Bank Lawyer's Blog

More Depth On Legal Issues Surrounding Marijuana Banking

University of Alabama Law Professor Julie Anderson Hill has posted a draft of a work-in-progress, an article for an upcoming Case Western Law Review Symposium Issue, entitled "Banks, Marijuana, and Federalism." In it, she explores the legal issues surrounding banks providing banking services to state-legal marijuana-related businesses in more depth than you'll see on the pages of this rag. While it requires some polishing (including the addition of a specific discussion of Fourth Corner, the Colorado cannabis co-op, in a section in the later portion of the article that she discusses in passing earlier in the article), I found it to be a valuable addition to the analysis of the risks to banks that want to provide services to such businesses.

Here's a portion of the "abstract" of the article provided by Professor Hill, which summarizes her approach and conclusions:

This article explores the root of the marijuana banking problem as well as possible solutions. It explains that although the United States has a dual banking system comprised of both federal- and state-chartered institutions, when it comes to marijuana banking, federal regulation is pervasive and controlling. Marijuana banking access cannot be solved by the states acting alone for two reasons. First, marijuana is illegal under federal law. Second, federal law enforcement and federal financial regulators have significant power to punish institutions that do not com-ply with federal law. Unless Congress acts to remove one or both of these barriers, most financial institutions will not provide services to the marijuana industry. But marijuana banking requires more than just Congressional action. It requires that federal financial regulators set clear and achievable due diligence requirements for institutions with marijuana business customers. As long as financial institutions risk federal punishment for any marijuana business customer’s misstep, institutions will not provide marijuana banking.

Among the many fascinating (to a nerd like me, at any rate) observations made by Professor Hill was the following potential problem with the Federal Reserve approving Fourth Corner's access to the federal reserve payments system:

If the Federal Reserve provided payment services to a cannabis credit co-op, the Federal Reserve and its employees would be engaging in money laundering. They might also be conspiring to manufacture and distribute marijuana, aiding and abetting the manufacture and distribution of marijuana, and acting as accessories after the fact for the manufacture and distribution of marijuana. 

As long as they don't process payments for payday lenders, online dating services, or Smith & Wesson, they should be safe from prosecution under the "prosecutorial discretion" mantra chanted by the present executive branch monks until the current administration vacates the White House. The problem with that approach is that the statutes of limitation will not have expired by the time new Attorney General Ted Cruz decides to wage a little MJ jihad on every Justice Department and federal bank regulatory agency official who looked the other way when some bankers in Colorado or Washington lit up a fat boy and followed the money.

I also agree with her conclusion that, while action by the U.S. Congress is necessary, it's not enough. A change in attitude by federal bank regulators will also be required, whether of not we get a federal legislative fix. If due diligence requirements make it too risky and expensive to bank these businesses, then marijuana businesses are going to find themselves continuing to face problems that only a third-party payment processor or payday lender could truly appreciate.

MJ Law 101

Being hooked up with a Colorado-based firm, I've given a lot of thought (and blog space) to the intersection of law (particularly banking law) and marijuana. As a result of these deep thoughts I'd like to say...uh...ummm..yeah...

What?

Dude!

It turns out I'm not the only one hanging out at corner of Bank and Bong Streets. So has professor Sam Kamin of my former place of abasement, The University of Denver's Sturm College of Law. According to a recent article by the editor of the The Denver Post's "The Cannabist" column, Professor Kamin will teach a course entitled "Representing the Marijuana Client." The description of the course does not describe whether the emphasis will be on representing clients who are under the influence of marijuana, are engaged in the state-lawful, federal-unlawful marijuana-related business, or are, themselves, marijuana. Taken literally, a "marijuana client" could be a joint, a roach, an edible, or merely a pipe bowl of stems and seeds.

Among the topics addressed in the course description will be "banking," and we assume that does not refer to a type of turn performed by an airplane, but, rather, the legal issues surrounding a commercial bank providing services to a marijuana-related business. As we recently pointed out, that aspect of the course can summed up rather quickly: it's illegal under federal law.

See, we saved potential students some time and money. We here at bank lawyers blog are all about mentoring.

On the other hand, as Kamin rightly points out, the issues involved are many and complex.

