Mile High Confusion Has National Implications
The legal fog surrounding banking and marijuana got thicker on Friday. New York State announced the five companies that would be allowed to legally produce and distribute marijuana for medical purposes. On the same day NCUA and the Federal Reserve Bank in Kansas City were being sued in federal court after blocking a Colorado credit union from gaining access to the banking system. This is going to get interesting.
Colorado was one of the first states to fully legalize the use of marijuana. But cannabis remains illegal under federal law. As a result, banks and credit unions are hesitant to open accounts for marijuana businesses. The Justice Department and FinCen responded to these concerns by explaining how credit unions and banks could serve pot businesses and comply with BSA requirements but depository institutions remained uneasy. Colorado eventually came up with the idea of forming a state-chartered credit union. The Fourth Corner Credit Union was granted a state charter contingent on obtaining Share Insurance. Its Field of Membership is composed of licensed cannabis businesses; businesses that serve the marijuana industry; and people who support Colorado’s efforts to legalize marijuana.
As I’ve discussed in a previous blog, the credit union’s application for share insurance put NCUA in a difficult spot. On the one hand, it was being asked to grant insurance protection to an institution designed to aid an industry that is illegal under federal law. On the other hand, NCUA has instructed examiners to utilize the U.S. Department of Justice’s guidance when examining credit unions in Washington State, where marijuana has also been legalized.
The lawsuit contends that the NCUA has violated both the federal constitution and the Administrative Procedures Act by denying Share Insurance to the credit union. In its complaint, the credit union argues that it has developed an intensive BSA framework and that NCUA has not adequately described how its procedures fail to address safety and soundness concerns.
NCUA’s decision does not kill the credit union. It has indicated that it may be able to obtain private insurance. Since the credit union is state-chartered, NCUA would no longer have any jurisdiction over the credit union. In contrast, It is hard to see how the credit union can operate however without access to the federal reserve so the even bigger news was that the Federal Reserve Bank of Kansas City followed the NCUA’s lead and refused to open up a Federal Reserve Master Account for the credit union. Without access to the Federal Reserve System, the credit union won’t be able to facilitate basic banking services such as ACH transactions. The credit union on Friday also filed a suit to overturn the Federal Reserve’s decision.
So, here’s what we know so far. Marijuana remains illegal under federal law. Both FinCEN and the Justice Department have issued memoranda detailing how financial institutions can open accounts for marijuana businesses. Notwithstanding this guidance, Both the Federal Reserve and NCUA have suggested that opening credit unions to cater to this industry may raise virtually insurmountable safety and soundness concerns.
The blame does not lay with the regulators but with a Congress that refuses to amend federal law, an administration which has made a virtue out of picking and choosing which federal laws should be enforced and state lawmakers that ignore federal law.
For those of you who might end up dealing either directly or indirectly with marijuana businesses in New York State, it goes without saying that servicing such accounts should be coupled with heightened compliance oversight. But remember New York’s cannabis industry is going to be among the most tightly regulated in the country while Colorado’s is among the most freewheeling here is a link to a previous post on the topic.
Get Ready For More Mortgage Reporting,
A three-month extender of the Highway Transportation bill approved by Congress last week includes a provision requiring mortgage lenders to report more information to the IRS. This morning’s American Banker is reporting that “the provision requires the reporting of the origination date of a mortgage, the property address for the collateral and outstanding balance on the loan at the beginning of the tax year.”
The good news is that you won’t have to start reporting the new information until January 2018 which gives Congress plenty of time to find an alternative revenue source.