On June 30, 2025, California Governor Gavin Newsom signed AB 130 into law, creating immediate and substantial new requirements for lenders foreclosing on subordinate liens secured by residential real property. This legislation adds yet another layer of complexity to California’s already intricate foreclosure landscape—and unlike previous COVID-era protections, AB 130 extends through a lengthy enforcement period with severe penalties for non-compliance.
Lenders holding junior position liens on California residential properties must understand these requirements immediately. The law took effect July 1, 2025, and applies retroactively to conduct occurring before enactment—creating compliance obligations for existing servicing practices that lenders could not have anticipated.
Scope of Application: Which Loans AB 130 Affects
AB 130 applies to a specific subset of loans, but the scope remains broader than many lenders initially recognize.
Junior Lien Requirement
The law applies exclusively to subordinate liens—any lien junior to another encumbrance on residential property. This includes:
- Second position deeds of trust
- Third, fourth, or any position junior to first
- Cross-collateralized loans where some properties secure in subordinate position
- Wraparound mortgages in junior position
Importantly, lien position is determined at time of recording. A loan originated in second position remains subject to AB 130 even if the senior lien later pays off, leaving the previously junior lien in first position.
Residential Property Requirement
AB 130 covers subordinate liens secured by residential real property—one-to-four unit residential properties regardless of property use. This includes:
- Single-family residences
- Duplexes, triplexes, fourplexes
- Condominiums
- Investment properties
- Rental properties
- Vacant residential properties
Commercial properties remain exempt, but mixed-use properties create uncertainty—conservative practice suggests compliance when any residential component exists.
Business Purpose vs. Consumer Purpose
Unlike many California lending laws, AB 130 makes no distinction between business purpose and consumer loans. Both are equally subject to these requirements when secured by residential property in junior position.
Borrower Definition
The statute defines “borrower” to include successors in interest. This expansive definition means compliance obligations extend to conduct affecting not only current borrowers but also predecessor owners—creating challenges when servicing transferred loans.
The Certification Requirement: Core Compliance Obligation
AB 130’s central requirement mandates that junior lien holders record and mail a “Certificate of Compliance” before conducting or threatening non-judicial foreclosure.
What the Certificate Must Contain
The certificate must declare, under penalty of perjury, that the lender or servicer has not committed specified “unlawful practices” regarding loan servicing. These unlawful practices include:
Communication Failures
Failing to communicate in writing with the borrower (including predecessors in interest) within the past three years. This requirement applies regardless of whether loan documents required such communication.
Servicing Transfer Notice Violations
Failing to provide required notices when loan servicing transfers occurred. While these requirements technically apply only to consumer loans under RESPA and Regulation X, borrowers will likely allege violations regardless of loan purpose.
Ownership Transfer Notice Violations
Failing to provide notice when beneficial ownership of the loan transferred. Again, these requirements traditionally apply to consumer loans, but the statute’s broad language invites litigation.
Foreclosing on Discharged Debt
Conducting or threatening foreclosure after debt discharge (bankruptcy discharge, IRS discharge, etc.).
Statute of Limitations Violations
Attempting foreclosure after the applicable statute of limitations has expired.
Statement Failures
Failing to provide periodic account statements when required by law.
When the Certification Must Be Filed
The timing requirement creates a narrow compliance window: the certification must be recorded and mailed before the lender may conduct or threaten non-judicial foreclosure.
“Threatening” foreclosure includes demand letters stating that foreclosure may result from continued default. This prohibition fundamentally changes pre-foreclosure communication—lenders can no longer send customary demand letters warning of potential foreclosure action.
Practical timing for compliance: record the certification immediately before recording the Notice of Default.
To Whom the Certification Must Be Sent
The statute requires mailing to “the borrower”—which, remember, includes all successors in interest. Conservative practice requires mailing to:
- Current property owner/borrower of record
- All previous property owners during the loan term (if addresses can be reasonably obtained)
- Any other parties with recorded interests
This creates substantial practical burdens for purchased loans where prior borrower contact information may be unavailable or incomplete.
Unlawful Practices: Conduct Creating Certification Issues
The certification requirement only creates liability when lenders actually engaged in “unlawful practices”—but the definition of these practices creates retroactive obligations.
The Retroactivity Problem
Conduct lawful when performed became “unlawful” retroactively on July 1, 2025. For example:
This retroactive application creates the law’s most problematic aspect—lenders face penalties for conduct that wasn’t unlawful when performed.