When I was on the Amendment 64 task force and just thinking about an edible — what can be in it, who’s determining what’s in it, what the dosage is, how you indicate the dosage, how you make sure it’s safely packaged, how it can be advertised,” he said. “Every small piece of it has so many regulatory issues, so if you’re working in that area, running a MIP (marijuana-infused product manufacturer) or something, the state, local, federal regulations of that are mind-boggling.”

As they are if you're trying to bank one of those businesses.

We wish Professor Kamin and his students well, because, this is an issue that is not going to simply disappear in a cloud of smoke. Moreover, it's not an issue confined to Colorado, but one that affects a growing number of states. Therefore, Kamin's closing statement is very cogent.

“It’s an expertise our students will have and others won’t,” he said. “There’s a lot of demand for this — and we’re trying to position our students well to fit in there.”

Yes, when it comes to marijuana, there has always been a lot of demand. As long as the students who take the course do not (even casually) partake of the subject matter, they might actually be able to render some useful advice to those in need of it.

State Nullification: Inhale Deeply

When we asked a couple of months ago whether the Cannabis Co-operative Credit Unions that have been authorized by Colorado law were "dead on arrival," we thought that the answer was "yes." Yet, there appears to be a beating heart and hopeful heart in this body, inasmuch as the State of Colorado recently granted the first such charter.

There  are a couple of catches, however. First, the NCUA still has to grant deposit insurance, which may be a couple of years away (although Colorado law allows the co-op to open its doors as long as it has "applied" for NCUA insurance). The second is that state law requires that the credit union have access to the Federal Reserve system via a master account. One of the attorneys for the credit union asserts that the credit union has a "right" to a master account. I'm not so sure, but I guess we'll see, won't we? 

This development comes on top of anecdotal evidence that a few banks are providing financial services for marijuana-related businesses and that the federal banking regulators know about it and are "tacitly" approving the same (in other words, not writing up the bank in an examination for engaging in this activity, as long as they have the right "risk-management policy" in place). If those instances denote a trend, then apparently "prosecutorial discretion" is waxing in areas other than illegal immigration. Apparently, you have to be involved in a much more heinous business like legal payday lending, check-cashing, legal gun-selling, deposit advance lending, overdraft protection, and legal online match-making before you offend the ethical sensibilities of the US Justice Department and the federal banking regulators. Engaging in organized drug financing in violation of federal criminal statutes is not worth the while of the current occupants of the executive branch of the federal government.

On the issue of whether or not recreational marijuana use ought to be decriminalized at the federal level, I'm an evangelical agnostic. I believe deeply, based solely on divine revelation and natural law informed by reason, that there are valid arguments on both sides of the issue, and I'm willing to listen to rational argument both for and against the proposition. However, the fact remains that what Fourth Corner Credit Union and those who assist it in servicing marijuana-related businesses is illegal under federal criminal laws. They are violating federal drug laws, and, arguably, engaged in a conspiracy to do so. There are a number of convicted felons whiling away their days in federal penitentiaries for having engaged in organized activity to promote the cultivation, harvesting, processing, distribution, and sale of marijuana, and the "processing" of funds derived from such activities.

This nation once almost went to war with certain states (South Carolina being the most prominent) over the theory of "nullification," whose advocates asserted that states could "nullify" within their borders the application of federal laws with which the state disagreed. President Jackson was prepared to use federal troops to invade any state that tried to put that theory into practice. Although the specific issue at that time involved tariffs, and today it involves the use of drugs, one hundred and eighty years later we seem to be on the verge of the same war, in which certain states think that they can, by changing their state laws on drugs, somehow nullify the effect of federal drug laws within their borders. A critical difference today is that the federal authorities are not only not prepared to combat the nullification effort, they appear to be accommodating it.

With several states, and the District of Columbia, enacting recreational marijuana use legislation earlier this month, and with more states expected to consider similar legislation in 2016, the issue is not going away and it's not just a problem for Colorado and Washington state. Personally, I think it would be better for the respect for the rule of law to have a debate in Congress over the merits of changing federal drug laws, or, at the very least, to have the Justice Department go through the process of considering the removal of marijuana as a Schedule 1 controlled substance. Moreover, for those financial institutions and those that aid and abet them in financing marijuana-related businesses, January 2017 could bring the second coming of a John Ashcroft wanna-be as Attorney General, and the worm could turn. If that happens, the discretion of prosecutors may be to nail your hide to the side of a barn. After all, I remember when "open bank assistance" and "forbearance" were not dirty words for bank regulators. Times change. Stuff happens.

