"I read it to mean that we would be require to disclose the fee. RESPA and Regulation X define settlement as a process, not a time-specific event and that the fee should be disclosed on HUD & HUD1A line 1201 as an estimate but would need to be disclosed before we could begin charging it."
You said that this was going to be a fee charged at pay-off. This is a subsequent event and would not be reflected on the HUD-1 as it is not part of the settlement transaction. If your loan contract supports the fee, you can charge it. It would be no different than other future requirements, such as paying their insurance or taxes annually.
"Also, it is easier to get these fees up front rather than trying to chase it down when the loan is paid off."
On this specific fee I disagree. If you collect a fee for the release of the lien at the time the loan closes, what are you going to do with it? You can't take it into income as it is slated for a future event and you would have to hold the fee in an in-process account until the lien was released. Reconciling this account would be a nightmare. I also believe it would be a finance charge at account origination, as the fee was not being paid to a public official (it could be more or less at the time of pay-off).
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