California’s New Second-Lien Foreclosure Law (AB 130): What Lenders Need to Know

Effective June 30, 2025, California Assembly Bill 130 (AB 130) imposes strict new compliance requirements on lenders and servicers foreclosing on second-position (junior) mortgage liens via nonjudicial foreclosure. This law was enacted as part of a housing budget bill and is California’s response to so-called “zombie second mortgages.” These dormant junior liens that resurface after years of silence to initiate foreclosure . The goal is to protect borrowers from surprise foreclosures on second mortgages, but the law significantly changes the foreclosure process for junior liens and adds new hurdles for lenders. In this article, we’ll break down the key provisions of AB 130 in plain English, explain how it differs from standard first-lien foreclosure rules, and outline best practices for compliance.

Disclaimer: Mayacamas Lending Inc. is not a law firm, and this article is not legal advice. Laws change frequently, and the information here is for educational purposes. Lenders should consult qualified legal counsel about AB 130 compliance and any specific foreclosure situations.

Which Loans Does AB 130 Cover (and Which Are Exempt)?

AB 130 targets subordinate mortgages. In other words, loans that are junior to a first mortgage on a residential property. This means it primarily affects second deeds of trust and other junior liens, such as home equity loans, home equity lines of credit (HELOCs), seller carry-back second mortgages, and similar second-position financing . The law does not apply to first-position liens (first mortgages) or their foreclosure process. First deeds of trust continue to be governed by existing foreclosure laws and are not subject to these new AB 130 requirements.

It’s important to note that AB 130’s definition of “subordinate mortgage” is broad. It covers any deed of trust or mortgage that was recorded subordinate to another lien (i.e. behind a first mortgage) . The law does not distinguish between consumer-purpose and business-purpose loans. Any junior lien on residential real estate is covered. However, other types of liens (for example, judgment liens or mechanic’s liens) are outside the scope of AB 130, since those are not mortgages or deeds of trust.

Bottom line: If you are a lender or investor dealing with second-position loans secured by California homes, AB 130’s rules apply. If you’re foreclosing on a first-position deed of trust, or enforcing a purely judicial lien (like a judgment lien), these specific new requirements do not apply, though first mortgages have their own set of California regulations under the Homeowner Bill of Rights, etc., which remain in effect.

“Unlawful Practices” That Can Block a Second-Lien Foreclosure

A central feature of AB 130 is that it identifies certain servicing failures or misconduct as “unlawful practices” for a subordinate mortgage. If any of these occurred at any time during the life of the loan, the law treats it very seriously. In fact, AB 130 effectively says a lender or servicer cannot proceed with a nonjudicial foreclosure on a junior lien if any of the following have occurred :

• No contact with the borrower for 3+ years: Failing to communicate in writing with the borrower about the loan for over three years . (In other words, a long gap of no written correspondence is an “unlawful practice.”)
• Missing monthly statements: Failing to provide periodic billing statements to the borrower when legally required (e.g. under Truth in Lending Act rules for consumer mortgages) .
• No required transfer notices: Failing to send required notices of loan servicing transfer or loan ownership transfer (as mandated by RESPA/TILA regulations when a loan is sold or servicing is transferred) .
• Loan declared discharged, then foreclosed: Representing to the borrower that the debt was written off or discharged. For example, sending the borrower an IRS Form 1099-C for canceled debt and later foreclosing or threatening to foreclose on that loan .
• Statute of limitations expired: Initiating or threatening foreclosure after the statute of limitations has run out on enforcing the debt (meaning the legal time period to collect the debt has expired).

Any one of the above lapses is considered an “unlawful practice” under the new Section 2924.13 of the Civil Code. Even a misstep by a prior loan servicer years ago counts against the current lender . AB 130 explicitly defines “mortgage servicer” to include all prior servicers of the loan, not just the current holder . This “life-of-loan” approach means a lender cannot ignore the loan’s history – you inherit the servicing history (and any past violations) along with the loan . For example, if a previous servicer failed to send a borrower their annual statements or went silent for three years, those past actions can now block your foreclosure unless addressed.