Actually, I don't expect such cautionary advice to concern those most at risk. They're too busy inhaling and munching.

Cheech and Chong Join The FDIC

There was some rather surprising news this week via the American Banker (paid subscription required) regarding banking: the FDIC is following FinCEN's lead in telling banks in Colorado (and elsewhere) to "smoke 'em if you've got 'em."

The Federal Deposit Insurance Corp. has quietly aligned itself with guidelines from the Financial Crimes Enforcement Network that are meant to assuage bankers' fears about the burgeoning marijuana industry, American Banker has learned.

[...]

Back in February, when Fincen released its guidance, the FDIC declined to comment on the document. But on Monday, FDIC spokesman Greg Hernandez confirmed that the agency is currently using the Fincen guidance.

The FDIC's decision to use the guidance is significant because federal banking agencies had previously refused to say whether they'd align themselves with the document, which is part of a broader Obama administration push to foster state-level experiments with marijuana legalization.

[...]

During one recent bank examination, an FDIC official told the bank's directors that the agency is in alignment with Fincen's marijuana guidance, according to Lance Ott, a consultant to the bank who heard the discussion. At the same time, the FDIC employee made clear that the agency is neither encouraging nor discouraging banks from serving pot merchants, Ott said.

The FDIC official told the bank that marijuana is a higher-risk business because of its dependence on cash and the increased chance of robbery, but that pot businesses do not hold a reputational risk for banks in states such as Colorado and Washington that have legalized the drug, Ott recalled.

One commenter to that article put one ironic aspect of this recent news very well.

Lemme see if I understand this. Two federal agencies, the FDIC and FinCEN, are knocking themselves out to have banks provide services to pot businesses which are legal in only a handful of states, while being illegal under federal law. Yet the FDIC, until just recently, actively participated in overt (Operation Chokepoint) and still participates in covert efforts to pressure banks to discontinue providing services to so-called alternative financial service providers, such as check cashers, money remitters and payday advance companies, that are legal in most states and are registered (legal) with FinCEN as Money Service Businesses. Where is the logic??

Logic? You want logic? Silly boy!

At the same time that the FDIC is inhaling deeply, its counterpart in the credit union arena is apparently blowing cold.

A New Mexico credit union closed its marijuana business accounts after a negative reaction by a NCUA field examiner, according to Paul Stull, president/CEO of the Credit Union Association of New Mexico in Albuquerque.

“From what I was told, the field examiner's reaction was quite over the top,” said Stull, who declined to name the specific credit union involved in the alleged incident. “The examiner said there was no way this could be done legally.”

The credit union closed the accounts after an examiner threatened to issue a letter of understanding and agreement if it didn't do so, Stull said. To his knowledge, there are no credit unions currently offering banking services to New Mexico's licensed medical marijuana businesses.

I spoke with the chief compliance officer of a Colorado Fed-member state bank that a Federal Reserve examiner made comments to her bank to the effect "You know, other banks in Colorado are banking marijuana businesses," but when she tasked if that meant that the Fed was taking the position that as long as the bank complied with the FinCEN guidance, the Fed would not object, the examiner backed off and said that he didn't mean to imply that such activity was OK or not OK, but that each bank needed to make an individual risk decision. Whatever the hell that means.

In other words, the federal regulators are all over the board on this issue.

The head of the Washington Bankers Association spoke for all but a tiny minority of banks in both Colorado and Washington (and elsewhere).

James Pishue, president of the Washington Bankers Association, said that the vast majority of banks are still staying away from marijuana because the drug remains illegal under federal law. "There really needs to be a federal solution to this," he said.

Yes, here's the basic risk for a bank that knowingly provides banking services to a marijuana business: The...Bank...Is...Violating...Federal...Criminal...Laws. The bank has to depend on the forbearance of federal government regulators and prosecutors to continue to get away with that law-breaking activity. If that's how you want to roll, go for it. You'll look great in pinstripes once John Ashcroft's doppelganger takes over as Attorney General in January 2017.

