Are Discharge Tracking Fees a Finance Charge?
When a mortgage is paid off, a discharge needs to be filed in the registry where the mortgage was recorded. The registry of deeds exists and its records are public to give notice to any subsequent creditor that a lien exists on a piece of property, so that the creditor isn’t making a loan on something that is already encumbered by another lien. It’s a notice system, and so when a mortgage is paid off a discharge is filed to let other creditors know that the previous obligation and security interest no longer exists. Without a discharge being recorded, creditors assume the obligation is still outstanding on the mortgage.
Sometimes things fall through the crack and discharges aren’t filed though, even when the loan is paid off. Some attorneys and other third-parties will sometimes charge a “discharge tracking fee” on a loan. This is to “track, obtain, and record” discharges. If a creditor is making a loan to purchase or refinance a mortgage, it wants to make sure it gets first-lien priority by ensuring any previous mortgages have a discharge recorded with them.
Is this a finance charge though? There are arguments for and against considering it a finance charge.
Arguments for:
A finance charge is the cost of consumer credit. The regulation says finance charges “includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit.” It also does not include any “charge of a type payable in a comparable cash transaction.” Or, in other words, if it was being bought with cash instead of through a loan, what charges would still need to be paid? Things like taxes, recording fees, etc.
Mandatory third-party fees also count towards finance charges, even if the consumer can choose the third party.
Discharge tracking fees are mandatory third-party fees that would not be incurred in a comparable cash transaction. In addition, a bankruptcy case in Massachusetts, In re Acevedo, 476 B.R. 360 (2012) assumes that a discharge tracking fee is a finance charge, but does not go into a substantive discussion about whether it truly is a finance charge.
Arguments Against:
On the other hand, 12 CFR § 1026.4(c)(7) excludes from finance charges (i) “Fees for title examination, abstract of title, title insurance, property survey, and similar purposes,” and (ii) “Fees for preparing loan-related documents, such as deeds, mortgages, and reconveyance or settlement documents.” An unrecorded discharge can certainly have an effect on the title to property, so option (i) is plausible as a “similar purpose.” More convincing, in my opinion, is that a fee to “obtain, track, and record” discharges is a “fee for preparing loan related documents” as a discharge indicated the termination of a loan obligation.
Really, either argument can be made in good faith, and not all fees are created equal. In my humble opinion though, the safe approach if you have the choice is to include the discharge tracking fee as a finance charge.