Cannabis Re-Scheduling: Commercial Lending Implications for Banks and Credit Unions

Name: Cannabis Re-Scheduling: Commercial Lending Implications for Banks and Credit Unions
Uploaded: 2026-01-06T19:05:35.000Z
Duration: 2 h 2 min 8 s

Executive Order on Cannabis Rescheduling

Introduction to the Discussion

The session begins promptly at 12:01 PM Eastern time, focusing on President Trump's historic executive order from December 18 regarding cannabis rescheduling.

The discussion will explore implications for financial institutions with existing cannabis banking programs and those interested in entering this space, particularly concerning commercial lending to cannabis-related businesses (CRBs).

Speaker Background

The speaker introduces themselves as a former financial regulator and attorney with experience in the Maine Bureau of Financial Institutions.

They reference the 2014 FinCEN guidance, which is crucial for financial institutions involved in cannabis banking, highlighting its significance during their tenure as a regulator.

Experience in Cannabis Banking

After leaving regulatory work, the speaker became general counsel for a financial institution that developed one of the first CRB banking programs in the country.

They recount an interview where they reassured the CEO about supporting CRB banking, leading to their hiring and subsequent growth of the institution's program.

Transition to Legal Practice

Two years prior to this discussion, they connected with Cojent Law while attending a conference and later joined their team due to their expertise in cannabis banking.

At Cojent Law, they assist various financial institutions—helping them enter or improve their cannabis banking practices while ensuring compliance with regulations.

Unique Firm Structure and Services

Cojent Law operates differently from traditional firms by focusing on client needs without the pressures of billable hours typical in larger firms.

The firm boasts a network of attorneys experienced in high-risk areas like cannabis banking and crypto practices, emphasizing client-centric service.

This structured summary captures key insights from the transcript while providing timestamps for easy navigation.

Federal Treatment of Cannabis: Historical Context

Early 1970s: Nixon Administration and the War on Drugs

The speaker introduces the historical background of federal cannabis treatment, noting that many participants are likely familiar with it.

References Nancy Reagan's "Just Say No" campaign during the Nixon administration, highlighting its anti-drug stance.

Discusses the debate within the Nixon administration regarding cannabis classification as a Schedule I drug, equating it with heroin and LSD.

Emphasizes that this decision was based on concerns about youth messaging rather than scientific evidence, leading to significant injustices over decades.

Notes that cannabis was deemed to have high dependency potential and no medical benefits, which stifled research opportunities.

Shift in Policy: The Cole Memo (2014)

Transitioning to 2014 under the Obama administration, where new guidance emerged from the Cole memo drafted by Deputy Attorney General James Cole in August 2013.

The memo outlined priorities for enforcement against cannabis-related activities such as selling to minors or using drugs on federal property.

Introduces FinCEN (Financial Crimes Enforcement Network), which provided guidelines for financial institutions dealing with cannabis banking—emphasizing cautionary but permissive measures.

Highlights enhanced onboarding processes and continuous due diligence required for banking cannabis customers, likening it to an intensified "Know Your Customer" approach.

Mentions requirements for filing Suspicious Activity Reports (SARs), particularly if any suspicious activity related to coal memo implications arose.

Risks Associated with Cannabis Banking

Discusses risks tied to compliance with BSA regulations in cannabis banking; emphasizes these risks are evolving over time due to changing expectations from regulators.

Points out that while guidance is not regulatory, it carries inherent risks due to lack of clear definitions and official commentary from FinCEN.

Observes how interpretations of FinCEN guidance have changed since 2014, leading to increased regulatory expectations based on best practices observed during examinations.

Warned about potential rescission of guidance but notes current criticism regarding its lack of updates amidst evolving legal landscapes.

Understanding Risks in Cannabis Banking

Overview of Operational Challenges

Cannabis banking presents operational challenges due to its cash-intensive nature, leading to various risks including teller and cash management risks, as well as theft risks.

Compliance and BSA Risk

The primary risk in cannabis banking is compliance with the Bank Secrecy Act (BSA). Failure to meet regulatory expectations can lead to serious findings from financial examiners.

Consequences of non-compliance may include documents of resolution or memorandums of understanding against the institution. In severe cases, a cease and desist order could be issued, as seen with a credit union in 2022.

Reputational Risk

Reputational risk arises when institutions start cannabis banking programs without fully understanding the implications and later withdraw from them.

A survey at a conference revealed that no attendees had lost customers due to cannabis banking; however, reputational damage can occur if an institution fails its cannabis clients.

