On September 22, 2025, California Gov. Gavin Newsom signed the Mortgage Forbearance Act into law, with an immediate effective date. The law, designed to provide emergency relief to California mortgage loan borrowers impacted by the various wildfires that occurred earlier in 2025, is in many ways reminiscent of the CARES Act forbearance framework from 2020. However, given that it is a state law, it has limitations compared to its predecessor. On the other hand, in situations where it does apply, the Mortgage Forbearance Act imposes additional burdens that will create compliance challenges for servicers.
High-Level Framework
At a high level, the California law will remind servicers of the 2020 COVID-19-era CARES Act forbearance framework. At its core, the act establishes forbearance procedures for any “borrower who is experiencing financial hardship that prevents the borrower from making timely payments on a residential mortgage loan due directly to the wildfire disaster.” To receive forbearance, the borrower must (1) submit a request to the borrower’s mortgage servicer, and (2) affirm “that the borrower is experiencing a financial hardship due to the wildfire disaster.” From there, the borrower may be eligible to receive up to 12 months of forbearance in total, allocated in 90-day increments. While in forbearance, the law prohibits dual tracking and the assessment of late fees and specifies how a servicer should report an account’s status to the credit reporting agencies. Forbearance requests made under the act must be submitted before January 7, 2027, or six months after the state of emergency is terminated, if that date is earlier.
Beyond the CARES Act
While clearly resembling the COVID-19-era forbearance framework, the California Mortgage Forbearance Act goes further than the CARES Act and also governs the back-and-forth interactions between the servicer and the borrower, aspects that were previously only addressed by investor guidelines and Regulation X. The California law specifies, for example, that a servicer must notify the borrower within 10 business days whether a request for forbearance has been approved. If forbearance cannot be offered because the borrower’s request is incomplete or there is a “defect” that is “curable,” the 10-business day notice must specify the “curable defect” and “[p]rovide 21 calendar days from the mailing date of the written notice for the borrower to cure any identified defect.” The servicer must accept any “revised request for forbearance” during the 21-calendar day period and must respond within five business days to any such request that is received.
To further complicate things, if a servicer is unable to approve a borrower’s forbearance request, the servicer must provide a denial notice that includes “the specific reason for denial.” While that concept is already familiar to servicers, the act specifies that the servicer must actually provide “[a] clear and concise explanation of the specific investor provision that is the basis for the denial,” and “[t]he text of the specific investor guideline or contractual provision that is the basis for the denial of the borrower’s forbearance request.”
If a borrower is approved for, and has been granted, wildfire disaster forbearance, the servicer must disclose at the beginning of the forbearance period “that the forborne mortgage payments are required to be repaid.” Moreover, the act prohibits requiring lump sum repayment of forborne amounts if the borrower was current when entering the forbearance period.
While a borrower is in a wildfire disaster forbearance, the Mortgage Forbearance Act will require outreach on the part of the servicer. “No later than 30 calendar days before the end of an initial forbearance period,” the servicer will have to send a written notice specifying “[a]ny documentation or forms” that the borrower must fill out or submit to get additional forbearance, and any applicable deadlines for requesting additional forbearance.
Scope and Applicability
The Mortgage Forbearance Act is an urgency statute under the California Constitution and, therefore, it went into effect immediately upon being passed into law. It generally applies to bank and nonbank mortgage servicers and subservicers of residential mortgage loans, which is defined to mean any loan that is secured by residential real property with one-to-four residential units. The forbearance requirements do not apply, however, to “an individual who has a recorded notice of default recorded against the real property that is secured by the residential mortgage loan before the beginning of the wildfire disaster unless the notice of default was rescinded.”