New Requirement: Certification Under Penalty of Perjury with the Notice of Default

Under AB 130, a lender or servicer must take an extra step before starting a nonjudicial foreclosure on a junior lien. In California, the nonjudicial foreclosure process formally begins by recording a Notice of Default (NOD) in the county records. Now, at the time you record the NOD for a second-position loan, you (as the foreclosing party) must also record a sworn Certification of Compliance. This certification, given under penalty of perjury, must state either:

• That no “unlawful practices” (as defined above) have occurred at any point during the loan’s life by the current or any prior servicer ; OR
• If any such unlawful practice did occur, the certification must list all instances of those violations (with details of what happened) .

This essentially forces the foreclosing lender/servicer to review the loan’s entire history and attest that it has been serviced properly. If there were any compliance lapses (e.g. a gap in contact or missing notice), those must be disclosed in the recorded certification. Knowingly falsifying this certification is perjury, a criminal offense, so lenders must be truthful and diligent in confirming the loan’s history. Failing to record the certification at the same time as the NOD will halt the foreclosure. The law prohibits proceeding with a nonjudicial foreclosure until this certification is recorded .

Why this is challenging: For many private lenders and note investors, especially those who purchase seasoned or distressed second liens, obtaining a complete history of prior servicers’ conduct can be difficult. Yet, AB 130 makes you accountable for it. Industry experts note that lenders now carry the burden of confirming compliance by all previous servicers, which is “often impossible to confirm” for older loans or loans from defunct companies . Missing documents (like an old servicing transfer notice) or long-gone recordkeepers could effectively jeopardize your ability to foreclose.

Notifying the Borrower of Their Rights (New Notice Requirement)

In addition to recording the compliance certification, the foreclosing lender/servicer must notify the borrower about these issues and their rights. Under AB 130, at the time the Notice of Default is served (mailed) to the borrower, the lender/servicer must also send two important documents via certified mail:

1. A copy of the recorded Certification of Compliance. The borrower gets to see the sworn statement regarding the loan’s servicing history and whether any violations were listed .
2. A special notice of the borrower’s rights under AB 130. This notice must inform the borrower that if they believe the servicer (current or any prior servicer) engaged in any unlawful practice on the loan or if they believe the servicer’s certification is inaccurate, the borrower has the right to petition a California court for relief before the foreclosure sale occurs .

In plain terms, the borrower must be told that they can go to court to challenge the foreclosure if they think the loan was serviced improperly or the lender lied about it. The notice should make clear that the borrower can ask the court to pause or stop the foreclosure if they raise an issue about compliance. This requirement is intended to ensure borrowers are aware of their new rights and don’t get blindsided by a fast-moving trustee’s sale.

Borrower’s Right to Petition the Court and Halt the Foreclosure

One of the most borrower-friendly aspects of AB 130 is that it gives homeowners a powerful tool: they can essentially freeze a pending nonjudicial foreclosure on a second lien by filing a court petition or lawsuit alleging a violation. If a borrower believes their servicer violated any of the rules (or misrepresented the facts in the compliance certificate), they can bring an action in court for injunctive relief i.e. ask a judge to stop the foreclosure.

Under the new law, courts are required to enjoin (halt) the foreclosure sale until the borrower’s case is fully resolved . In other words, as soon as the borrower files a verified complaint or petition citing a potential unlawful practice or false certification, the trustee’s sale is put on hold. The foreclosure cannot proceed until a judge makes a final determination. This automatic injunction is a major change – it means the mere filing of a borrower’s complaint will stop the sale, preventing the home from being sold before the dispute is heard.

What can the court do after that? AB 130 explicitly empowers the court to provide broad equitable remedies as it deems appropriate, depending on the severity of the violations . The law gives examples of remedies the judge might order:

• Striking or reducing the arrears: The court can nullify all or part of the mortgage arrears claimed by the lender, effectively reducing what the borrower owes .
• Barring the foreclosure entirely: In egregious cases, the court can prohibit the lender from foreclosing at all, period .
• Allowing foreclosure with conditions: The court might permit the foreclosure to proceed but only after the servicer corrects any compliance issues and recalculates the arrearage properly . Essentially, the sale could be allowed but subject to the lender fixing the problems first.

