By Elayna Z. Matthews, Creditors’ Rights & Bankruptcy and Litigation Attorney
The American Bankers Association (“ABA”) recently urged the United States Senate to promptly issue rules, regulations, and industry guidance to banks and financial institutions that want to bank with and lend to individuals and businesses in the quickly expanding hemp industry, including those growing hemp domestically or engaged in the hemp processing or retail sale industries. The ABA issued a “Statement for the Record” on July 25, 2019 before the United States Senate’s Agriculture, Nutrition and Forestry Committee highlighting the need for additional clarifications for banks and financial institutions to bank with and lend to the hemp industry, which was one of the clear purposes of the 2018 Farm Bill.
- 2018 Farm Bill – The 2018 Farm Bill, effective December 20, 2018, legalized the production and sale of hemp as an agricultural commodity and removed it from the list of controlled substances. The 2018 Farm Bill requires the United States Department of Agriculture (“USDA”) regulations to bring the entire bill into full force and effect. USDA interim regulations are anticipated for the Fall of 2019.
- Hemp vs. Marijuana – Hemp is the same plant as marijuana (Cannabis sativa L.), and marijuana remains illegal at the federal level. The only difference between hemp and marijuana is that hemp must contain less than 0.3% Tetrahydrocannabinol, commonly called “THC”, which is the substance in marijuana that gives its users a high.
- Ambiguous Federal Guidelines for Banks and Lending Institutions – The 2018 Farm Bill did not clarify how banks and other lending institutions can comply with all applicable federal laws regulating hemp and service those involved in the hemp industry. Additional industry guidance is needed to clarify how banks can lawfully service the hemp industry. The 2018 Farm Bill does not specify which federal agency is tasked with issuing banking and lending regulations; it only tasks the USDA with issuing hemp program regulations generally.
- American Bankers Association “Statement for the Record” – On July 25, 2019, the ABA submitted a “Statement for the Record” urging the United States Senate’s Agriculture, Nutrition and Forestry Committee to provide additional direction for banks and lending institutions seeking to act in legal compliance while working with hemp businesses.
- Despite State & Industry Calls for Federal Guidance, Ambiguity is Expected to Continue – In spite of the deluge of requests for federal guidance, it is unclear when banks and other lending institutions might expect specific instructions.
ABA’s Multiple Pleas to Federal Regulators to Clarify Lawful Hemp Lending and Banking
The ABA’s “Statement for the Record” was not the first public letter issued by the ABA and urging federal regulators to clarify how banks can lawfully bank with the hemp industry. Last month on June 21, 2019, the ABA urged several chairmen and directors of the Federal Reserve System (the “Fed”), the Comptroller of the Currency, and the Financial Crimes Enforcement Network to act with a similar plea. The ABA requested assistance from these influential financial regulatory agencies “to provide the nation’s banks with clarity regarding compliance with the Agricultural Improvement Act of 2018”, which de-listed hemp from the Controlled Substances Act and generally legalized its production in the United States.
The ABA’s letter also followed a similar letter co-authored by the state banking associations for every single state in the country addressed to the chair and ranking member of the U.S. Senate Banking Committee on May 20, 2019, where the banking associations urged the Senate “to conduct hearings on the merits of providing cannabis-related businesses access to banking services.” These letters indicate that the 2018 Farm Bill does not contain the necessary guidance for banks to confidently and lawfully lend to and bank with the hemp industry.
2018 Farm Bill Leaves Ambiguity for Hemp Businesses, Lenders Alike
Even though the clear intent of the 2018 Farm Bill was to legalize hemp, the 2018 Farm Bill does not clarify how banks and other lending institutions can comply with all applicable federal laws regulating hemp and service those involved in the hemp industry. That task is left up to federal regulators. Hemp is legal under the 2018 Farm Bill, but hemp is the same plant as marijuana, which remains illegal at the federal level. The only difference between hemp and marijuana is that hemp must contain less than 0.3% Tetrahydrocannabinol, commonly called “THC”, which is the substance in marijuana that gives users a high. The 2018 Farm Bill requires that the U.S. Department of Agriculture (“USDA”) promulgate regulations to give the bill meaning and set forth industry expectations, but the regulations are not expected until fall of 2019 at the earliest, with possible interim regulations as early as August 2019. There is no guarantee that the USDA’s regulations will clarify things for banks.
Lender Due Diligence in the Post-2018 Farm Bill World
Banks that want to do lawful business with hemp customers now, but still avoid riskier marijuana clients, need to know what sort of due diligence and reporting requirements they should require of hemp customers to remain in full compliance with the law and the federal financial industry regulators. FinCEN has issued very limited guidance for banks desiring to lend to marijuana customers, and some banks have elected to follow FinCEN’s guidance even with their non-marijuana hemp customers. It remains unclear in most states how a bank can take a valid and fully enforceable security interest in a borrower’s hemp, whether it be the crop or a retail hemp product.
Additionally, for lenders in Oregon, the Oregon Farm Product Effective Filing Statement (“EFS”) still has not been updated to include hemp or marijuana to the categories of available farm products. At this time, Banks that want to work with hemp customers are strongly encouraged to carefully review all existing statutes, rules, regulations and policy guidance that does exist concerning the lawful production and sale of U.S. grown hemp and to develop robust internal policies and procedures for handling hemp accounts and loans. Banks are also encouraged to have a plan to ensure the institution’s policies are current since hemp regulations are evolving quickly.
Farm Bill Supporters in U.S. Senate Echo ABA’s Requests for Guidance
The ABA is not the only one trying to get federal regulators’ attention and promote clarity for lawfully servicing the hemp industry. Senators Ron Wyden (D-Or.) and Mitch McConnel (R-Ky.), strong supporters of the 2018 Farm Bill, co-wrote a letter to the Federal Deposit Insurance Corporation (“FDIC”), the Office of the Comptroller of the Currency (“OCC”), the Farm Credit Administration (“FCA”), and the Fed on April 2, 2019, urging each agency to “offer guidance” to banks and other industries in order to “ease any concerns” about engaging with and providing banking and lending services to hemp businesses.
And more recently, Senator Wyden wrote to the U.S. Food and Drug Administration (“FDA”) on June 25, 2019, and expressed concern with the agency’s current approach to regulate hemp-derived cannabidiol, commonly known as “CBD”, a popular newer product with numerous claimed health benefits that can now be found in many national and local retail stores in products such as sodas, lotions, and supplements. Senator Wyden urged the FDA to issue an interim final rule to ensure that CBD products can lawfully remain on grocery store shelves nationwide as a food additive and dietary supplement ingredient until more robust regulations can be enacted.
Though many stakeholders and politicians have publicly urged federal regulatory agencies to issue quick guidance to enable banks and other service industries to lawfully service the hemp industry, the legislative process takes time, and quick resolution of the nationwide confusion is not going to end anytime soon. Until robust regulations are promulgated, banks that service the hemp industry must continue to do so within the murky regulatory framework that currently governs the hemp industry. Contact our Financial Services Industry Team to learn more and check back for additional information regarding the Secure And Fair Enforcement Banking Act (the “SAFE” Banking Act) of 2019.
Elayna Matthews is an associate in the Litigation and Creditors’ Rights & Bankruptcy practice groups and the Financial Services Industry Group. The information in this article is not intended to provide legal advice. For professional consultation, please contact Elayna Matthews at Saalfeld Griggs PC. 503.399.1070. [email protected] © 2019 Saalfeld Griggs PC