Progress is slow lifting the compliance haze on marijuana mortgages

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Editor's Note: This is part three of a three-part series on mortgage lending to workers in the legal cannabis industry. Read part one and part two.

The federal versus state conflict on legal cannabis has put marijuana businesses and their workers in a bind. Banks will not establish deposit relationships and as a result, many marijuana businesses pay their bills, taxes and employees in cash.

While the cannabis industry is helping boost local real estate markets in states where it is legal, lenders have reservations about underwriting workers whose compensation is paid in cash.

However, two federal guarantee programs have no specific bar on the use of income from cannabis businesses.

The regulations for the Veterans Affairs loan guarantee program require lenders to ensure that a borrower has a stable and reliable source of income, said agency spokesman Randal Noller. The U.S. Department of Agriculture Rural Development program does not have a policy regarding loans to people working in the legal cannabis business.

And at least one lender has originated loans for cannabis industry workers and sold them to the government-sponsored enterprises. Evergreen Home Mortgage has sold loans to both Fannie Mae and Freddie Mac where the borrowers are W-2 employees and don't have an ownership interest in the cannabis business where they work, said Tamra Rieger, executive vice president of loan fulfillment at the Bellevue, Wash., lender. She declined to specify whether these borrowers had additional income sources that were considered during underwriting or how many of these loans have been originated.

When asked specifically about this, Freddie Mac spokeswoman Lisa Tibbitts said in a statement, "The Department of Justice has made it clear that selling marijuana and other related activities violates federal law regardless of state law." Fannie Mae declined to comment.

If the traditional secondary market won't consider these workers for loans, the non-qualified mortgage lenders would be a logical alternative. But even these companies are worried about lending to people getting paid in cash.

There is not one jumbo or non-qualified mortgage lender that allows Evergreen Home Loans to use income from a cannabis business to qualify a borrower, said Rieger. "That is where we had the worst trouble."

She couldn't find anybody in the scratch-and-dent market willing to work with these borrowers, either.

"We still have to issue compliant loans based on federal laws, Consumer Financial Protection Bureau guidelines and Dodd-Frank; those still apply to non-QM loans."
— Tom Hutchens, senior vice president, Angel Oak Mortgage Services

"Jumbo is the most restrictive out of all the types. What we found in Washington is the credit unions have been the only ones that have been able to help jumbo borrowers because of the way they are regulated by the NCUA."

The National Credit Union Administration has taken a hands-off approach to working with cannabis businesses and their employees.

"The NCUA's position is that the decision whether to work with a cannabis-related business is one for the credit union itself. We have advised credit unions of FinCEN's guidance and that we examine for Bank Secrecy Act and anti-money laundering compliance. We also expect credit unions to analyze and mitigate risk, as we do with any financial service product they provide," agency spokesman John Fairbanks said in a statement.

A number of credit unions known to work with the cannabis industry declined, or did not respond, to requests for comment.

Jumbo lenders are likely concerned about the risk of an expensive mortgaged property being seized by the Drug Enforcement Administration or the institution being subject to prosecution by the Justice Department, regardless of the laws in the state of Washington, Rieger said.

FHA and jumbo are "the two products we have no ability to provide [people who work in the legal cannabis industry] with a loan. We'd love to be able to help those borrowers," she said.

Angel Oak Mortgage Services is another lender staying away from the cannabis industry. Despite taking additional risk for other types of borrowers in its non-Qualified Mortgage lending, it can't ignore federal law.

"We still have to issue compliant loans based on federal laws, Consumer Financial Protection Bureau guidelines and Dodd-Frank; those still apply to non-QM loans," said Tom Hutchens, senior vice president of Atlanta-based Angel Oak.

"The challenge is that there are just so many hurdles that don't apply to other employees," he added.

The problem is that federally chartered banks don't allow deposits from cannabis businesses, and employees must have verifiable information about income and assets.

"If [the information] is not verifiable because of the type of business they are in, then that's not a loan we're going to be able to transact," Hutchens said. "We have to have a documentable ability to repay. Anyone in an all-cash business, do they have a documented ability to repay? Chances are the answer is no, but they could. It's not an absolute."

Easing the prohibitions is up to Congress, with at least 23 bills introduced in the current session that would affect the treatment of cannabis, according to The Cannabist.

There is the Secure and Fair Enforcement (SAFE) Banking Act, introduced in the House by Rep. Ed Perlmutter, D-Colo., and the Senate by Sen. Jeff Merkley, D-Ore. The bills seek "to create protections for depository institutions that provide financial services to cannabis-related businesses."

On Sept. 8, in the emergency aid package for Hurricane Harvey, Congress extended the Rohrabacher-Blumenauer amendment (first passed in budget legislation in 2014 and formerly known as Rohrabacher-Farr) through Dec. 8. It prohibits the Justice Department from spending funds to interfere with the implementation of state medical marijuana laws.

However, Attorney General Jeff Sessions opposes any attempts to legalize marijuana for any use. In May, Sessions sent a letter to congressional leaders asking them not to include the amendment in any appropriations legislation.

"I believe it would be unwise for Congress to restrict the discretion of the Department to fund particular prosecutions, particularly in the midst of an historic drug epidemic and potentially long-term uptick in violent crime," the letter said. "The Department must be in a position to use all laws available to combat the transnational drug organizations and dangerous drug traffickers who threaten American lives."

As long as federal and state policies — and executive branch and legislative branch objectives — remain at odds, there will be no change in the status quo. Lenders' ability to serve those in the marijuana business remains limited.

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Enforcement ATR Qualified Mortgages Underwriting Purchase Jeff Sessions DoJ The VA FHA NCUA Fannie Mae Freddie Mac Washington