These are powerful remedies. The threat of having a court wipe out arrears or block the foreclosure gives borrowers substantial leverage if a servicer has been neglectful. Even if the court doesn’t ultimately bar the sale, the process of court review alone means delay, expense, and uncertainty for the foreclosing lender. Lenders should assume that any borrower who gets this AB 130 notice is likely to consult an attorney and potentially file to delay the sale. Especially if there have indeed been long periods of no communication or other known issues.

Can a Completed Foreclosure Sale Be Unwound? (Post-Sale Challenges)

AB 130 also contemplates what happens if a foreclosure sale already went through without the new requirements being met. Under prior law, once a trustee’s sale is completed in a nonjudicial foreclosure, it’s very difficult for a borrower to undo it. The new law provides borrowers a window to challenge and potentially set aside a completed sale on a second lien, but only in specific circumstances.

A borrower may file a lawsuit to have the foreclosure sale rescinded (set aside) after it’s completed if any of the following apply :

• No compliance certification was recorded at the time of the NOD (i.e. the lender ignored the new law’s certification requirement) .
• The recorded certification indicated an unlawful practice occurred during the loan’s life. In other words, the lender’s own certification disclosed a violation (for example, admitting there was a 4-year communication gap or a missing notice).
• The borrower believes the servicer misrepresented the loan’s compliance history in the certification . For instance, if the borrower has evidence that a supposed “compliance” claim is false or an unlawful practice was omitted, they can allege the certification was misleading.

If the borrower proves one of these conditions, a court could order that the trustee’s sale be undone, essentially restoring the borrower’s ownership (subject to the liens as before) as if the foreclosure had not happened. However, there is an important protection for third-party buyers: the law says that any failure to comply with AB 130 does not affect the validity of a sale to a bona fide purchaser (BFP) for value. That means if an unrelated third party bought the property at the foreclosure auction in good faith, the sale will generally stand. The borrower might still have claims against the lender or servicer, but the buyer who purchased the home is protected and would keep title. In practice, this likely means that a court will not void a completed sale if the property has passed to a new owner who was not involved in the wrongdoing. (Many second-lien foreclosure sales result in the lender itself taking title via credit bid, not a third-party buyer. In those cases, unwinding the sale is more feasible since no innocent purchaser is impacted.)

Finally, note that AB 130’s post-sale remedies apply to sales going forward under this law. The statute should not be read as retroactively undoing foreclosure sales that happened before the law was effective. In fact, the new provisions went into effect immediately in mid-2025 and do not affect past trustee’s sales that were already completed . Lenders conducting second-lien foreclosures from now on must comply, or risk a completed sale being challenged.

Judicial vs. Nonjudicial Foreclosure: Key Differences Under AB 130

California allows two methods of foreclosure: nonjudicial foreclosure (a trustee’s sale outside of court, which is most common for deeds of trust) and judicial foreclosure (filing a civil lawsuit to foreclose, which is less common). AB 130’s new rules overwhelmingly focus on nonjudicial foreclosures of junior liens. It’s critical for lenders to understand how the choice of foreclosure method can affect the process:

• Nonjudicial Foreclosure: This is the typical method for mortgages and deeds of trust in California. It does not involve a court case; instead, the lender follows a statutory process (Notice of Default, Notice of Trustee’s Sale, etc.) and conducts a sale via a trustee. AB 130 adds substantial requirements to the nonjudicial process for second liens – including the certification and notice to borrower described above. A lender cannot proceed nonjudicially on a junior lien without complying with those new steps . If they try, the sale can be stopped or invalidated. Essentially, AB 130 injects a layer of court oversight into the nonjudicial process by giving borrowers the right to halt the sale via the courts unless the lender affirmatively proves clean hands.
• Judicial Foreclosure: This involves filing a lawsuit and obtaining a court judgment to foreclose. AB 130’s procedural requirements (the certification and mail notices) do not apply if a junior-lien lender opts to foreclose through the courts, because those requirements are tied to the nonjudicial power-of-sale process. However, and this is important, any of the “unlawful practices” defined by AB 130 can still be raised by the borrower as a defense in a judicial foreclosure action. In fact, the law expressly says that the listed unlawful practices are valid affirmative defenses in any judicial foreclosure of a subordinate mortgage. That means if you sue the borrower to foreclose a second deed of trust, the borrower can argue in that court case that, say, you failed to send required statements or waited too long to act, and the court can deny or limit your foreclosure on that basis. The outcome (like possibly barring the foreclosure or reducing the debt) could mirror the remedies under AB 130.