On the other hand, you are going to need to smoke dope to comprehend the current regulatory landscape of banking dope.

Coakley's Special Friend

Massachusetts Attorney General and wanna-be governator, Martha Coakley, has tried to make political capital out of her lawsuit against the FHFA and its wards, Fannie Mae and Freddie Mac, over their policy of refusing to permit the sale of houses to non-profit organizations who intend to resell the home to the borrowers who have defaulted on the loan secured by a loan that is owned by Aunt Fannie or Uncle Freddie. We last discussed the lawsuit in June.

While Martha has publicly trotted out one of the nonprofits involved in this scheme as a paragon of virtue and the Plantonic ideal form of nonprofit rectitude compared to which all other nonprofits are merely a pale reflection, some investigative reporting has uncovered the fact that the CEO of said nonprofit is a campaign contributoer to Ms. Coakley.

Massachusetts Attorney General Martha Coakley stands accused of failing to disclose close ties between her gubernatorial campaign and a nonprofit that’s at the center of the State of Massachusetts’ lawsuit against the Federal Housing Finance Agency, Fannie Mae and Freddie Mac over buyback programs.

According to a new report in The Boston Globe, Elyse Cherry, the CEO of Boston Community Capital, is the co-chair of Coakley’s campaign finance committee.

Cherry’s Boston Community Capital is also the focus of a lawsuit filed by Coakley against the FHFA, Fannie and Freddie, which alleges that Fannie and Freddie, currently under FHFA conservatorship, are refusing to comply with the Massachusetts law called “An Act to Prevent Unnecessary and Unreasonable Foreclosures.”

One of the provisions of the law, which was passed in August 2012, prohibits creditors from blocking home sales to non-profits simply because the non-profit intends to resell the property back to the former homeowner.

In the lawsuit, filed in June, Coakley said that these foreclosure buybacks are exactly what the GSEs are preventing by refusing to engage in the buyback program.

When Coakley filed the lawsuit in June on behalf of the State of Massachusetts, she specifically cited Boston Community Capital’s Stabilizing Urban Neighborhoods Initiative as an example of how the Massachusetts buyback program can work.

[...]

But according to the Globe report, Cherry hosted a Coakley fund-raiser mere days before the lawsuit was filed.

From the Globe report:

Though Cherry’s work has drawn high-profile supporters, Coakley’s lawsuit is drawing criticism from a prominent affordable housing advocate who opposes Cherry’s approach and a government ethics champion who says Coakley should have disclosed her ties to Cherry to avoid the appearance she’s doing favors for insiders.

“It’s important that the public knows about private dealings that could potentially affect government action,” said Pam Wilmot, executive director of Common Cause, a nonprofit group that promotes transparency in government.

Coakley said there was no need to file a public disclosure with the State Ethics Commission since Cherry’s $3,250 in state donations to Coakley since 2005, the $1,500 she gave to Coakley’s failed US Senate bid in 2010, and the $5,000 she donated to the Democratic State Committee in September are already matters of public record.

One of the interesting aspects of the criticism of the Cherry-Coak(ley) connection is that much of it is coming not from the Titans of Wall Street, The Top 1%, or Darth Vader, but from folks who you would think would be rising to Coakley's defense. Among these critics is a guy who usually considers no bar is too low to limbo under, as long as the result of dancing under it is the infliction of pain on a lending institution.

Bruce Marks, a longtime housing advocate and chief executive of the Neighborhood Assistance Corporation for America in Jamaica Plain, saidthat Cherry’s buyback program is flawed because Boston Community Capital buys foreclosed-upon homes at a discount from lenders, but doesn’t pass along all the savings to families that were foreclosed upon. Instead, her group typically boosts the resale price by at least 25 percent, Boston-area property records show.

Marks cites Coakley’s yearly salary, $590,000 in 2013, as evidence that she “paints herself as this advocate for the consumer, and it’s the opposite.”

Marks also said that BCC makes money on each home refinance it conducts because BCC marks up the home by 25% above the price it paid to the lender when BCC resells it to the homeowner. According to Marks, borrowers must also bring approximately $5,000 in fees to the closing.

