What Happened?
On June 30, 2025, California Governor Gavin Newsom signed into law, with an immediate effective date, California Assembly Bill 130, a significant housing bill that, notably renders certain mortgage servicer conduct an unlawful practice in connection with subordinate lien mortgage loans, including, among others, not providing the borrower with any communication regarding the loan secured by the mortgage for at least 3 years and threatening to conduct a nonjudicial foreclosure after providing a form to the borrower indicating that the debt had been written off or discharged.
The legislation appears to be geared toward combatting “zombie mortgages” which are second mortgage debt that homeowners may have believed was discharged or satisfied long ago, only to have it unexpectedly reappear with demands for payment and potential threats of foreclosure years later. These dormant loans are often sold to debt buyers for a small fraction of their value. Borrowers may have received no notices or statements for years, leading them to believe the second mortgage had been forgiven, discharged in bankruptcy, or modified along with their first mortgage.
Why Does It Matter?
Notably, the legislation forbids mortgage servicers from engaging in the following “unlawful practices” while the servicing subordinate lien mortgages:
- 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
- Failing to provide a periodic statement as required by TILA or investor/grantor requirements
Failure to comply with these law’s prohibitions could impede or prevent foreclosure of the second lien and expose servicers to liability. For example, borrowers contending that the mortgage servicer engaged in an unlawful practice may seek to enjoin the foreclosure sale until a court renders a final determination of the servicer’s compliance with the new law. Under the new law, it is affirmative defense in a judicial foreclosure proceeding if the court finds the mortgage servicer engaged in any of the unlawful practices enumerated above. Court may also provide equitable remedies that they deem appropriate, depending on the extent and severity of the mortgage servicer’s violations. However, any failure to comply with the provisions of this section does not affect the validity of a trustee’s sale or a sale in favor of a bona fide purchaser.
What Should I Do?
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 notices required by RESPA and TILA, especially with older vintage subordinate lien loans that have been delinquent or sporadically performing. Subordinate lien debt buyers must also ensure that their servicers comply with these laws before foreclosing on these debts. Additionally, servicers should review their foreclosure procedures to ensure they do not run afoul of California’s new standards.
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