficiency protection. The court determined that a home improvement loan is not protected by the anti-deficiency statute, meaning the lender can pursue a deficiency judgment.

Practical takeaway: deficiency judgments are a powerful tool -- not only for collecting additional amounts after a foreclosure sale, but as leverage in workout negotiations before the sale. In the session, Kelley described using the threat of a deficiency judgment recorded against a borrower's other properties to motivate a settlement. Understanding which loan types are subject to anti-deficiency protections in each state is essential for maximizing recovery options.

What Note Investors Should Do Now

The regulatory environment is moving in one consistent direction: more licensing requirements, longer foreclosure and eviction timelines, expanded borrower protections, and new lien types that can affect collateral positions. Note investors who treat compliance as a core business function -- rather than a cost to minimize -- will be better positioned in every scenario.

Submit public comments on proposed federal rules, particularly the CFPB foreclosure moratorium. Your voice matters in the rulemaking process.

Get licensed in states that require it. California's SB 908 is the immediate priority, but other states are following suit. The licensing costs are minimal; the penalties for non-compliance are not.

Verify your servicer's practices. Confirm that credit pulls are soft, that call recording complies with state consent laws, and that loss mitigation procedures follow current federal and state requirements.

Check HOA status on every property in an HOA-governed community, especially in super-priority states like Nevada and Florida.

Adjust your underwriting timelines. Extended eviction periods, open-ended moratoriums, and expanded bankruptcy protections all lengthen the time between acquisition and resolution. Build these delays into your cash flow models and pricing.

Stay connected to legal resources. Kelley's firm maintains lobbyists and in-house counsel monitoring legislation across multiple states. Individual investors can access similar intelligence through industry groups, conferences (IMN, CLO, MBA, Five Star, Structured Finance Association), and the note investing communities where these developments are tracked in real time.

The regulatory landscape is not static. The investors who monitor it, adapt to it, and build compliance into their operations are the ones who survive the next cycle -- and the one after that.