Marks said that BCC charges an interest rate 6.375% for the loans it gives to the previously distressed borrower, which is two percentage points more than what BCC pays for the money it borrows to make the loans.

“If a bank was doing that, you’d charge them with predatory lending,” said Marks, who said his group collects a small fee from banks to help homeowners negotiate a reduced mortgage payment with their lenders.

A two percent spread is predatory lending? C'mon Bruce! Even your running buddies in Havana wouldn't drink that vat of Kool-Aid.

While I doubt that in the Peoples Commonwealth of Massachusetts this particular kerfuffle, standing alone, will cost Martha the governor's crown, the race against Charlie Baker is currently neck-and-neck. When your opponents and a good portion of your supporters gang up to publicly question your conduct on ethical grounds shortly before early voting starts, you're not doing yourself, or the lawsuit that you're waging as much through press releases as through motions and briefs, any favors.

MJ Co-Ops: DOA?

Readers may recall the brilliant idea for "cannabis co-ops," hatched by Colorado legislators who, sunshine on their shoulders, were not only crying at the beauty of the concept, but apparently flying at 30,000 feet on a Rocky Mountain High. And, of course, as was the case with the Dude's soiled floor rug, they were looking for a way to "tie the room together."

Notwithstanding that the law passed and was signed by Colorado's ever-optimistic governor Hickenlooper (yes, that's his real name) in June, according to this morning's The Denver Post, the idea has generated as much movement as a convocation of stoners with a sweet tooth and a gross of Hasheys Bars.

Even with the flurry of international publicity that swirled last spring around the groundbreaking effort — one that theoretically would allow pot businesses to band together and form their own banking entity — there has been lukewarm interest in giving it a try without first knowing it's not a useless effort.

As such, there hasn't been a formal application to the federal agency that would have to approve one.

That "federal agency" is the Federal Reserve.

For now, the Federal Reserve hasn't said one way or the other — probably because there hasn't been a formal application for access to the nation's financial system.

My guess is that the Federal Reserve will channel the spirit of Nancy Reagan and "Just Say No!" On the other hand, it may adopt the response that federal banking regulators have thus far revealed with respect the requests of the governors of Colorado and Washington for regulatory guidance to banks on banking "legitimate" marijuana businesses in their states: The Mount Rushmore Response. This involves impassive staring and no audible sound.

According to cannabis industry representatives, while no applications have been filed yet, they are "seeing some movement" on the cannabis co-op front. Unfortunately, the initial meeting to discuss the first application never got off the ground when chief organizer "Dave" was unable to gain access to the conference room.

More On A Higher Standard For Bank Directors

Kevin LaCroix has some further thoughts on John Gorman's criticism of the proposal of FRB Governor Daniel Tarullo and certain academics that bank officers and directors should be held to a different (i.e., more stringent) fiduciary standard than officers and directors of other types of corporations. After discussing John Gorman's criticism of Tarullo's proposal (discussed here), LaCroix also discusses recent decisions by a federal district court judge in Georgia and the Georgia Supreme Court, the upshot of which is that while bank officers and directors (in Georgia, at least) are entitled to the protection of the business judgment rule, there may be some basis for holding them liable for ordinary negligence (as opposed to the higher "gross negligence" liability standard that is the "default" standard under FIRREA and the effective standard if the business judgment rule is applied). Kevin is concerned.

It should be emphasized that the academics’ proposal to hold bank directors to a higher standard was limited just to directors of systemically important financial institutions. I share the concerns John Gorman expressed in his American Banker article about this proposal. However, I have additional concerns, which is that there are already theories floating around that bank directors should be held to a different standard than directors of other companies, as shown by Judge Thrash’s remarks in the Buckhead Community Bank case. My concern is that if the idea were accepted that directors of systemically important banks should be held to have expanded fiduciary duties, the idea would quickly expand beyond just systemically important institutions and be applied to many , most, or even all bank directors, without regard to whether or not their institution is systemically important.

This was the same concern I expressed in my earlier post, and it's comforting to know that other observers share your concern about "trickle down" liability.

Kevin is particularly concerned about the spate of litigation directed against officers and directors of failed banks by the FDIC. The FDIC has been attempting to whittle away the business judgment rule wherever possible. The long-range implications are troubling.

