What California AB 130 Means for Second Lien Note Investors

If you invest in second-position notes or any subordinate liens in California—this new law is a must-know.

California Assembly Bill 130, signed June 30, 2025, adds strict new requirements to non-judicial foreclosures on junior liens such as:

1. Second trust deeds
2. Home Equity Loans
3. HELOCs
4. Seller carryback second liens (like the 80/10/10)
5. Bridge loans

This law isn’t just about lender oversight—it has direct consequences for note investors buying in the secondary market.

Before we dive in, I’d like to acknowledge the power of community. I was inspired to write this article after Sri Gandla of Fairworth Investments brought up the timely topic at our recent Note Investing Tools Mastermind meeting.

Now, on to unraveling how these new borrower protections could affect your ability to enforce second-lien notes

The Law at a Glance: CA Assembly Bill 130

AB 130 creates California Civil Code § 2924.13, which says a lender or servicer cannot proceed with a foreclosure on a junior lien if any of the following occurred at any time during the life of the loan:

1. There has been no communication with the borrower for over 3 years
2. Failure to provide monthly statements
3. Missing notices of loan servicing or ownership transfers (under RESPA or TILA)
4. Attempting foreclosure after issuing a 1099-C (cancellation of debt)
5. Trying to foreclose or threatening to foreclose after the statute of limitations has expired

Even one misstep by a previous servicer could put you at risk—whether or not you caused it.

Before Foreclosing, Here’s What’s Now Required

To move forward with a non-judicial foreclosure, the current servicer, beneficiary, or trustee must:

1. File a certification, under penalty of perjury, that a) no prohibited acts occurred (even by previous servicers) or b) list all instances of violation.
2. Mail a copy of the certification to the borrower via certified mail.
3. Include a borrower’s rights notice that explains when they have the right to challenge the foreclosure in court.

Miss a step? The borrower can sue—or even undo the foreclosure sale entirely.

Here’s an excerpt from the bill that would keep most note investors up at night:

“(f) The 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.”

Why This Hits Junior Lien Holders Hard

If you’re buying or holding second-position notes in California, here’s what to watch for:

1. You inherit servicing risk

Even if you weren’t the original lender, you or your agent must vouch that no servicer ever violated § 2924.13. That includes entities that may be out of business or failed to document transfers properly.

2. Certification carries legal weight

You’re signing under penalty of perjury. That means any error—accidental or not—can have legal consequences.

3. Foreclosure delays or reversals

If you foreclose without full compliance, borrowers can file to stop or reverse the foreclosure—even after a sale.

4. Reduced market value

Investors may discount or avoid second liens in California altogether. Some institutional lenders already plan to exit the space.

What Should 2nd Lien Note Buyers in CA Do Now?

Note investors are adjusting their due diligence and pricing strategies to factor in these new risks.

• Review servicing records – Confirm statements, notices, and borrower contact occurred properly.
• Ask for servicer history – Find out who handled the loan before and what documentation is available for the full life of the note.
• Work with audit experts – Services like ProTitleUSA can help flag red flags in the loan history.
• Price for risk – Adjust yield expectations to account for compliance uncertainty.
• Use attorneys for due diligence & foreclosure – The stakes are higher; don’t DIY in California.

Why Property Owners Could Feel the Squeeze Too

While AB 130 directly targets lenders and note holders, property owners in California may feel the ripple effects of this legislation. Many homeowners rely on second-lien financing—like HELOCs or bridge loans—to access equity without refinancing low-interest first mortgages.

With lenders now facing higher legal exposure, access to these funds may tighten dramatically. That means fewer options for home improvements, business startups, debt consolidation, or covering life events.

Investors who flip or develop properties may also find fewer lenders willing to provide flexible gap funding, which could slow down transactions and cool parts of the housing market.

Bottom Line and Some Personal Thoughts

Some may argue that AB 130 was well-intentioned – it aims to protect borrowers from abusive second-lien practices and address dormant “zombie mortgages” that are resurfacing. However, that protection may end up depriving borrowers of the ability to even obtain a home equity loan.

Many homeowners, especially those lucky enough to have locked in a sub-4% first mortgage, turn to second liens to tap into their home’s equity without refinancing the entire balance at today’s higher rates. They only pay the current higher interest rates on the smaller, second-lien amount. But if junior lien lenders exit the market due to increased legal and servicing risk, borrowers will face fewer options and likely higher costs from the few lenders that remain.

That so-called protection could start to feel more like shackles on their equity.

It’s also creating real exposure for lenders and private note investors purchasing existing second liens as legitimate debt on the secondary market. According to reporting by ProTitle USA, there are already lawsuits in the works to protect their creditor rights. And industry groups, such as the California Mortgage Association, have voiced strong opposition, including this video plea from lobbyist Mike Belote.

Personally, we prefer investing in performing first liens – and we already avoid California due to its extensive regulations and debtor-friendly tendencies (which is ironic considering it is a Deed of Trust non-judicial state). But regardless of whether you currently invest in California second liens or not, it remains concerning for all note investors. Why? What happens in one state could take hold in other states.