AB 238 creates a California statutory forbearance program tied to the January 2025 Eaton/Palisades wildfires and related straight-line winds. It lets eligible homeowners request disaster-related forbearance, requires servicers to grant an initial 90-day pause and to extend in 90-day increments up to 12 months total, and prohibits certain foreclosure actions while a borrower is complying with the forbearance.
The bill matters because it overlays state requirements onto existing federal servicing regimes: it prescribes application windows, decision timelines, credit-reporting options during a forbearance, and mandatory borrower disclosures, but it also shields servicers from liability when federal or investor servicing guidelines make compliance impossible. That combination creates operational obligations for servicers and practical protections — and limits — for borrowers.
At a Glance
What It Does
AB 238 lets wildfire-affected borrowers request forbearance and requires servicers to offer an initial 90‑day forbearance, extendable in 90‑day increments up to 12 months. It sets application and notice deadlines, prevents late fees and default interest during the forbearance, and prevents foreclosure actions while a borrower is performing under the plan.
Who It Affects
The law applies to depository institutions and licensed mortgage servicers and subservicers regulated under California’s Financial Code and Business and Professions Code, as well as natural‑person borrowers with residential mortgages on properties of one to four units within the defined disaster. It also directs the Department of Financial Protection and Innovation (DFPI) to publish guidance and a help line.
Why It Matters
AB 238 creates a time‑limited state remedy tied to a specific disaster that interacts with federal servicer handbooks and investor contracts. For compliance officers and servicing operations teams, it imposes concrete timelines, disclosure obligations, and credit‑reporting rules while preserving a narrow immunity where federal or investor servicing rules would conflict.
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What This Bill Actually Does
The bill starts by defining who counts as a borrower and which loans are covered. ‘‘Borrower’’ excludes people who surrendered the property or who had a recorded notice of default before the wildfire unless that notice was rescinded. Covered loans are residential mortgages on properties with up to four units; ‘‘federally backed’’ loans are identified by reference to existing federal programs.
To access relief, an eligible borrower must submit a request to their mortgage servicer and affirm wildfire‑related hardship. The filing window closes on the earlier of six months after the state emergency ends or January 7, 2027, so the deadline is fixed even if the emergency remains in effect for a long time.
Once a borrower asks, the servicer must offer an initial 90‑day forbearance and allow extensions in 90‑day increments to a cumulative maximum of 12 months.The bill builds in operational guardrails. Servicers must notify borrowers within 10 business days whether the request is approved; where a submission has curable defects the servicer must identify them, give the borrower 21 calendar days to fix them, accept a revised submission during that period, and respond to revisions within five business days.
While a forbearance is in effect, the servicer cannot charge late fees or apply a default rate of interest, and it must not commence foreclosure or related eviction or sale if the borrower is performing under the forbearance.On credit reporting the statute follows the Fair Credit Reporting Act but gives servicers two discrete options for accounts in disaster relief: report the account as current, or, if the account was delinquent before the forbearance, keep that delinquency status during the plan but report it as current if the borrower brings the account current during the forbearance. The bill also requires a one‑time disclosure that forborne payments must be repaid and forbids requiring a lump sum payment for borrowers who were current when entering forbearance.
Finally, the text carves out that servicers are not liable under this title where compliance is impossible because it conflicts with applicable federal or investor servicing guidelines, and it tasks DFPI with publishing links, guidance summaries, and a help line.
The Five Things You Need to Know
Borrowers must file for forbearance by the earlier of six months after the state emergency ends or January 7, 2027.
Servicers must grant an initial 90‑day forbearance and extend it in 90‑day increments up to a 12‑month maximum.
Servicers must notify a borrower of approval or denial within 10 business days and must provide a 21‑day cure window for curable application defects, with a five‑business‑day response to revised submissions.
During an approved forbearance the servicer cannot assess late fees or apply a default interest rate, and may not initiate foreclosure or eviction actions while a borrower is complying with the forbearance.
For credit reporting during the forbearance, servicers must either report the account as current or preserve a pre‑disaster delinquency (but report it current if the borrower brings the account current during the forbearance).
Section-by-Section Breakdown
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Definitions and scope of the disaster
This section sets the statutory vocabulary: who is a ‘‘borrower,’’ what counts as a ‘‘residential mortgage loan,’’ and which specific wildfire events trigger the title (the Governor’s Jan 7, 2025 state of emergency and the federal DR‑4856‑CA declaration). Two important exclusions are spelled out: borrowers who have surrendered property and borrowers with a recorded notice of default predating the disaster (unless rescinded). Those exclusions narrow eligibility and will matter in close cases where ownership status or prior defaults are ambiguous.
Covered institutions
AB 238 applies to federally or state‑chartered depository institutions, entities licensed under specified divisions of the Financial Code, and licensees under a division of the Business and Professions Code. That captures mainstream banks, mortgage lenders and servicers, and many licensed nonbank servicers and subservicers, so compliance obligations will reach both bank and nonbank servicing operations.