There undoubtedly are meritorious lawsuits filed against bank directors, particularly where there is evidence of self-dealing or complete abdication of responsibility. Just the same, the overall level of litigation aimed at bank directors is both excessive and socially inefficient, particularly with respect to the litigation that so often follows after banks’ failures. So often the failed bank lawsuit allegations consist of little more than scapegoating and hindsight second-guessing. Creating a liability regime that would encourage further litigation and expand the potential liabilities of bank directors would accomplish little except enlarging the litigation burden that prospective directors would have to consider before accepting a seat on a bank board.

There is no question that prospective directors of financial institutions (especially community banks) have to think long and hard about the potential liability before agreeing to accept a board seat. For an increasing number of otherwise qualified candidates, the decision may be that if you don't have "a dog in the hunt" (a substantial financial investment in the bank), the benefits of being on the board do not outweigh the risks if (God forbid!) "something bad happens."

FinCEN: All's Well With Marijuana Banking

Apparently, FinCEN chief Jennifer Shasky Calvery has surveyed the battleground that is marijuana banking, decided that the battle has been won, and is telling the world to "move along now, nothing to see here" (paid subscription required).

There are 105 U.S. financial institutions providing banking services to marijuana dispensaries and other pot businesses, a top federal official is expected to reveal in a speech Tuesday.

[...]

Marijuana shops, which generate large amounts of cash and can be targets of thieves, have been lobbying for more access to the mainstream financial system. The guidelines were meant to encourage financial institutions to do business with the industry provided they met certain criteria, and Fincen Director Jennifer Shasky Calvery is expected to declare that the agency's goal has been achieved.

"From our perspective the guidance is having the intended effect," Shasky will say, according to a copy of her prepared remarks that Fincen provided to American Banker. "It is facilitating access to financial services, while ensuring that this activity is transparent and the funds are going into regulated financial institutions."

Reporter Kevin Wack points out what Ms. Calvery does not: 105 financial institutions is less that 1% of the total number of financial institutions, which means that 99% of all financial institutions won't do business with marijuana businesses that are legal under state law as long as dealing in marijuana is illegal under federal law. Most financial institutions in states like Colorado and Washington, where recreational marijuana sales and use are legal under state law, will simply not do business with purveyors of flammable and/or edible hemp-related products.

So, if the "intended effect" of the FinCEN guidance was to encourage financial institutions to bank marijuana businesses, it's difficult to see how she can make that statement with a straight face. In fact, our inside sources tell us that upon leaving the venue of her speech, Ms. Calvery was kidnapped by "Black Ops" storm troopers of the OCC and waterboarded until she coughed up the names of the Gang of 105.

There will be blood...

On another positive note, Ms. Calvery assured bankers that all those SARs they've been filing, including those "Cheech & Chong SARs" that related solely to the weed-related, are not being eaten by FinCEN's pet goat.

Between January and March 2014, teams across the country reviewed more than 180,000 of the more than 290,000 suspicious activity reports that were filed, according to the speech, which also details how the reports have been used to catch various kinds of criminals.

"So, as you can see, BSA reporting does not go into a 'black hole' as suggested by some in the financial industry," Shasky will say.

Well, knowing that 38% of the SARs filed are not reviewed doesn't exactly fill me with anything other than inertia. How about you? Are you all fired up, ready to go (file a SAR)? As to the 62% of SARs that were actually "reviewed," Ms. Calvery does not tell us with what kind of detail those reviews were performed. A cadre of anal-retentive Einsteins parsing the nuances with electron microscopes is one thing. A crew of high school students getting their community service credits in the bag while sitting in a SAR-filled bullpen sipping Red Bull and giving each other wedgies is another thing.

I'm still betting that there's a goat involved.

Secondary Smoke Allergy

I'm not sure if it's the collateral paranoia engendered by Operation Choke Point, the fact that regulators are on a crusade to root out evil wherever they see it (and they know it when they see it), or if somebody simply got ahold of a bad batch of weed, but the way banks are treating any business remotely (and I mean "remotely") connected with the (state) legal marijuana business has officially jumped the shark. It's time to untwist the knickers and take a deep breath.

