California Enacts Law Targeting Servicing and Foreclosure of So-Called “Zombie” Second Mortgages
On June 30, 2025, California Governor Gavin Newsom signed into law Assembly Bill 130, which adds Section 2924.13 to the California Civil Code and targets so-called “zombie” second mortgages. Applicable to “mortgage servicers”, which are defined to include the current mortgage servicer, and any prior mortgage servicer, the law imposes various requirements for subordinate-lien residential mortgage loans. The new provisions create significant compliance issues and are effective immediately.
Unlawful Practices
The new provisions define certain “unlawful practices” by a mortgage servicer (again, including any prior servicer) in connection with a subordinate-lien residential mortgage loan, including:
Failure to provide any written communication regarding the subordinate mortgage for at least 3 years;
Failure to provide a servicing transfer notice when required by RESPA/Reg. X, investor requirements, or other applicable law;
Failure to provide a loan ownership transfer notice when required by TILA/Reg. Z, investor requirements, or other applicable law;
Conducting or threatening to conduct a foreclosure sale after providing a form to the borrower indicating that the debt has been written off or discharged, including but not limited to an IRS Form 1099;
Conducting or threatening to conduct a foreclosure sale after expiration of the applicable statute of limitations period;
Failure to provide a periodic statement when required by TILA/Reg.Z, investor requirements, or other applicable law.
Compliance Certification
The law provides that a nonjudicial foreclosure cannot be conducted or threatened until the servicer, mortgagee, trustee, beneficiary, or authorized agent completes both of the following:
Along with the notice of default, recording a certification under penalty of perjury that either:
The mortgage servicer did not engage in an unlawful practice as defined above; or
The mortgage servicer lists all instances when it committed an unlawful practice as defined above.
And
Along with recording the notice of default, sending both of the following documents by certified mail:
A notice stating that if the borrower believes the mortgage servicer engaged in an unlawful practice or misrepresented its compliance history, the borrower may petition the court for relief before the foreclosure sale; and
A copy of the recorded certification described above.
Defense to Foreclosure
The law also provides a range of borrower remedies for nonjudicial and judicial foreclosures:
If a borrower petitions the court for relief before a foreclosure pursuant to a power of sale, the court shall enjoin the foreclosure until a final determination has been made.
In a judicial foreclosure, the borrower has an affirmative defense to foreclosure if the court finds that the mortgage servicer engaged in any of the unlawful practices defined above.
A court may provide equitable remedies as it deems appropriate, which may include striking all or a portion of the arrears claim, barring foreclosure, or permitting foreclosure subject to future compliance and corrected arrearage claim.
In a nonjudicial foreclosure, a borrower may petition the court to set aside the sale: (1) if the certification described above was never recorded, (2) when the recorded certification indicates that the mortgage servicer engaged in any of the unlawful practices defined above, or (3) if the borrower believes there was a misrepresentation of the compliance history.
Finally, the law protects the validity of a trustee’s sale or a sale in favor of a bona fide purchaser.
* * *
Again, this law is effective immediately. It is critical for servicers to implement these new foreclosure procedures, and to review files for evidence of required communications and other criteria for this new class of “unlawful practices”. These considerations must also be incorporated into diligence reviews and servicing transfer procedures for subordinate-lien mortgages going forward. Finally, servicers should consider their foreclosure strategies, in light of these new provisions.
If you have any questions or would like to discuss these issues, please contact Reid Herlihy.
Download a PDF of this article here.
About The Authors
Reid Herlihy is a nationally recognized lawyer for regulatory compliance, enforcement, and transactional matters, with a particular focus on mortgage servicing and collections. He represents mortgage servicers, lenders, debt collectors, consumer finance companies, financial institutions, investment banks, and secondary-market investors.
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