Bankers’ Hours column: It’s hard for pot sellers to get mortgages
In this column we’ve written about lending and the marijuana industry in Colorado, but we’ve never specifically discussed what happens when a borrower associated with the business seeks a home mortgage.
This oversight will hopefully be corrected, thanks to a reader who cited the case of a family member that was turned down for a residential mortgage by a couple of banks before finally finding a loan.
Potential borrowers who work in the business most certainly aren’t treated alike, and there’s a good reason:
First, a bit of background:
Owners of marijuana farms, and retailers who sell the product, can’t use a federally insured financial institution, be it bank, credit union, or savings bank to deposit their cash. They probably can’t do business with a non-insured credit union either, if it’s a member of the Federal Reserve system.
The pot industry has secured state approval to open a credit union for those in the business, but it won’t be operational until it can process business through the Federal Reserve, and, also, be granted federal insurance of deposits.
Which won’t happen as long as marijuana is illegal under federal law.
One of the oldest premises in U.S. jurisprudence is the concept of Federal Preemption. Federal law always trumps a state statute.
Entrepreneurs have difficulty getting a home loan if they have to rely on income from their cannabis business to qualify, simply because that income is considered to be derived from engaging in an illegal activity under the laws of the United States.
The federal government could shut down the recreational marijuana business in every state that permits it. No one thinks that’ll happen, but the federal law against marijuana is still on the books.
Which is why banks are unwilling to lend to an entrepreneur in the pot business. All of the assets, including all cash earned by the business, is technically subject to arrest by federal authorities. We’ve all heard about the seizing of drug dealers’ cars, boats, houses and money in safes by the DEA. Under federal law, the owner of your corner cannabis convenience store is no different.
On the other hand, W-2 employees can get a home mortgage, if they otherwise qualify, but not from every lender. This is because U.S. marshals can’t arrest the back earnings of a W-2 worker, although certain lenders might have a concern about the stability of that applicant’s future income.
All residential mortgage lenders start out with the same basic guidelines from Fannie Mae and Freddie Mac. Then, they might add other criteria that they feel prudent. In the case of, say, a bookkeeper for Mary’s Marijuana Farm, one lender may feel that the probability of future income could be compromised if the business were to be shut down by the feds, while another lender may not.
Also, there’s the issue of money laundering that’s got everybody scratching their heads, especially bankers. For example, if a pot retailer deposits cash receipts into a checking account it could be construed as money laundering under federal law. Would it be abetting that activity by making a home loan to an employee of a marijuana business? If you’ve got a good personal relationship with your lawyer, buy him or her a beer, make sure the counselor isn’t on the clock, and ask that question.
So, it appears that the beautiful cannabis chaos in Colorado will continue until Uncle Sam wipes the federal statute off the books.
Pat Dalrymple is a western Colorado native and has spent almost 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His e-mail is firstname.lastname@example.org.
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