Do lenders have a workaround by choosing judicial foreclosure? In light of the burdens AB 130 places on nonjudicial foreclosures, some junior lien holders are indeed considering the judicial route for certain loans. This might be considered if, for example, the loan balance is high enough to justify a potentially lengthy court process, or if documentation is so incomplete that a clean certification is impossible. Judicial foreclosures are slower and more costly, but they allow the lender to present their case and the loan history to a judge rather than being automatically halted by a missing certification. Some experts have noted that servicers may weigh whether a judicial foreclosure is a better route for particular second-lien files, depending on the circumstances and value of the lien. Going to court might avoid the perjury certification issue, but remember that it does not erase the underlying problems. The judge can still rule against the foreclosure if the servicing deficiencies are serious.

First-position loans: As mentioned, AB 130’s new section 2924.13 does not apply to first mortgages. First-lien foreclosures in California continue under the existing rules (such as Civ. Code 2924 et seq., and the homeowner protections in Civ. Code 2923.5, 2924.11, etc. for first liens). Those existing laws require things like contact efforts before foreclosure and forbid certain foreclosure practices (like “dual tracking”), but they do not include the new certification or automatic injunction mechanism that AB 130 created for second liens. So while first-lien foreclosures still must comply with the Homeowner Bill of Rights and other statutes, they are not affected by the changes we’re discussing in this article.

Other liens: Liens that are not mortgages or deeds of trust (for example, homeowners association liens, judgment liens, tax liens) typically follow different enforcement processes (often judicial). AB 130’s provisions specifically amend the Civil Code section governing mortgage foreclosures, so these other lien types aren’t directly impacted by AB 130.

Best Practices for Lenders and Servicers Under AB 130

Given the new risks and obligations AB 130 creates, lenders who originate or invest in junior liens should adapt their practices immediately. Here are some best practices to help navigate the new landscape:

• Review and document your loan files thoroughly: Before initiating any foreclosure on a second-position loan, perform a meticulous audit of the loan’s history. Ensure you have records of all borrower communications, monthly statements, and required notices (servicing or ownership transfers) for the life of the loan. Check that there was no gap in written correspondence longer than 3 years at any point. Any missing documentation or unexplained long silences should raise a red flag.
• Obtain prior servicer records: If the loan was ever transferred or serviced by others, reach out and obtain the servicing files from those prior servicers (if they are still in business). You need to know if a prior servicer failed to send a notice or left a long communication lapse, because that past issue becomes your issue now. Incorporate a comprehensive servicing history review into due diligence whenever you acquire a junior loan.
• Engage compliance auditors or experts: Consider using specialized audit services or experts to examine loan histories for compliance gaps. For example, professionals can help identify if required RESPA/TILA notices were given and if periodic statements were sent. An expert audit can uncover “red flags” before you proceed to foreclose.
• Do not “threaten” foreclosure without compliance: AB 130 covers not just foreclosures but even threatening to foreclose on a second lien. This means sending a default letter or notice to a borrower could trigger the law. Ensure that before you even send a Notice of Default or any acceleration letter, you are prepared to certify full compliance. Avoid making any foreclosure threats in communications unless you’ve done the due diligence to back it up.
• Address gaps proactively: If you discover an unlawful practice (e.g. no contact for 3+ years), consider re-engaging with the borrower before starting foreclosure. While the law doesn’t explicitly cure a past violation, demonstrating good-faith efforts now might help. At minimum, you might attempt to resolve the default by a workout or modification, given that a foreclosure in such cases will be uphill. Never proceed to foreclose if the statute of limitations has passed or after issuing a 1099-C for the debt. Those are clear cut violations under AB 130.
• Weigh the judicial foreclosure option: For certain loans with problematic histories, discuss with counsel whether a judicial foreclosure may be more feasible. This won’t eliminate the borrower’s ability to fight, but it does mean the dispute is resolved in one court process rather than a last-minute injunction. Depending on the lien’s value and the severity of any compliance lapses, judicial foreclosure might be worth considering, despite the added time and expense.
• Use attorneys for foreclosure compliance: Given the high stakes (potential perjury and voided sales), it’s wise to involve legal counsel when navigating a second-lien foreclosure. Have an attorney review your certification and the loan’s history. They can help craft the required notice to the borrower and ensure you’ve met every technical requirement. In California’s current environment, don’t try a DIY foreclosure on a junior lien. The risks are simply too high .
• Adjust your lending and investing strategy: Recognize that junior liens in California now carry higher enforcement risk. Some lenders are already pricing in extra risk premiums or even exiting the second-lien market due to AB 130. As a lender originating seconds, you should only do so with robust compliance systems in place. As an investor buying second-note portfolios, perform extra due diligence and consider that some notes might be effectively non-foreclosable if records are missing. In any case, factor in the possibility of legal delays and costs when evaluating returns.
• Maintain open communication with borrowers: One lesson from AB 130 is that maintaining contact can be crucial. Regularly send required statements and perhaps periodic courtesy check-ins. Not only is this good customer service, it can prevent the scenario of a “zombie” loan. If a borrower has fallen silent, document your attempts to reach them. A well-documented record that you tried to communicate could be important if the 3-year issue arises.
• Document everything and be truthful: When it comes time to draft the certification, ensure it is accurate. List any and all known issues. Remember, omitting a violation is dangerous since the borrower could also know of it and could claim you misrepresented the history. It’s better to disclose issues (and then be prepared to address them with the borrower or court) than to risk a perjury accusation.
• Stay informed: This law is new, and its interpretation may evolve. There could be legal challenges or amendments to AB 130 if courts find parts of it problematic or if the legislature revisits the issue. Keep an ear out for any updates or case law that clarify how these requirements play out in practice. Adjust your policies accordingly.

