Governor Signs Subordinate Loan Legislation - Effective Immediately

Governor Gavin Newsom has signed Assembly Bill 130 into law, a sweeping measure that enacts a number of significant policies relating to housing, as part of a negotiation with lawmakers over the state’s budget.

Among many other changes, the law places new restrictions on lenders’ ability to foreclose on subordinate mortgages.

The new law, which takes effect immediately as a budget trailer bill, targets what proponents of the legislation have called “abusive” foreclosure practices in the secondary lending market. Under the measure, lenders and mortgage servicers will be prohibited from foreclosing on a second mortgage unless they first provide a sworn certification that they have maintained proper communication with the borrower.

Specifically, the law makes it illegal to pursue foreclosure if a borrower hasn’t received any communication from the servicer for at least three years. To proceed, the lender must record and serve a signed declaration under penalty of perjury detailing whether such unlawful practices occurred. This declaration must be recorded at the same time as the formal Notice of Default and served on the borrower.

The law was opposed by a coalition of mortgage and real estate related-industries, including the California Land Title Association, which warned that the requirements under the bill are so strict that they may effectively make it impossible to enforce second mortgages, potentially cutting off access to home equity financing for many California homeowners.