Suit Takes Aim at Recording Tax
BORROWERS in New York may not be aware of this: They pay some of the highest closing costs in the country, because of a mortgage-recording tax that few other states levy.
But depending on the outcome of a lawsuit now being argued in New York Supreme Court, those who obtain mortgages through federal credit unions in the state may be able to avoid that tax, and save thousands of dollars on a purchase or refinancing.
In the suit filed last year, the Hudson Valley Federal Credit Union (formerly the IBM Employees FCU), in Poughkeepsie, N.Y., contends that New York State is compelling the credit union to collect the recording tax, despite the credit union’s federal tax-exempt status.
Arguments are set to be heard on Tuesday before Justice Judith Gische in Manhattan; a decision could come within six weeks.
Besides New York, 10 other states charge a recording fee, including Florida and Georgia, according to Dale Lois, a lawyer representing Hudson Valley.
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.
Further, the state says that Hudson Valley, in its initial challenge of the tax in 2008, did not exhaust its administrative options in seeking a refund of the roughly $1.8 million in recording taxes it had paid for borrowers on about 3,700 mortgages and home-equity loans, advertised as “no cost,” from 2006 to 2008.
The credit union’s advocate in the case is the Justice Department, which filed a brief in October, stating, “Because the United States has not waived immunity to the type of tax imposed, the Court should determine New York’s system unconstitutional.”
New York’s taxpayers stand to lose a considerable amount of revenue if the court agrees with the federal government. According to Richard Bamberger, a spokesman for Andrew M. Cuomo, the state attorney general, federal credit union mortgages yielded the state tens of millions of dollars in recording taxes last year.
The state could see revenue drop further if it lost the suit, because more borrowers would be likely to seek credit union loans and thereby avoid the tax.
But Michele Raab-Francis, the chief executive of the Safe Harbor Capital Group in Bellport, N.Y., and a director of the New York Association of Mortgage Brokers, said that if the credit unions prevailed, “it would be an extremely huge benefit to the consumer.”
The mortgage-recording tax in New York City is 2.05 percent of the total loan amount, up to $500,000, and 2.175 percent on loans of $500,000 or more. On a $500,000 loan, that would add $10,875 to the closing costs. In Westchester, by contrast, the rate is 1.3 percent for a single-family home; in Nassau and Suffolk County, the rate is 1.05 percent. (Refinance borrowers can sometimes avoid the recording tax, if the lender agrees to waive it.)
Ms. Raab-Francis, who brokers loans on behalf of both banks and credit unions, says that obtaining loans through a credit union “is a much more pleasant experience for the consumer,” and that the loan terms are often competitive with those of larger banks.
In the greater New York City area last week, the Bethpage Federal Credit Union of Long Island was offering 30-year fixed-rate loans at 5.125 percent. The Polish and Slavic Federal Credit Union, which makes mortgages in New York and New Jersey, offered 5.25 percent.
The average rate at the time, according to Freddie Mac, was 5.21 percent.
Credit unions usually charge only a nominal fee but require an affiliation of some kind. Bethpage Federal, for instance, is generally open to anyone who lives, works, worships or conducts business on Long Island, and to members’ immediate relatives.
A list of local credit unions can be found at the Credit Union National Association’s Web site, at www.cuna.org.
A version of this article appeared in print on April 11, 2010, on page RE6 of the New York edition.
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