Lawsuit Filed Against AB 130!

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Summary: On September 8, 2025, a coalition of mortgage lenders and trade groups filed suit in federal court challenging the constitutionality of California’s new law, AB 130. The case, California Mortgage Association v. Bonta, was filed by attorney T. Robert Finlay.

The lawsuit argues that while AB 130 was intended to address so-called “zombie mortgages” (old junior liens that resurface years later), the law goes far beyond that purpose. According to the complaint, the statute “casts a much wider net” that severely limits or eliminates the enforceability of nearly all subordinate liens on residential property in California.

Finlay contends AB 130 violates multiple constitutional protections, including the Contract Clause, Due Process, Takings, and Equal Protection provisions, and is also preempted by federal laws such as the Truth in Lending Act and RESPA. Critics warn the law could effectively wipe out second mortgages in the state, while supporters argue it provides needed protections against abusive foreclosure practices.

What does this mean?

This means that a lawsuit was officially filed to challenge the language within AB 130. The hope, and in my opinion, the correct outcome will result in a massive re-work of the bill with the guidance and input from the mortgage industry.

The fact that such a poorly written bill was rushed into law with essentially no input from industry professionals is both shocking and surprising.

While there is no word yet on an injunction, we will keep our fingers crossed for some relief from what we consider an unconstitutional law.

New Law - AB 130 - Does this kill junior lending?

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Brief Summary of the new law:

California’s new law, AB 130, has major implications for lenders making subordinate loans. The law creates new technical requirements that, if not met, can render a junior lien unenforceable—even for something as small as missing a monthly mortgage statement. This effectively prevents many lenders from foreclosing, even while a senior lienholder may still proceed with foreclosure.

Several major trade groups (CMA, CMBA, CBA, UTA, and the Credit Union League), with support from law firms, are preparing to challenge the law in court and seek an injunction. They are also seeking additional plaintiffs who have been directly impacted, such as lenders who can’t foreclose due to the new rules or those who have decided to stop making subordinate loans in California altogether.

Will this kill junior loans?

No, I don’t think it will. Honestly, after reading through the law, it sounds scarier than it really is. That’s not to say it’s well-written or addresses the correct items, but at least it doesn’t kill Jr. lending.

The new requirements surround the servicing of the loan. So, assuming you have a legitimate loan servicer who will file the new required certification, you should be fine.

However, that doesn’t mean this won’t delay things. The new law is ripe for abuse by ambulance-chasing attorneys and borrowers who like to play games.

While a lawsuit against the new law is pending, we will continue to provide Jr liens as a product for our clients. We have made and will continue to make adjustments to our loan terms to ensure that we continue to provide a favorable product for both our investors and borrowers.

What Next?

We hope the pending lawsuit against CA will prompt the state to recognize that the new law is poorly written and doesn’t effectively address the issue it was intended to solve. It was pushed through too quickly, and its impact extends much farther than intended. We hope that the lawsuit will provide an injunction while the industry attorneys fight the law.

Business purpose loan updates

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As many of you know, private lenders primarily do what is considered to be “business purpose loans”. What is a Business Purpose Loan? A business-purpose loan is a type of financing where the borrowed funds are used primarily for business-related activities rather than personal, family, or household purposes. We operate under the business purpose exemption since it enables us to provide financing with more flexible terms to borrowers who need quick access to capital for business ventures, real estate investments, or other commercial activities. Relying on this exemption ensures that we remain compliant with applicable laws while meeting the specific needs of your business clients.

 

I have been asked many times what we do to prove that our loans are being used for business purposes, so I wanted to elaborate on the process and disclosures we use. 

 

  1. Purpose letter. We get a letter (typically handwritten or on business letterhead) from our borrower on every transaction where they explain what the loan proceeds will be used for. 

  2. We get a “certificate of business purpose” where they describe in bullet point format how the loan proceeds will be broken down to further provide insight in to how the funds will be used. 

  3. We review the loan proceed breakdown at the end of the transaction to be sure a majority of the loan will be used for business purposes. 

  4. We have an additional business purpose affidavit called “Affidavit Regarding Business/Commercial/Investment Loan Purpose” that we have the borrower sign with loan documents AND NOTARIZE to verify completion and understanding. 

  5. Our loan application was specifically built for business purpose loans with additional language added to make it clear we don’t do consumer purpose loans. 

 

These five points ensure that our file is well-documented and clearly for business purposes. 