Legal Risks Associated with Cannabis Banking

Legal risks are perceived as minimal despite potential federal crime implications since prosecutors typically lack appetite for pursuing financial institutions involved in safe cannabis money handling.

Financial institutions are highly regulated entities, which further protects them from legal repercussions related to aiding cannabis businesses.

Future Developments in Cannabis Regulation

Rescheduling Efforts Under Biden Administration

In May 2024, President Biden directed federal agencies to initiate rulemaking for rescheduling cannabis from Schedule I to Schedule III, recognizing medical benefits similar to those of other Schedule III drugs like codeine.

Impact of Executive Orders on Cannabis Policy

On December 18th, President Trump issued an executive order aimed at rescheduling cannabis. This directive requires the Attorney General to expedite the rulemaking process initiated by Biden's administration.

While this executive order does not immediately change cannabis scheduling, it signals optimism for future developments regarding federal recognition of medical benefits associated with cannabis.

Rescheduling Cannabis: Implications and Insights

Overview of Rescheduling Process

The speaker expresses optimism about the rescheduling process for cannabis, despite concerns that it may face delays. They view President Trump as a significant influencer in this decision-making.

It is noted that President Trump has been advised to pursue rescheduling, indicating a strong likelihood of movement in this area.

The 2024 rulemaking process has already begun with a substantial number of comments (43,000 total), where approximately 40,000 were in favor of rescheduling.

Impact on Cannabis-Related Businesses

Regardless of the outcome of the rulemaking, all cannabis-related businesses (CRBs), both medical and recreational, will continue to operate in a federally illegal space.

For medical CRBs to become federally legal, the FDA must establish a regulatory framework covering dosage testing and advertising among other aspects.

Adult-use CRBs will remain federally illegal even after the FDA framework is established, which poses challenges for banking institutions.

Financial Institutions' Considerations

Both medical and adult-use accounts will still be considered high-risk by banks and credit unions post-rescheduling.

The existing compliance requirements from 2014 FinCEN guidance will remain unchanged; onboarding processes and due diligence are still necessary for financial institutions dealing with CRBs.

Regulatory Environment and Future Expectations

There is speculation about whether FinCEN might revise its guidance following rescheduling; however, no changes have been made thus far despite previous discussions on burdensome compliance regimes.

The speaker recalls past remarks from Deputy Attorney General James Cole regarding the need for less stringent compliance measures for banks working with CRBs.

Examination Treatment Variability

Differences exist in how examiners treat CRB programs across regions; there’s an ongoing debate about applying a uniform approach given varying state conditions.

Despite potential changes from rescheduling, CRBs will still function within a federally illegal framework.

Deregulatory Trends

Current administration trends lean towards deregulation; historical context provided through reference to the Chevron case highlights judicial deference to administrative agencies’ interpretations.

Loperbrite Decision and Its Impact on Regulatory Approaches

Changes in Regulatory Treatment

The Loperbrite decision is expected to lead federal regulatory agencies, including financial regulators, to adopt a more differential approach towards regulated entities due to increased litigation risks.

The Streamline Act is currently under consideration by the Senate Banking Committee, proposing an increase in CTR reporting thresholds from over $10,000 to $30,000.

Advocacy for Regulatory Changes

A letter has been submitted to the Senate Banking Committee requesting the elimination of marijuana limited SAR filings as part of efforts to streamline regulations.

While enhanced onboarding and monitoring will still be required for high-risk accounts, the aim is to reduce unnecessary data flooding regulators with ineffective information.

Risk Assessment Post-Rescheduling

Diminished Risk Circles

Following potential rescheduling of cannabis to Schedule III, there may be a slight reduction in risk across three identified circles: compliance requirements remain but overall risk diminishes.

Legal and reputational risks are perceived as lower when comparing cannabis products to more dangerous substances like heroin or LSD.

Commercial Lending Services and Associated Risks

Expanding Financial Services

The discussion includes expanding services into commercial lending while maintaining awareness of BSA compliance, legal, and reputational risks.

FinCEN guidance does not differentiate between lending and depository services; thus all financial services must adhere to similar compliance standards.

Complex Relationships in Lending

Engaging in commercial lending introduces complexities regarding relationships with customers (CRBs), especially if compliance issues arise during loan terms.

It’s crucial for lenders to vet borrowers thoroughly and maintain ongoing monitoring of loan purposes and payment sources. Communication between BSA departments and commercial lending teams is essential for effective oversight.

