Do colleges automatically get notified (from National Merit or the school) that an applicant has become a Finalist, or do they need to report it themselves in February?
No, it is not automatic. There is not even a press release for finalists. If you want your college to know, you should let them know. That said, most semifinalist progress to finalist.
Yes, you can report – but most will expect it as it’s unusual to not progress.
@amsunshine I think NM scholarship offering colleges do, as I applied to UCF as a NMSF and received a physical award letter from them with info about their own full-ride/Benacquisto for becoming a NMF even though I never contacted them.
^^I’m sure it’s assumed.
ETA: of course, if you apply as a semifinalist, a college knows they should send you info about their award and reminding you to choose them as first choice to get the award. It’s a no brainer for them to send those out as 90% of SF proceed to F.
Many schools purchase the names and contact info of students with high scores from the College Board. They may not know the exact cut off for NM but they have a general idea.
@lkg4answers This was after I had applied to UCF in the Fall, I received the mail with the award letter to sign and send back in the Spring after NMF certificates had been released.
That makes sense @amsunshine but the award letter I was sent had a place to sign to accept the scholarship and had to be sent back to them and everything, so that wouldn’t be too great for a student who didn’t become a NMF but got the auto-sent award letter from UCF about becoming an NMF. 
Assuming that is the case, it makes perfect sense when you understand such a letter is mostly theatrics and a brilliant marketing strategy to make sure all accepted NMFs know about the scholarship and to get as many NMFs to commit to UCF as possible. Signing such a letter from UCF does nothing, by itself, to get anyone the Benacquisto because it’s not a UCF scholarship to give (it’s from the state) and there are explicit rules from both the state of Florida and NMSC that govern how the scholarship is awarded. Even if you had signed the letter, it was express or implied that you would not actually get the scholarship unless you satisfied all those governing requirements (including gaining finalist status and indicating UCF as first choice by the deadline).
Thank you for clarifying @amsunshine !