Proving Compliance with Historical Standards
When certifying compliance, lenders must verify not only their own conduct but potentially the conduct of:
- Previous servicers
- Previous lenders (if the loan was purchased)
- Original servicers at loan origination
For purchased loans, obtaining accurate servicer certifications becomes essential—yet prior servicers may refuse to provide certifications about conduct occurring years earlier under standards that didn’t exist when the servicing occurred.
Borrower Remedies: Why Compliance Matters
AB 130 provides borrowers with extraordinary remedies for violations—making compliance essential for foreclosure completion.
Petition to Undo Completed Foreclosure
Borrowers may petition courts to set aside (undo) completed non-judicial foreclosure sales if:
- No certification was recorded
- The certification contained material misrepresentations about compliance history
- The servicer committed unlawful practices
This remedy exists even after foreclosure completes and the property sells to a third party at auction—subject to the bonafide purchaser exception discussed below.
Mandatory Temporary Restraining Orders
If a borrower files a petition challenging the foreclosure based on AB 130 violations, courts must issue temporary restraining orders halting the foreclosure sale. The statute’s language is mandatory—not discretionary.
Previously, borrowers requesting TROs faced burden of proof demonstrating irreparable harm and likelihood of success. AB 130 eliminates this analysis: if a borrower makes allegations suggesting AB 130 violations, the TRO issues automatically.
The TRO remains in effect “until a final determination on the petition has been made”—language creating uncertainty about whether this means after hearing on preliminary injunction, after trial, or some other milestone.
Additional Court Powers
Beyond mandatory TROs, courts may impose “additional measures” as appropriate, including:
- Modifying the amount of arrears owed
- Eliminating interest or penalties
- Requiring compliance with other conditions before allowing foreclosure
- Any other relief courts deem appropriate
These broad powers create significant uncertainty about potential outcomes once borrowers invoke AB 130 protections.
Bonafide Purchaser Exception
AB 130 does not allow borrowers to undo foreclosure sales to bonafide purchasers for value. This exception protects third parties who purchase properties at legitimate foreclosure auctions.
However, if the foreclosing lender retains the property after foreclosure (no third-party bidder), the borrower may petition to undo the sale. This creates strategic considerations for credit bidding and property retention.
Practical Compliance Strategies
For Current Foreclosures Already Initiated
Lenders with foreclosures initiated before July 1, 2025, face strategic decisions:
For New Foreclosures
- All written communications sent to borrowers over the past three years
- Servicing transfer notices (if applicable)
- Ownership transfer notices (if applicable)
- Periodic account statements provided
For Ongoing Servicing
Special Situations Requiring Additional Analysis
Cross-Collateralized Loans
When a single loan secures multiple properties in different lien positions, AB 130 creates complex compliance questions:
- Does the entire loan become subject to AB 130 if any property is in junior position?
- Can the lender foreclose on first-position properties without certification?
- How does certification work when some properties are residential and others commercial?
These scenarios require case-specific legal analysis before proceeding.
Senior Lien Default Scenarios
Junior lenders facing senior lien foreclosures must act quickly to protect their positions—yet AB 130 delays junior lien foreclosure by requiring certification first.
Consider strategies including:
- Curing senior defaults to prevent foreclosure
- Purchasing senior liens (without paying off to preserve first position status)
- Entering tri-party agreements with senior lenders and borrowers
Simply buying out the senior lien doesn’t help—the loan remains junior for AB 130 purposes because lien position is determined at origination.
Loan Sale Considerations
AB 130 significantly impacts junior lien loan sales:
Conclusion
AB 130 represents yet another escalation in California’s multi-year expansion of foreclosure regulation. Unlike previous measures with sunset provisions or limited scope, AB 130 applies broadly to all junior liens on residential properties and creates compliance obligations extending years into the past.
The retroactive nature of “unlawful practices”—making previously lawful conduct now actionable—creates particular unfairness. Lenders who purchased loans years ago with no servicing deficiencies under then-applicable law now face certification challenges based on conduct that was entirely appropriate when performed.
Lenders holding junior liens on California residential properties must immediately: 1. Assess current portfolio for AB 130 applicability 2. Implement prospective servicing practices supporting future certifications 3. Collect historical servicing documentation for loans approaching default 4. Develop systematic compliance protocols for foreclosure initiation 5. Engage qualified California foreclosure counsel before commencing foreclosures
AB 130 will generate substantial litigation as borrowers exploit certification requirements to delay foreclosures and courts interpret ambiguous statutory language. Early compliance and conservative interpretations provide the best protection until case law clarifies enforcement standards.
For guidance on AB 130 compliance, foreclosure procedures, or California lending regulations, contact Geraci LLP’s Litigation & Bankruptcy Practice Group.