Legislative Changes

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Governor Newsom has signed Senate Bill 1146, sponsored by the California Mortgage Association, which will take effect on January 1, 2025, to address the usury issues created by the In re Moon decisions. The new law allows any licensed broker to negotiate or arrange a forbearance, modification, or extension of a loan with an interest rate over 10% while retaining the broker exemption from usury caps. This legislative fix comes after the 9th Circuit's Bankruptcy Appellate Panel limited lenders' options in In re Moon, requiring the original broker's involvement in forbearances to maintain the usury exemption, thus constraining lenders trying to help borrowers avoid foreclosure. With judicial appeals unsuccessful, SB 1146 provides a solution by expanding the broker exemption, offering more flexibility for lenders and borrowers alike.

Mortgage Versus Deed of Trust - What is the Difference?

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When it comes to financing a property, there are two common types of agreements that can be used: a mortgage and a deed of trust. While both of these agreements involve borrowing money against a property, there are some key differences between them. In this blog post, we'll explore the difference between a mortgage and a deed of trust and what you need to know about each of them.

What is a Mortgage?

A mortgage is a legal agreement between a borrower and a lender that involves the transfer of an interest in a property from the borrower to the lender as security for the loan. Essentially, the borrower agrees to give the lender a lien on the property in exchange for the loan. This lien is recorded in the county where the property is located and is removed once the loan is paid off in full.

One key aspect of a mortgage is that it involves a two-party agreement between the borrower and the lender. The lender has the right to foreclose on the property in the event of default, but they must go through a judicial process to do so. This process can be lengthy and costly for both parties.

States That Use a Mortgage:

Connecticut, Delaware, Florida, Illinois, Indiana, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Vermont, Virginia, West Virginia, Washington, D.C.

What is a Deed of Trust?

A deed of trust, on the other hand, is a three-party agreement between the borrower, the lender, and a trustee. The borrower transfers an interest in the property to the trustee, who holds it as security for the loan. If the borrower defaults on the loan, the trustee has the power to foreclose on the property and sell it at auction to repay the loan.

One key difference between a mortgage and a deed of trust is the foreclosure process. With a deed of trust, the foreclosure process is typically much faster and less costly than with a mortgage. This is because the trustee has the power to sell the property without going through the judicial process.

States That Use a Deed of Trust:

Alaska, Arizona, California, Colorado, Idaho, Illinois, Mississippi, Missouri, Montana, Nevada, North Dakota, Oregon, Texas, Utah, Washington, Wyoming.

Which is Right for You?

When it comes to choosing between a mortgage and a deed of trust, there is no one-size-fits-all answer. Both options have their pros and cons, and the best choice for you will depend on your unique circumstances including the state of the subject property

As a hard money lending expert, I understand the nuances of both mortgages and deeds of trust and can help you determine which option is right for your specific needs. Whether you're looking to purchase a residential or commercial property, I can provide customized lending solutions that meet your unique needs and help you achieve your real estate investment goals.

Servicing Loans In California

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Servicing a hard money loan in California requires a unique set of skills and expertise that not all lenders possess. While hard money loans are often used as a short-term financing solution, it is still important for lenders to provide quality loan servicing to ensure that the borrower and lender have a positive experience throughout the life of the loan.

Here are some key considerations for servicing a hard money loan in California:

  1. Communication: Open and clear communication is essential for the successful servicing of a hard money loan. It is important for lenders to establish regular communication with the borrower to ensure that they understand the terms and conditions of the loan and to address any concerns or questions the borrower may have.

  2. Payment processing: Accurately processing payments and properly applying them to the borrower's account is a critical aspect of servicing a hard money loan. This includes properly accounting for any fees, late charges, or other costs associated with the loan.

  3. Escrow management: Escrow management is another critical component of servicing a hard money loan. Lenders need to ensure that all taxes, insurance, and other fees related to the property are paid on time and that the borrower's account is properly credited for any payments made.

  4. Loan modifications: In some cases, borrowers may need to modify the terms of their hard money loan. Lenders need to be prepared to work with borrowers to determine if modifications are necessary and, if so, to ensure that the modifications are properly documented and communicated to all parties involved.

  5. Compliance: Finally, lenders need to ensure that they are in compliance with all state and federal laws and regulations governing hard money loans in California. This includes properly disclosing all fees and charges associated with the loan and ensuring that the loan documentation meets all legal requirements.

In conclusion, servicing a hard money loan in California requires a comprehensive understanding of the unique challenges and requirements of this type of lending. Lenders who prioritize clear communication, accurate payment processing, proper escrow management, effective loan modifications, and regulatory compliance are well-positioned to provide quality service and support to their borrowers, ultimately maximizing returns and mitigating risk for both the borrower and the lender.

Contact Jeff today to discuss options for servicing your hard money loans.