Good update on weed lending and banking from my friend Rob Chrisman.
I’m usually pretty liquored up when I write this 6-day a week commentary. Either that or stoned. Actually I am neither, especially at 4AM, but wanted to grab your attention – although occasionally people ask me about both conditions contributing to my writing. The topic of residential lenders making loans to borrowers involved in marijuana-related businesses comes up occasionally – primarily because the federal government views it as illegal, and thus any lender that deals with the federal government must also.
To step back for a moment, the US government defines marijuana as the dried leaves, flowers, stems, and seeds from the hemp plant, Cannabis sativa. The government also indicates the plant contains the mind altering chemical delta-9-tetrahydrocannabinol and other related compounds. Marijuana remains illegal at the federal level, despite recent moves by about 1/3 of the states to legalize it at the state level. Given FDIC insurance is at the federal level, banks throughout the country risk a lot if they decide to do business with such customers – even if the state in which the bank is located has legalized it.
So banks and lenders remain stuck due to federal laws. The federal government classifies marijuana as a Schedule 1 controlled substance (along with heroin, LSD, GHB, meth, ecstasy, and so on) having a high potential for abuse, no currently accepted medical use in treatment here in the US, and having a lack of accepted safety for use of the drug or other substance under medical supervision.
Because marijuana remains illegal at the federal level, some credit card companies won’t process transactions for pot dispensaries. That is also why the vast majority of banks won’t even open accounts for these businesses either. After all, who wants to risk deposit insurance and potentially see criminal prosecution? But it appears more and more financial institutions are open to doing business with marijuana dispensaries.
Further, the number of banks and credit unions who said they would consider handling marijuana money under Treasury Department guidelines has increased from 51 in March 2014 to 301 in March 2016.
And Steve Brown with PCBB writes that “The Associated Press indicated that most dispensaries say they have been getting financial services mainly from local credit unions. Only time will tell how this plays out and the boost in state legalization could eventually tip the scales and open up this customer base to community banks.”
What about banking the marijuana industry?
Same thing – many banks that report up to federal regulators can’t accept that income, and won’t handle those deposits. But banking marijuana businesses is not illegal. It’s a permissible activity but banks need to be very thorough in their review of all the risks involved. A recent American Banker article noted that there are 301 banks providing banking services to marijuana-related businesses.
What about someone who owns a rental house, and the tenant’s income comes from a marijuana-related business?
What about problems caused by marijuana cultivation in and around residences?
The Institute of Real Estate Management (IREM) issued a white paper that warned of problems. “The growing of marijuana requires significant amounts of water, heat, and humidity,” the IREM white paper stated. “These conditions can create mold issues in properties. These requirements can also increase utility costs for the landlord, and if tenants don’t pay individual electric and water bills. Further, the property could be subject to civil asset forfeiture if you permit growing.”
What if the housing complex has its loan with Fannie Mae, or receives subsidies from the Federal Government?
Things can become complicated, and conflicting in a hurry. The Agencies and investors’ contractual agreements with lenders place the burden on the lender to assure that they are conforming to existing rules, regulations, and laws.
The Colorado Association of Realtors wrote a blog posting entitled “Recreational Sales and Property Values,” which assured its membership that home values would not suffer due to the changes in law. “Although state law allows pot shops to exist, Amendment 64 gives local governments the authority to regulate commercial activities associated with the recreational use of marijuana.”
Some day in the future, the marijuana sector may offer banks & other lenders a wealth of opportunity. Today, however, that opportunity comes with a lot of known and unknown risks for depository and non-depository lenders.
Rob Chrisman’s Daily Commentary January 28