FCUs Are Subject to New York's Mortgage Recording Tax

The Court of Appeals for the State of New York ruled that Hudson Valley FCU is subject to the mortgage recording tax.

Hudson Valley asserted that it was not required to pay the mortgage recording tax (MRT) on mortgage obligations issued to members because (1) the Federal Credit Union Act (FCUA) exempts federal credit unions and their property from state taxation and (2) as instrumentalities of the United States, federal credit unions are immune from state taxation under the Supremacy Clause.

However, the Court wrote "if federal credit union mortgages were intended to be excluded from state MRTs, such immunity would have been plainly stated in the FCUA. Instead, although the FCUA contains an extensive list of exemptions relevant to federal credit unions, it makes no mention of mortgages or loans of any kind."

The Court disagreed with Hudson Valley that the mortgage recording tax "is tantamount to an illegal direct tax on the credit unions themselves."

The Court also concluded that the credit union's assertion that the mortgage recording tax would thwart the efforts of credit unions to serve people of modest means and would have serious financial ramifications for federal credit unions to be unfounded.

The Court opined "contrary to its assertions, there appears little danger that the MRT will drive federal credit unions out of business."

The Court further rejected the federal instrumentality argument.

Read the Decision

Brief Filed in Mortgage Recording Tax Case

ABA and the New York Bankers Association last week filed a a motion “for leave to file the amicus.” If the court grants the motion, we will then file a friend-of-the-court brief asserting that the New York State Court of Appeals should affirm a lower court’s decision to dismiss Poughkeepsie-based Hudson Valley FCU’s claim that federal credit unions and their members are exempt from paying the New York state mortgage recording tax.

“While ABA and the NYBA acknowledge the limited tax exemption provided to federal credit unions by the U.S. Congress in the Federal Credit Union Act, Hudson Valley’s position in this appeal expands that tax exemption beyond its clear terms,” the trade groups’ brief said.

“In doing so, Hudson Valley seeks to obtain an unwarranted competitive advantage over hundreds of other mortgage lenders -- and/or those lenders’ thousands of mortgage loan customers -- who are required to pay the mortgage recording tax … ,” the brief said.

The trade groups asserted in their brief that the Federal Credit Union Act makes it clear that it does not grant tax immunity to credit union borrowers or to credit unions for tax payments made on behalf of those borrowers. “The FCUA also does not exempt either ‘mortgages’ or ‘loans’ from taxation,” they said.

Read the brief.

Appeals Court: FCUs Subject to NY Mortgage Recording Tax

The Appellate Division of the Supreme Court of New York upheld a lower court decision that Hudson Valley FCU and all other federal credit unions operating in New York are subject to the state's mortgage recording tax.

Hudson Valley sought a declaration that it and other federal credit unions are exempt from the New York State mortgage recording tax (MRT), in connection with mortgages made by them to their members, under the Federal Credit Union Act of 1934 (FCUA) and the Supremacy Clause of the US Constitution.

Contrary to Hudson Valley's contention, the Court found that the mortgage recording tax is a tax on the privilege of recording a mortgage, not a tax on property.

Additionally, the Court "rejected plaintiff’s contention that the FCUA should be interpreted so as to exempt federal credit unions’ mortgage loans, and the right to record them, from the MRT because the imposition of the tax undermines the statute’s main policy of making low-cost credit available to average Americans." The Court noted that at the time the FCUA was enacted, federal credit unions did not have the authority to make home loans. The Court further notes that Congress had amended the FCUA authorizing federal credit unions to make residential mortgage loans, Congress never amended the statute specifically to exempt federal credit unions’ mortgage loans from the mortgage recording tax. Therefore, the Court concluded that it does not have to consider whether federal credit unions have an implied exemption from the MRT under the Supremacy Clause.

To read the decision, click here and go to page 37.

Hudson Valley FCU, Mortgage Recording Tax, and Class Action Lawyers

The Times Herald-Record is reporting that Hudson Valley FCU is being sued by borrowers regarding the mortgage recording tax.

For more details about the mortgage recording tax, see earlier posts (April 13 and May 26).

The article states that "[o]n April 29, a group of borrowers who obtained mortgages from Hudson Valley Federal Credit Union filed a lawsuit against the credit union seeking a refund, plus damages, of the tax they paid to have their mortgages recorded in the counties where they lived."

The sharks, I mean lawyers, representing the borrowers are with Izard Nobel, a Hartford, Conn.-based class action firm.

The article states that there could potentially be thousands of plantiffs as 10 other states have mortgage recording taxes.

With apologies to Jimmy Buffett,

"You got fins to the left, fins to the right, and you're the only bait in town."

New York Court Rules that FCUs Subject to Mortgage Recording Tax

The New York Supreme Court ruled that even though the Federal CU Act defines federally chartered credit unions as instrumentalities of the federal government and thus exempt from state taxes, the mortgage recording tax is not a tax on credit unions or a tax on borrowers, but on the “privilege of recording” a mortgage, as argued by the state’s Department of Taxation and Finance. (see Aril 13 post) The Court found that the mortgage recording tax was properly assessed against federal credit unions, including Hudson Valley FCU, and granted the Department of Taxation and Finance motion to dismiss.

Hudson Valley FCU challenged the mortgage recording tax arguing that federal credit unions are exempt from virtually all state
and local taxation, including taxation on intangible property such as mortgages. The credit union was seeking a refund of almost $1.9 million.

But the New York Court of Appeals held that the mortgage recording tax is not a tax on property, and thus not an exempted tax for federal credit unions.

Mortgage Recording Tax

Arguments are scheduled to be heard today in the New York Supreme Court over whether federal credit unions operating in New York are exempt from the state's mortgage recording tax.

New York assesses two mortgage recording taxes -- a regular mortgage recording tax that is paid by the borrower and a "special additional mortgage recording tax" that is paid by the lending institution

According to the New York Times, Hudson Valley Federal Credit Union, in Poughkeepsie, N.Y., is suing the state of New York. The credit union contends that New York State forced the credit union to collect the recording tax, despite its tax-exempt status. Hudson Valley Federal Credit Union is seeking a refund of all of the special additional mortgage recording taxes paid prior to the Tax Department's ruling that the credit union is exempt from the tax.

The complaint states that Hudson Valley FCU and other federal credit unions, as instrumentalities of the United States government, are afforded immunity from taxation under the Supremacy Clause of the United States Constitution in that a state cannot tax an instrumentality of the United States government without the express authorization of Congress. The U.S. Justice Department filed a brief supporting the federal credit union.

However, the New York Times wrote that:

The state maintains that it has not violated the tenets of the Federal Credit Union Act of 1934, which stipulates that credit unions “shall be exempt from all taxation,” except on real and tangible personal property. The tax, the state says, is not on the credit union or on mortgages but for the privilege of recording a mortgage.

A decision is expected in about 6 weeks.

If the credit union wins the case, the state of New York could lose millions of dollars of revenue.