As an increasing number of states legalize marijuana for medical or recreational use — or both — the marijuana business is booming. For community banks, lending to or accepting deposits from marijuana-related businesses (MRBs) represents a lucrative opportunity, but it can also be risky. Marijuana continues to be classified as a controlled substance under federal law, so banks that do business with MRBs may risk being charged with aiding and abetting a federal crime.
The U.S. Department of Justice and the Financial Crimes Enforcement Network have issued guidelines that offer some comfort to banks. For example, the guidance states that banks won’t be prosecuted if they conduct thorough due diligence on MRBs, monitor them for money-laundering activities and comply with certain other requirements. However, many banks will understandably be wary of doing business with MRBs until federal legislation is enacted that normalizes relations between state-licensed MRBs and financial institutions. Stay tuned.
New interagency guidance on managing third-party risk
The Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the Federal Reserve have finalized their “Interagency Guidance on Third-Party Relationships: Risk Management,” which was proposed in 2021. The new guidance promotes consistency in the agencies’ supervisory approach to third-party risk management. (Previously, each agency had its own guidance.)
The guidance maps out the third-party risk management life cycle — planning, due diligence and third-party selection, contract negotiation, ongoing monitoring, and termination — and describes risk management principles applicable to each stage. The guidance also clarifies that a bank’s risk management program should focus on critical activities, while noting that not all third-party relationships are equally critical or present the same level of risk to a bank’s operations.
Watch out for “digital redlining”
Various federal laws and regulations protect consumers from unfair and discriminatory practices by banks. They include the Equal Credit Opportunity Act, the Fair Housing Act and the Dodd-Frank Act, which authorizes the Consumer Financial Protection Bureau to prosecute “unfair, deceptive, or abusive acts or practices.”
Federal banking regulators are particularly concerned about redlining. This is a form of illegal disparate treatment whereby a lender provides “unequal access to credit, or unequal terms of credit, because of the race, color, national origin, or other prohibited characteristic(s) of the residents of the area” in which the credit seeker lives or the mortgaged residential property is located. A bank may expose itself to allegations of “digital redlining” if, for example, it offers more favorable credit terms for products offered through certain channels — such as websites or social media platforms — that are less likely to be used by minorities. Banks should review their marketing materials and online activities with this in mind. Contact us with any questions.