A federally chartered credit union in New York is challenging a tax that the state imposes on mortgage origination, arguing that its federal charter preempts any state taxation.
The $2.6 billion Hudson Valley Federal Credit Union brought a complaint against the state's mortgage recording tax to the New York Supreme Court after its growing mortgage business made the levy a steadily increasing burden, according to court documents and it's lawyer, Dale Lois.
Lois, a lawyer with the firm Quartararo & Quartararo, explained that the tax has a long history in New York and is unusual in that the state collects it but then distributes its proceeds to the counties where the mortgage is recorded. This makes it difficult to quantify how much tax the CU might pay each year, since the amount's vary from county to county. Collecting the tax is further complicated because while it is actually levied on the borrower, in actuality the credit union pays it since paying it is a requirement for recording the mortgage used to secure loans.
"In its impact, the tax substantially increases the cost of FCU loans, and thus contravenes Congress' principal purpose in establishing the federal credit union system," the credit union wrote in its complaint. "To make more available to people of small means credit for provident purposes through a national system of cooperative credit, thereby helping to stabilize the credit structure of the United States."
The credit union argued in its complaint that it is exempt from the tax both because federal law supersedes state law and because the Federal Credit Union Act makes it clear that federally chartered credit unions are tax exempt.
The credit union referred all calls about the case to Lois, who explained that he had been personally convinced that the tax should not be applied to credit unions, but that Hudson Valley may have moved against the tax now because its mortgage business had continued to increase.
"I have been working with credit unions for some years and have long thought that the mortgage recording tax should not be applied to federal credit unions," Lois said.
NAFCU, the New York Credit Union Association and CUNA all advanced similar arguments in amicus briefs they have submitted to the court but which the court had not yet formally accepted as of press time.
Hudson Valley argued in its complaint that the damage to federal credit unions was real and lasting because the costs of the of the recording tax, which Lois estimated cumulatively to be in the tens of millions of dollars per year, has helped deter New Yorkers from buying homes or refinancing their existing mortgages.
In addition, the credit union argued that it is exempt from the mortgage recording tax because of the nature of the tax, contending that it was a real tax on property and not merely, as New York had argued, a tax on the "privilege" of recording a mortgage.
"The state's position obviously and materially sets federal law and New York State law in conflict as to the character of the mortgage recording tax and the legality of collecting the tax in connection with the recording of FCUs' mortgages," the credit union argued. "The conflict directly impairs the public purposes and fundamental operations of not-for-profit, cooperative lending associations created by Congress and regulated by an independent federal agency. Federal law therefore preempts New York law to prohibit the imposition of mortgage tax on FCUs' mortgages. This court must apply federal law in deciding the merits of this case," Hudson Valley concluded.
–[email protected]