On June 30, California Governor Newsom signed Assembly Bill No. 130 (“AB130” or the “Bill”). Effective immediately, the Bill added a new section to the California Civil Code to codify that certain actions constitute unlawful practices when taken by a “mortgage servicer” in connection with a subordinate mortgage. The Bill also adds a number of certification and disclosure requirements that mortgage servicers must adhere to in connection with nonjudicial foreclosures of subordinate mortgage loans.  

At the outset, it is important to note that the Bill defines the term “mortgage servicer” broadly to include the current mortgage servicer and any prior mortgage servicers. Thus, the Bills’ requirements—including certifications that a mortgage servicer is required to record in connection with certain foreclosures—cover the activities of both the current servicer of a subordinate mortgage and any prior servicer of that mortgage.

Unlawful Practices for Subordinate Mortgages

Under the newly created Section 2924.13, a “subordinate mortgage” is defined to include a security instrument in residential real property that was, at the time it was recorded, subordinate to another security interest encumbering the same residential real property. The new section does not distinguish between loans for a consumer or business purpose. Pursuant to the new section, the following conduct constitutes an unlawful practice in connection with a subordinate mortgage:

• The mortgage servicer did not provide the borrower, which term is defined to include a successor-in-interest, with any written communication regarding the loan secured by the mortgage for at least three years.
• The mortgage servicer did not provide a transfer of loan servicing notice to the borrower when required to provide that notice by law, including, but not limited to, the federal RESPA and investor or guarantor requirements.
• The mortgage servicer did not provide a transfer of loan ownership notice to the borrower when required to provide that notice by law, including, but not limited to, the federal TILA and investor or guarantor requirements.
• The mortgage servicer conducted or threatened to conduct a foreclosure sale after providing a form to the borrower indicating that the debt had been written off or discharged, including, but not limited to, an Internal Revenue Service Form 1099.
• The mortgage servicer conducted or threatened to conduct a foreclosure sale after the applicable statute of limitations expired.
• The mortgage servicer did not provide a periodic account statement to the borrower when required to provide that statement by law, including, but not limited to, the federal TILA and investor or guarantor requirements.

Nonjudicial Foreclosure Requirements

The Bill also requires a mortgage servicer (or mortgagee, trustee, beneficiary, or authorized agent) conducting or threatening to conduct a nonjudicial foreclosure of a subordinate mortgage to both record a certification regarding the above-referenced unlawful practices and provide notice to the borrower regarding any unlawful practices. Specifically, the mortgage servicer must, simultaneously with the recording of a notice of default, record in the office of the county recorder of the county that the encumbered property is located, a certification under penalty of perjury that either:

• States that the mortgage servicer did not engage in any of the unlawful practices described above; or
• Lists all instances in which the mortgage servicer, and any prior mortgage servicer of the subordinate mortgage, committed an unlawful practice described above.

Importantly, because “mortgage servicer” is defined to include both the current and any prior servicer, the party filing the certification will be certifying, in addition to any actions of its own as mortgage servicer, that (a) none of the prior mortgage servicers engaged in any of the unlawful practices listed above, or (b) it has listed each of such unlawful practices in which any prior mortgage servicer engaged.

The mortgage servicer must also, simultaneously with the service of a recorded notice of default, send the borrower a copy of that certification along with a notice providing 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. The Bill requires the mortgage servicer to send both the certification and the notice to the borrower by United States certified mail with return receipt requested to the last known mailing address of the borrower. Upon a borrower’s petition to the court for relief before the foreclosure sale, the court must enjoin a proposed foreclosure sale pursuant to a power of sale in a subordinate mortgage until a final determination on the petition has been made.

Additionally, a court may provide equitable remedies that the court deems appropriate, depending on the extent and severity of the mortgage servicer’s violations. The equitable remedies may include, but are not limited to, striking all or a portion of the arrears claim, barring foreclosure, or permitting foreclosure subject to future compliance and corrected arrearage claim.

A borrower may also petition the court to set a nonjudicial foreclosure sale aside when a certification described in this section was never recorded or when such a certification indicates that the mortgage servicer engaged in an unlawful practice described above or misrepresented its compliance history.

While most of the provisions of the Bill involve the nonjudicial foreclosure process for subordinate mortgages, the Bill also includes a provision in the new Section 2924.13 establishing that the unlawful practices listed above constitute affirmative defenses in a judicial foreclosure proceeding. Thus, even if the current mortgage servicer has complied with the provisions of AB130, if a prior mortgage servicer did not, the borrower may use that prior servicer’s violation as an affirmative defense in a judicial foreclosure.

Although violating provisions of the Bill may have a number of consequences for both nonjudicial and judicial foreclosure proceedings, failure to comply with the Bill does not affect the validity of a trustee’s sale or a sale in favor of a bona fide purchaser.

Take Aways

AB130 establishes significant requirements for mortgage servicers of subordinate mortgages to move forward with foreclosures in California based on their servicing activities, as well as those activities of the loans’ prior mortgage servicers. While we anticipate legal challenges and requests for an injunction in the short term, given the immediate effectiveness of AB130, prior to moving forward with a foreclosure in connection with a subordinate mortgage in California, servicers should evaluate the loan file for compliance with the elements that could result in an unlawful practice under new Section 2924.13. Servicers also should seek to obtain comprehensive records of any prior mortgage servicer’s activities in connection with the loan to evaluate adherence to these requirements. We also recommend monitoring developments in individual foreclosure actions as the California courts interpret these new provisions.