Application process, timelines, and decision rules
This substantive core requires a borrower to submit a hardship affirmation and gives the servicer an operational playbook: an initial 90‑day forbearance, automatic extension mechanism up to 12 months total, and a 10‑business‑day deadline to notify the borrower of approval or denial. If a servicer cites curable defects it must identify them, provide 21 calendar days to cure, accept revised submissions during that window, and respond to revisions within five business days—tight timelines that will require process changes for many servicing shops.
Repayment disclosure and lump‑sum prohibition
Servicers must give a single written disclosure at the start of forbearance that forborne payments must be repaid. For borrowers who were current when entering forbearance, the law expressly prohibits requiring a lump‑sum payoff as the repayment method, leaving flexibility for alternatives (e.g., repayment plans, loan modification, capitalization), though the statute does not prescribe specific repayment mechanics.
Limited foreclosure moratorium while performing
While a borrower is performing under the forbearance terms, servicers cannot start judicial or nonjudicial foreclosure, move for a judgment or sale order, or execute a foreclosure‑related eviction or sale. The protection is conditional: it applies only while the borrower is complying with the forbearance schedule, which makes tracking ‘‘performing’’ status operationally important for servicers and borrowers alike.
Conflict safe harbor for federally backed and investor‑governed loans
The statute provides a nonliability rule where compliance with AB 238 would conflict with federal servicing guidelines or investor obligations, as those guidelines existed on January 13, 2025. ‘‘Conflict’’ is defined narrowly — where it is impossible to comply with both — so servicers may invoke this safe harbor but will need to document the impossibility. The provision intentionally references specific federal handbooks (Fannie Mae, Freddie Mac, FHA, VA, USDA) to limit the inquiry to those established standards.
DFPI duties to publish resources
The Department of Financial Protection and Innovation must host links to federal servicing provisions for disaster forbearance, a plain‑English summary of Fannie/Freddie guidance, and a dedicated phone line for borrower assistance. That central resource aims to help consumers navigate overlapping federal and state relief options but will require DFPI resource allocation and ongoing maintenance to remain current.
Severability and procedural note on trustee sales
The bill includes a severability clause to preserve remaining provisions if a court invalidates any part. Separately, another provision (3273.26) states that failure to comply with the title ‘‘shall not affect the validity of a trustee’s sale or a sale to a bona fide purchaser for value,’’ meaning procedural violations under the statute do not automatically invalidate completed trustee sales — a consequential limitation on post‑sale relief for borrowers.
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Explore Housing in Codify Search →Who Benefits and Who Bears the Cost
Every bill creates winners and losers. Here's who stands to gain and who bears the cost.
Who Benefits
- Homeowners directly impacted by the January 2025 Eaton/Palisades wildfire events who retain title and meet the borrower definition — they gain a statutory, time‑limited pathway to pause payments for up to 12 months and an assurance that servicers cannot pursue foreclosure while the borrower complies.
- Borrowers who were current when entering forbearance — the law forbids requiring a lump‑sum repayment from this group, increasing practical access to manageable repayment options.
- Consumer assistance organizations and legal aid groups — DFPI’s mandated central resources and hotline make it easier to triage cases and provide consistent counseling to wildfire‑affected homeowners.
Who Bears the Cost
- Mortgage servicers and subservicers — they must build or adapt intake processes to meet 10‑business‑day and 5‑business‑day turnaround rules, manage 21‑day cure workflows, maintain credit‑reporting choices, and track ‘‘performing’’ status to avoid wrongful foreclosure starts. Those operational changes carry implementation and training costs.
- Investors and loan owners — while the statute affords a safe harbor where federal or investor guidelines conflict, investors still face potential cash‑flow and credit performance implications from extended forbearances and may need to approve servicing exceptions or modifications.
- State regulator DFPI — tasked with publishing guidance and operating a dedicated phone line, DFPI will absorb administrative costs and must keep published links and summaries accurate against evolving federal guidance.
Key Issues
The Core Tension
AB 238 tries to reconcile two legitimate goals — giving wildfire‑impacted homeowners time to recover and preserving servicers’ ability to follow binding federal or investor servicing rules — but the result is a compromise: strong procedural timing and short‑term protections for borrowers on paper, paired with narrow immunity for servicers where those protections collide with preexisting servicing obligations, and limited post‑sale remedies for affected homeowners.
Two implementation frictions stand out. First, the ‘‘conflicts with’’ safe harbor is defined as impossibility to comply with both state and applicable federal or investor servicing guidelines; that narrow standard creates room for dispute.
Servicers will be incentivized to document why compliance is impossible, and borrowers or advocates will contest narrow invocations of the safe harbor. That will shift many disputes into record‑keeping fights and could produce uneven access to forbearance depending on how conservatively servicers interpret investor handbooks.
Second, the statute leaves important repayment mechanics unspecified. It requires a one‑time disclosure that forborne amounts must be repaid and bars lump sums for borrowers who were current at entry, but it does not mandate repayment schedules, prohibition on capitalization, or a required path (e.g., forbearance followed by modification).
Combined with the clause that failure to comply ‘‘shall not affect the validity of a trustee’s sale,’’ the bill creates a practical enforcement gap: a borrower who loses a trustee sale despite a servicer’s statutory lapse may face limited remedies. Both issues raise questions about whether the protections will produce predictable, enforceable outcomes for distressed homeowners.
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