When I bought my boat nearly 20 years ago, it was registered with the California Department of Motor Vehicles. The boat has a six-digit number engraved on a bulkhead in the engine room, and I am informed that this is probably an old Coast Guard documentation number that must have been used by a prior owner. I have applied for a loan that will be secured by the boat, and the finance company has indicated that it will require the boat to be Coast Guard documented. I am a little confused by this process, and I am hoping that you can shed some light on it. First, why is the lender requiring Coast Guard documentation? Are there any advantages or disadvantages to Coast Guard documentation? If the boat is re-documented, what needs to be done with the California registration paperwork? Will this cause the county to reassess the value of the boat for property tax purposes? What about sales or use tax assessed by the state?
Our reader is asking a lot of good questions about the differences between Coast Guard documentation and state registration of a vessel, but he can relax. The differences between the two systems and the procedures for switching between the systems are very straightforward.
First, for a boat that is moving from California registration to Coast Guard documentation, the California registration paperwork and the pink slip are surrendered to the Coast Guard to establish proof of ownership for the vessel. The paperwork is submitted along with a form that provides information about the owner.
When a lender is involved, the lender usually handles the paperwork, since it will be recording a mortgage at the time the documentation is issued. And, when the boat has been previously documented, the old Coast Guard official number will be re-assigned to the vessel.
Next, a change of registration systems is not a sale, so there is no assessment of sales or use tax. Similarly, the new registration has no effect on the value of the vessel, so the change will have no effect on the annual property tax assessment.
The most important question posed by our reader is why the lender requires the boat to be documented. The simple answer is that the vessel is not adequately secured as collateral for the loan unless it is documented.
For a California-registered boat, the lender is named as the “legal owner” of the vessel on the registration and title, in the same manner as a lender is identified on the title for a car. This establishes the lender’s right to repossess the boat in the event of a default by the owner, but it does not protect the lender against competing creditors who are asserting liens against the same boat.
A mortgage against a vessel is not technically a maritime lien, because the loan does not provide a service to the vessel. Instead, the loan is an obligation that is related to a benefit (usually in the form of money) provided to the vessel owner — and under maritime law, a lien against a vessel must relate to a service provided directly to the vessel. Since it is not a maritime lien, it would be junior to legitimate maritime liens in the event of a default where the claims against the vessel exceed its value.
In recognition of this issue, in 1920, the U.S. Congress passed the Federal Ship Mortgage Act, which provided senior lien status to properly recorded vessel mortgages, even though they were not technically maritime liens. This is a federal law and, as such, it does not affect state-registered vessels.
Since the vessel must be documented to fall under the lender-protections of the Ship Mortgage Act, lenders invariably require vessels to be documented.
Finally, our reader asked about the advantages and disadvantages of Coast Guard documentation, from the viewpoint of the boat owner. In fact, Coast Guard documentation provides little immediate benefit to the boat owner.
Some people speculate that documentation may provide some benefit for boats that travel internationally. This may be true, since foreign customs agents are more familiar with the documentation paperwork than they are with state-registration paperwork. But from a legal standpoint, it makes no real difference.
Another benefit to the owner may be the title history maintained by the Coast Guard. State registration systems do not provide a way to report the title history of a vessel, whereas the history is available from the Coast Guard and reported on its Abstract of Title form.
With all of this in mind, it’s clear that our reader has little choice, since his lender is requiring him to document the boat. But once the documentation paperwork has been submitted to the Coast Guard, he is unlikely to notice any difference between the two registration systems.