We discussed not long ago a Texas promoter of a conference on legal marijuana businesses being cut off by his bank. More recently, we've discovered that Wells Fargo has thrown one of its Washington customers under the bus because he publishes a magazine with the word "marijuana" in the title.

Last week, Marijuana Venture magazine publisher Greg James said he was informed that Wells Fargo Bank would not accept deposits from the limited liability company that publishes the magazine.

Never mind that Marijuana Venture merely writes about the legal cannabis industry and does not promote marijuana use. "We are simply running stories on how to navigate the industry and promoting best of breed business practices," James said.

[...]

James is not the first person in Washington to find it difficult to work with banks because his business has at least some connection to marijuana. A banker told one Seattle-area entrepreneur who grows medical marijuana to stop bringing cash that reeks of weed into the branch. But James' business has nothing to do with the growing, processing or sales of actual marijuana. He's publishing a magazine about marijuana.

I get the "cash that reeks of weed" repugnance. After all, the largest banks only desire "cash that reeks of greed." That stink smells like a whiff of heaven to them.

James makes the valid point that once you start down the slippery slope of "unbanking" publishers of newspapers and magazines that are focused on discussing legal marijuana issues, you're not just on a slippery slope, you're riding a waxed toboggan down the slope.

James wonders whether banks would not deal with the Puget Sound Business Journal because the paper reports on the marijuana business. And what about the Denver Post, which has a marijuana editor?

I assume that the Post's marijuana editor had just consumed an entire bag of "Hashey's" bars and was "unavailable for comment."

The longer the federal bank regulators take to issue guidance on this issue, the longer it will take for the smoke to clear. Even though no one expects the regulatory agencies to put their seal of approval on banking MJ businesses themselves, they could give banks some comfort about banking the businesses that serve those businesses, like the landscape company that irrigates the plants or the electrical contractor that services the heat lamps. At the very least, they could assure quivering masses of protoplasm like Wells Fargo that the risk posed by Marijuana Venture is acceptable, especially compared to the risks of, for example, banking folks who are actually on OFAC's SDN list.

A Distinct Lack of Interest

In a think piece in yesterday's American Banker, attorney Michael Reyen discusses that fact the City of Richmond, California's "Seize The Mortgage" plan through the use of eminent domain has been stymied by the failure of the plan's supporters to obtain the supermajority approval necessary to obtain City Council approval to move forward with the half-baked scheme. As a result, its supporters are trying Plan B: partnering "with another community to form a joint powers authority and carry out the plan."

To date, it has not had any takers.

Why not? According to Reyen, because other municipalities fear (rightly, in my opinion) the costs and risks of litigation, and because the FHFA has threatened to pull Uncle Freddie and Aunt Fannie out of any municipality that starts seizing mortgages through such a means. As to litigation, although a federal court dismissed a lawsuit filed by mortgage loan securities trustees, the court did so "without prejudice." In other words, the issue was not yet "ripe," but if Richmond proceeds to actually implement the plan, "ripeness" will permeate the air like the scent of a thousand dead armadillos in the middle of an Amarillo blacktop in mid-August.

The negative reaction of the FHFA and mortgage securities investors would be even more consequential over the long haul.

The FHFA has stated that it may initiate legal challenges against any local or state government that sanctions the use of eminent domain to restructure mortgage loan contracts in a way that affects FHFA’s regulated entities, Fannie Mae and Freddie Mac. It has also said that it may act by order or regulation to “direct the regulated entities to limit, restrict or cease business activities within the jurisdiction of any state or local authority employing eminent domain to restructure mortgage loan contracts.” This amounts to a death sentence for residential mortgage lending in any municipality in which the FHFA limits, restricts or ceases business activities.

Notwithstanding these "strong headwinds," Reyen thinks that the idea is not yet dead, and cites the interest of Irvington, New Jersey, in pursuing the scheme. In my view, the headwinds will only become stronger if these plans move forward. In addition, as the economy continues to improve and real estate values eventually recover, the "need" for such "creative" measures to assist underwater borrowers will be harder to justify. That won't stop true believers from believing in it, but it may finally crater any practical chance of any such plan being seriously pursued to the point of "ripeness."