But the rules differ for federal credit unions and state credit unions, and state credit unions that converted from federal on or after January 1, 2009 have yet another different set of rules!

New York State’s Mortgage Recording Tax has been in the financial news in recent weeks, with the recent decision in Hudson Valley Federal Credit Union v. New York State Department of Taxation and Finance, et al (Gische, J., Sup. Ct. N.Y County, made May 14, 2010, entered May 20, 2010; Index No. 106732/2009).

In that case, which dealt with the entire mortgage recording tax and not only the additional tax, Justice Judith Gische held that federal credit unions are not exempt from the mortgage recording tax, based on the controlling New York Court of Appeals decisions in Franklin Society for Home Building and Savings v. John J. Bennett, Jr., 282 NY 79 (1939), and SS Silberblatt, Inc. v. New York State Tax Commission, 5 NY2d 635 (1959).  These decisions came after and distinguished the New York mortgage recording tax from a similar taxes in other states that had earlier been stricken by the United States Supreme Court (Federal Land Bank of New Orleans v. Crossland, 261 US 374 (1923, regarding an Alabama tax) and Pittman v. Home Owner’s Loan Corporation of Washington, D.C., 308 US 21 (1939, regarding a Maryland tax).

As a result of its success at the trial level, the New York State Department of Taxation and Finance is currently reconsidering its 1986 decision to exempt federal credit unions from payment of the SAMRT (the “Special Additional Mortgage Recording Tax”).

If the reconsideration results in a future imposition of the tax, it is likely that the Department will make the change effective at a date that is not immediately on the issuance of the Tax Services Bulletin announcing the change.

While we await the result of the reconsideration, there will be no change in the usual procedure regarding closings with federal credit unions.

Our closers will continue to take the appropriate affidavits of exemption in duplicate from an officer of the credit union or its attorney, and no SMART will be imposed where “the mortgaged premises consist of real property improved by a structure containing six residential dwelling units or less, each with separate cooking facilities” and the lender is a federal or state credit union.

If the lender is a state chartered credit union, or the lender is a natural person, Tax Law Section 253 (1-a) (a) expressly exempts the mortgage from the SAMRT.

However, there are three different kinds of affidavits – one for state chartered credit unions that converted from federal on or after January 1, 2009, one for state credit unions that have either always been state credit unions or converted from federal credit unions on or before December 31, 2008, and yet another affidavit for federal credit unions.

The original version of the statute only provided the exemption for situations in which the lender was a natural person.  The law was amended in 2009, effective January 1, 2010, amending the statute to add “a credit union as defined in Section two of the banking law.”  This took effect January 1, 2010, and overturned TSB-A-06(1)R, by which the Department of Taxation and Finance decided that mortgages made to state credit unions were not exempted.  See TSB-M-10(1)R – which also points out that there is a different procedure for state credit unions that have been converted from federal credit unions on or after January 1, 2009.

For state credit unions which were formed as state credit unions or were converted from federal credit unions on or before December 31, 2008, the following affidavit requirement is provided:

To claim this exemption from the SAMRT, the state credit union must submit an affidavit to the recording officer at the time the mortgage is presented for recording. The affidavit must be made in duplicate, signed by the mortgagee, and set forth the following:

  • the mortgaged premises constitute real property that is principally improved by a structure containing a total of not more than six residential dwelling units, each with its own separate cooking facilities;
  • the mortgagee is a state credit union formed under Article 11 of the Banking Law; and
  • the mortgage is exempt from the SAMRT imposed by section 253.1-a(a) of the Tax Law.

State credit unions that had formerly been federal credit unions (and converted on or after January 1, 2009) obtained this slightly different treatment by Section 533 of the Laws of 2008, which, rather than amending the tax law provision with regard to the SAMRT, amended Article 11 of the Banking law, Section 486-a – a place one would not be likely to look for a mortgage tax exemption!

The affidavit requirement for a state credit union converted from federal on or after January 1, 2009:

To claim exemption from the SAMRT, the converted state credit union must submit to the recording officer an affidavit at the time the mortgage is presented for recording. The affidavit must be made in duplicate, signed by the mortgagee, and set forth the following:

    <li?The mortgagee is a credit union that has been issued an authorization certificate from the Superintendent of Banks pursuant to section 486 of the Banking Law indicating that the credit union has converted from a federal charter to a state charter on or after January 1, 2009.

  • Pursuant to section 486-a of Article 11 of the Banking Law, the mortgage is exempt from the special additional mortgage recording tax imposed by section 253.1-a(a) of the Tax Law.

See TSB-M-08(5)R, Special Additional Mortgage Recording Tax Exemption for Federal Unions that Convert to State Credit Unions.

Of course, the state credit union differentiation only makes sense in an historical way – the Department should have rolled everything into the new requirements as of January 1, 2010 rather than keep two separate rules for state credit unions that both result in an exemption from the SAMRT.

Where the mortgagee is an individual, or a federal credit union, the affidavit for exemption of special additional mortgage tax should contain the following:

  • Mortgagor and mortgagee names
  • Dollar amount of the mortgage
  • Location of the property
  • Basis for the exemption
  • A Federal Credit Union can claim exemption on any type of land, but the individual mortgagee can only claim it on a one to six family dwelling with separate cooking facilities (i.e. not on vacant land “to be improved”).
  • Must have a jurat, “sworn to before me”, not an acknowledgment (unless it is signed by an attorney with the statement “being an attorney at law, licensed to practice…, makes this statement on the pains and penalties of perjury”).

To sum up the SAMRT as it relates to credit unions, only the “regular” mortgage taxes are imposed, and these are passed on to the borrower.  There is no SAMRT where the lender is a state credit union since January 2010, or a state credit union that converted from federal on or after January 1, 2009, and there has been no SAMRT imposed where the lender is a federal credit union, since 1986 (though that is now being reconsidered).

If the Department of Taxation and Finance decides in the future that the SAMRT is properly imposed when the lender is a federal credit union, I would expect the decision to be challenged, or at least that the federal credit unions might challenge the anti-pass-through provision of the statute.  There is also the possibility that federal credit unions might decide to pass the tax along to the borrower, despite the anti-pass-through language of the statute.

One might expect the federal credit unions to try to use the 1992 Dime Savings Bank case as a precedent, if they find their mortgages being made subject to SAMRT in order to be recorded.

The Appellate Division Second Department held in The Dime Savings Bank of New York, FSB, v. The State of New York. 174 AD2d 173 (1992), that the anti-pass through provision of the special additional mortgage recording tax was in conflict with a federal regulation (12 CFR 545.32 (b)(5)) and was thus unenforceable against federal savings associations (including federal savings banks). The plaintiff federal thrift obtained a judgment enjoining enforcement of the anti-pass through provision against it.  The borrowers had to pay the tax.

Similar provisions in the Federal Credit Union Act (FCUA) and the applicable federal regulations for federal credit unions may lead to federal credit unions claiming a similar exemption from the anti-pass-through provision of the state statute.

However, most federal thrifts did not jump on the Dime Savings Bank bandwagon, realizing that passing through the SAMRT to the borrower would not be competitive.  While some out-of-state federal savings institutions have followed the precedent and passed the tax on to the borrower, most have not.

If the rule is changed and the SAMRT is imposed on the recording of mortgages made to federal credit unions, it is possible that only a few might choose to try to pass the tax on to the borrower.