Understanding Compliance and Lending in Cannabis Businesses

The Role of BSA Officers in Evaluating CRBs

It is essential to consult with your BSA officer to determine if a Cannabis-Related Business (CRB) is a suitable candidate for lending.

Advocating for "carrots for compliance," the speaker emphasizes rewarding compliant CRBs with commercial lending opportunities.

CRBs that demonstrate an established compliance record and timely, consistent information sharing are preferred candidates for lending.

Open communication between the commercial lending department and the BSA department is crucial for effective collaboration.

Changes in Tax Implications for Cannabis Businesses

A significant change will occur once rescheduling happens: Section 280E of the federal tax code will no longer apply to cannabis businesses.

There has been confusion regarding whether this applies to medical versus adult-use cannabis; however, it pertains to the substance itself rather than its use case.

The removal of Section 280E means CRBs can deduct business expenses, leading to improved financial health with better balance sheets and profit margins.

Collateral Risks in Commercial Lending

Financial institutions should be selective about collateral when engaging in commercial lending within the cannabis sector, avoiding using cannabis products as collateral due to potential legal issues during defaults.

Preference should be given to tangible assets over intangible ones like licenses when determining acceptable collateral types.

Valuation of collateral should adopt a conservative approach, assessing value from a non-cannabis perspective rather than specialized uses related to cannabis operations.

Legal and Contractual Risks Associated with Cannabis Lending

Legal risks include ensuring compliance with BSA obligations post-loan issuance; specific side agreements addressing these concerns are recommended for financial institutions entering this space.

Institutions should have tailored loan agreements that clarify how collateral can be used by CRBs and stipulate conditions under which loans may default or require renegotiation due to regulatory changes.

Rewards of Engaging in Cannabis Commercial Lending

Increased interest income is a primary benefit; financial institutions charge premiums on loans due to higher associated risks within the CRB sector, justifying premium pricing strategies.

Diversification of commercial loan portfolios through engagement with CRBs presents an opportunity despite inherent risks, creating potentially sticky relationships beneficial for both parties involved.

Cannabis Banking Insights and Considerations

Financial Institution Strategies for CRB Lending

Financial institutions can enhance both interest and fee income by charging fees on depository relationships during the loan term.

There is a high demand from Cannabis-Related Businesses (CRBs) for financing, often turning to private lenders with exorbitant rates due to limited options.

With regulatory changes, there is potential for financial institutions to offer commercial lending to CRBs, which requires careful risk management decisions from boards and senior management.

Policy Development for CRB Commercial Lending

Institutions need a strategic plan that includes a revised commercial lending policy specifically addressing CRB needs.

Establishing clear collateral considerations and limits is essential in the new lending framework for CRBs.

A strict approval process must be defined, determining whether board or senior management will authorize loans.

Importance of Board Engagement

Given the high-risk nature of BSA compliance in cannabis banking, active board engagement is crucial; this should be documented in board minutes.

Examiners look favorably upon visible board involvement in managing risks associated with commercial lending.

Communication with Customers Regarding Regulatory Changes

Institutions may receive inquiries from CRB customers about recent regulatory announcements; proactive communication through letters or Q&As is recommended.

It's important to clarify ongoing BSA obligations despite any positive changes in account treatment, emphasizing continued operational risks.

Market Trends and Competitive Landscape

The cannabis banking space is expected to see increased competition as more financial institutions enter due to reduced reputational risks and opportunities for interest income.

Enhanced product offerings like smart safes are suggested as ways to build trust with CRBs while navigating competitive pressures on fees.

Assistance from Legal Experts

Cogent Law offers support through presentations on cannabis banking policies and procedures tailored for financial institutions entering this market.

They provide legal opinion letters regarding risks associated with cannabis banking, which some regulators require.

Hemp Banking and Recent Developments

Overview of Hemp Banking Issues

The speaker introduces the topic of hemp banking, indicating a significant amount of ongoing changes in this area. They express willingness to discuss further if attendees have questions.

A recent appropriations bill from November has reportedly recriminalized 90% of hemp businesses, creating uncertainty within the industry. However, an executive order on December 18 offers hope by suggesting updates to the definition of hemp.

The speaker encourages attendees to reach out with any questions regarding hemp banking, providing their contact details for further assistance.

Engagement and Closing Remarks

The speaker acknowledges that they did not allocate time for questions during the session but expresses openness to address inquiries either now or later via direct communication.

Concluding remarks include gratitude towards attendees and a reminder that they are available for follow-up discussions about hemp banking issues.