Many in the credit union movement hope for passage of the SAFE Banking Act, federal legislation that passed the House but has an unsure future in the Senate.
This legislation generally would prohibit federal banking regulators from penalizing a depository institution for providing banking services to a legitimate cannabis-related business.
“We are absolutely hopeful it will pass in some form that will allow lending with peace of mind,” says Neighbors, who takes every opportunity to lobby in the bill’s favor. “That’s where we expect to make some money because our biggest revenue driver is the loan portfolio.”
Numerica also supports the bill to clarify the current murkiness in this business. The U.S. has had five different confirmed attorneys general since 2009. As administrations change, so do local U.S. attorneys, each with their own prosecutorial discretion.
“Those changes create less certainty, and it’s hard to mitigate risk when you don’t know what the risk is,” Ciani says.
Even passage of the SAFE Banking Act won’t remove compliance concerns related to cannabis banking, according to Call.
“There will always be significant compliance issues around MRB banking that will be ongoing even if cannabis is fully legalized,” he says.
With the buzz around legalization, Call predicts there will be “more pressure on government officials to alleviate this dark cloud that has been hovering over the industry for decades.”
As for the risk of MRB lending, “just because it’s a cannabis business doesn’t make it more volatile than any other small farmer, manufacturer, or retailer once the legality issue is removed,” Neighbors says. “Any of these businesses could be a good credit risk or a bad one.”
O Bee caters predominantly to producers and processors, whose operations are capital-intensive, Collins says. He sees a huge upside in being able to lend to them in the future.
Often, the machines used to process marijuana cost upwards of $250,000 each, he says.
MRBs can get financing from the manufacturer, but that may require giving up some equity in the business, Collins says. “MRB owners hate to give up equity. And when they do, there are additional parties in the business and it becomes a problem for us, too.”
Credit unions that serve MRBs circle back to member service and public safety in their drive to ease federal regulations and treat legal businesses fairly and safely.
Vocality Community, which serves a low-income area, is designated as a Community Development Financial Institution. That’s a driving force in its operations, Neighbors says.
“We have a lot of underserved folks who need our help. Our cannabis members are just one portion of this group who need credit union services,” she says.
Public safety is a prime concern, too, especially with people sometimes carrying hundreds of thousands of dollars around in cash.
“People are having safes put in their homes,” Neighbors says. “Or not. Is the cash buried in the backyard? Under the mattress? What if a home invasion occurs and it’s the wrong address?
“Any dollar we get off the street and into the Federal Reserve system,” she says, “is another sigh of relief.”
Bruce Pearson, an attorney with the law firm of Styskal, Wiese, and Melchione LLP, says credit unions in states that have legalized marijuana generally fall into three groups: the small minority that offer services to marijuana-related businesses (MRBs), those that refuse to do so, and institutions that have adopted a don’t-ask, don’t-tell stance regarding potentially disguised MRBs.
All three groups face risks at some level. Those providing banking services must meet strict compliance requirements.
But simply saying “no” to MRBs isn’t enough.
“If you’re going to be a ‘no’ shop, you need to have operational procedures that back that up,” Pearson says. “Are you actively looking for MRBs that are disguised as car washes, window washers, and dry cleaners? And, if you’re going to be a ‘no’ shop, are you driving off businesses that you can’t get back someday?”
Credit unions that don’t monitor loans that could be tied to disguised MRBs risk not only the seizure of collateral but could face prosecution under federal racketeering law.
“What that looks like in court is you literally have to prove a negative: I didn’t know and I had no reason to know that the collateral was being used in a criminal enterprise,” Pearson says. “If you’re seeing the deck stacked against you, you’re right.”
Pearson’s advice for the don’t-ask, don’t-tell crowd is simple: get into one of the other two categories.
This article appeared in the Winter 2021 issue of Credit Union Magazine. Subscribe here.