The Big Picture: Proceed Cautiously and Consult Counsel

AB 130 represents a significant shift in California’s foreclosure landscape for junior liens. It was enacted to curb “abusive” second-lien practices and long-dormant loans suddenly triggering foreclosure. A well-intentioned goal to protect homeowners . For lenders and servicers, however, the law means new compliance burdens, higher litigation risk, and potentially slower recoveries on second mortgages. These changes are not to be taken lightly.

If you originate or invest in first deeds of trust, you might be indirectly affected as well: borrowers locked into low-rate first mortgages often turn to second liens for additional funds, but lenders may now be more hesitant to offer those second loans. Industry observers warn that AB 130’s stringent rules could “significantly increase legal costs and risk” for lenders and even have a chilling effect on the availability of junior financing in California. In short, both lenders and borrowers could feel the ripple effects. Borrowers get new protections, but may find fewer willing lenders for seconds.

As a lender, the best way to build trust and confidence with borrowers and regulators is to embrace a culture of compliance and transparency. By diligently following the law’s requirements, communicating with borrowers, keeping thorough records, and certifying honestly, you demonstrate good faith and reduce the chance of foreclosure disputes. While AB 130 makes foreclosing a second lien more complex, it does not make it impossible to enforce your rights, provided you have “clean hands” and follow the proper steps.

Always consult with knowledgeable real estate counsel when dealing with a default on a junior lien in California. Every situation can have unique facts, and legal advice is crucial, especially under this new regime. Remember that this article is a general resource and not a substitute for professional legal counsel.

Laws are always changing, and compliance is an ongoing effort. AB 130 is now in effect, and lenders must adapt to it. By staying informed and working closely with your compliance team or attorneys, you can continue to operate in the California market while avoiding the pitfalls of this new law. Above all, approach second-lien foreclosures with caution, thoroughness, and a commitment to fair servicing. This will serve you well in the eyes of both courts and customers.

Disclaimer: Mayacamas Lending Inc. is not a law firm, and this article is provided for informational purposes only. It is not legal advice. For advice on specific situations or compliance with California law, please consult a licensed attorney. We make every effort to provide accurate information, but laws and regulations may change, and we do not guarantee the completeness or timeliness of the information above.