Finally, and perhaps most importantly, the law specifically states that it does not require servicers to “take any action that would require the mortgage servicer to breach the terms of an existing contract with the investor that owns or insures the residential mortgage loan.” In other words, servicers must still follow applicable investor and insurer guidelines. Additionally, with respect to federally backed loans, the law suggests that a servicer does not have to do anything that would “conflict[] with the servicing guidelines applicable to the federally backed loan.” And for any other non-federally backed loan, servicers do not have to take any action under the California law if it would “conflict[] with the servicing guidelines issued by Fannie Mae or Freddie Mac.” That exemption would apparently apply even when a particular loan is not subject to Fannie Mae’s or Freddie Mac’s guidelines. However, to “conflict[] with” investor or insurer guidelines, it must be “impossible to comply with [the California law] and the person’s obligation under the applicable servicing guidelines.” Practically, this means that the California law will likely supplement existing forbearance and loss mitigation policies.
Questions and Challenges
California’s new law is sure to cause compliance challenges for mortgage servicers. Some of those issues are due to unanswered questions and ambiguities within the law, while others may arise because of how the law interacts with various federal laws. And, of course, the fact that the law was effective immediately upon Gov. Newsom’s signing will mean that servicers lack an appropriate implementation period.
Below are various issues that may arise as servicers attempt to comply with the Mortgage Forbearance Act:
- Investor Guideline Denials – The requirement to disclose actual investor guideline or contractual text in connection with denials is likely to be challenging for many servicers to operationalize, and the consumer benefit likewise appears questionable.
- Credit reporting – The law notes, as a starting point, that servicers must report borrowers in compliance with the Fair Credit Reporting Act (FCRA). However, it then specifies exactly how borrowers are to be reported while in forbearance. For example, the California law says that a servicer “shall not furnish information during the forbearance period indicating that the payments are in forbearance” and, if a borrower was current when entering the forbearance period, the servicer must “[r]eport the credit obligation or account as current.” While the CARES Act amended the FCRA with respect to COVID-19 forbearance reporting, California state law does not have the same effect on federal law for wildfire disaster forbearances. This will lead to questions regarding whether following the state law would comply with the FCRA’s accurate reporting mandate.
- Borrower Outreach – The act requires outreach to the borrower “before the end of an initial forbearance period.” Does that only apply to the first 90-day forbearance? Or does California intend for servicers to be conducting outreach prior to the expiration of each 90-day forbearance period (both the initial period and any 90-day extensions)?
- Lump Sum Repayment Prohibited – The act purports to prohibit lump sum repayment of forborne amounts for borrowers who are current when entering the forbearance period. However, this ignores how a forbearance works, and further, the act does not contemplate or require any type of post-forbearance payment relief. Therefore, it is unclear how servicers can effectuate this provision.
- Loans in Foreclosure – The act exempts loans where a notice of default was recorded before the beginning of the wildfire disaster, which was January 7, 2025. This presumably means that loans where a notice of default was recorded after that date, but prior to the passage of the act in September 2025, are subject to the required forbearance framework.
- Conflicts with Investor Guidelines – A key question for servicers will be whether the California law “conflicts with” applicable guidelines for federally backed loans and, in particular, whether there are any direct and true conflicts with Fannie Mae and Freddie Mac guidelines.
- Interplay with Regulation X – The California law does not completely align with the loss mitigation requirements of Regulation X. Although federal law permits the offering of forbearance when appropriate, the request from the borrower will likely constitute the submission of a loss mitigation application, which will require an acknowledgment letter within five business days. If the request is considered incomplete, California’s new law requires that a servicer give the borrower 21 calendar days to remedy the deficiency. That could conflict with Regulation X’s “reasonable date” framework and the commentary that suggests a reasonable date by which the borrower should return missing information or documentation must never be beyond the next upcoming enumerated milestone, so long as it is seven days or more in the future.
- Immediate Effective Date – The fact that the law immediately became effective on September 22, 2025, unfortunately means that servicers are not afforded an implementation period and, therefore, must be ready to comply as quickly as possible.
In light of these challenges, in the short-term servicers should ensure they have (1) a good grasp of the disaster forbearance options that are available under different investor guidelines; (2) a process in place to capture the information necessary for a borrower to request forbearance under the California law; (3) decision letters go out within 10 business days of receiving a request from a borrower; (4) a mechanism to provide required disclosures upon approval of a forbearance; and (5) appropriate denial verbiage, including actual text from investor guidelines, which can be provided as applicable.