Republished with permission from Doss Law. Original article published 7/1/2025 on dosslaw.com

On July 1, 2025 California AB 130 became operative law in California. It is intended to  remedy “zombie loans,” which are typically dormant loans, usually junior liens, that a homeowner thought was resolved or paid off but are revived by a debt collector or new servicer.

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 self-servicers) 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(s).

Under California Civil Code 2920.5, a “mortgage servicer” means  a person or entity who directly services a loan, including managing the loan account by collecting and crediting loan payments, managing any escrow account, or enforcing the note and security instrument. “Mortgage servicer” also includes a contracted subservicing agent to a master servicer, but  does not include a trustee or a trustee’s authorized agent acting under a power of sale pursuant to a deed of trust.

The Certificate of Compliance 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 possible violations that the certification must address.

1. Three Years of Silence

If true, the certificate must state the mortgage servicer did not provide any “written communication” regarding the loan for three 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.

2. No Servicing Transfer Notice

If true for 1-4 unit SFR loans, 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. Thus, the servicing transfer notice requirement will not apply to 5+-unit loans, loans secured by commercial property, land loans, agricultural loans, and industrial loans.

3. No Notice of Ownership Change

If true for 1-4 unit SFR loans on the borrower’s primary residence, the certification must disclose any changes of ownership 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.

4. 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.

5. 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 the 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 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.