A lawsuit pending in New York’s supreme court could give credit unions a huge advantage over banks when it comes to mortgage originations. At issue are taxes charged on mortgage loans.
The case was filed on behalf of the plaintiff, Hudson Valley Federal Credit Union, in the Supreme Court of the State of New York against the New York State Department of Taxation and Finance on May 12, 2009, according to a copy of the complaint provided by the plaintiff’s attorneys, Quartararo & Lois PLLC.
At issue are mortgage recording taxes in the state. The credit union claims that it is immune from “federal taxation and virtually all state and local taxation” based on the Federal Credit Union Act of 1934 and the Supremacy Clause of the U.S. Constitution.
The state tax is 50 cents for each $100, or a half point, according to the complaint. The law does not specify which party will be responsible for paying the tax. But the burden to pay the tax falls on credit unions since they “require payment of the tax to record mortgages given to secure federal credit union loans.”
The total mortgage tax varies by county, from 0.75 percent to 2.00 percent of the loan amount, Dale J. Lois, an attorney with Quartararo & Lois, said in a phone interview with MortgageDaily.com. However, on some refinances with cashout, only the cashout portion is taxed. But on a purchase, “it’s from dollar one.”
Only 11 states have mortgage recording taxes, and two — Georgia and Florida — already exempt federal credit unions, Lois said.
The complaint says that the mortgage recording tax is not a tax on real property or tangible personal property, and it doesn’t fall with any stated exception to the exemption of federal credit unions within the act.
The complaint also states that credit unions, “as instrumentalities of the United States government, are also afforded immunity from taxation under the Supremecy 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.”
“If we win the case, it will have a preclusive effect on all credit unions,” Lois stated. “In other words, it will benefit all credit unions in the state if we win the case and the tax is abolished.”
He said that the U.S. Department of Justice, the Credit Union National Association, the National Association of Federal Credit Unions and the Credit Union Association of New York have all filed friend-of-the-court briefs on behalf of the plaintiff. None have been filed on the state’s behalf.
Lois acknowledged that banks are subject to the tax, and a victory would give credit unions in New York an advantage over banks on home loan originations.
He said that the state has moved to dismiss the case. The credit union has responded by asking that the motion be denied and that a summary judgment is issued in its favor.
Oral arguments are scheduled for April 13, and the judge is expected to rule on the motions within 60 days of the oral arguments.
Hudson Valley Federal Credit Union, Plaintiff, -against- New York State Department of Taxation and Finance, Robert L. Megna, in his official capacity as Commissioner of the New York State Department of Taxation and Finance, and the State of New York.
Index No. 106732/2009, May 12, 2009 (Supreme Court of the State of New York, County of New York).
