Month: June 2017

An Overview of Medical Marijuana Regulation

(Sorry for the long post, I kept it as brief as I could while hitting the important points.)

Marijuana has had a roller coaster of a year. In November, four states (Massachusetts, California, Maine, and Nevada) all passed measures to legalize its recreational use. Twenty-six states have legalized or permitted its use in one form or another. But then, on the other hand, the current Attorney General is asking Congress for permission to broaden the Department of Justice’s ability to go after medical marijuana businesses.

Here’s the thing: there is a lot of money out there in the marijuana industry (it’s already estimated at about $7.1 billion), and handling money is kind of what financial institutions do. There are many valid and competing public policy and risk concerns with handling marijuana money though. As a financial institution, you need to be aware and informed of the landscape and debate in order to make a well-reasoned decision on how to deal with this corkscrewing business.

So here’s a brief overview on the issues of the day to get a sense of how we got here and where we are going. Note this only applies to medical marijuana; it does not apply to recreational use!

The Cole Memo

In October 2009, Deputy Attorney General David Ogden issued a memo to the attorneys in its agency directing them on the Department of Justice’s policies and approaches to enforcing federal marijuana legislation in light of state medical marijuana laws. In June 2011, Deputy Attorney General James Cole issued another memo addressing widespread questions about the Ogden Memo and effectively updating it. Then, in August 2013, Deputy AG Cole issued yet another memo, called “the Cole Memo” even though the prior memo was also authored by Cole, which updated the prior two memos in light of state ballot initiatives to legalize marijuana for recreational use.

The DOJ had established eight “enforcement priorities” through the last two memos, and the Cole Memo reiterates them. The eight priorities that the federal government finds “particularly important” are:

  1. Preventing distribution of marijuana to minors;
  2. Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels;
  3. Preventing the diversion of marijuana from states where it is legal under state law in some form to other states;
  4. Preventing state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
  5. Preventing violence and the use of firearms in the cultivation and distribution of marijuana;
  6. Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;
  7. Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and
  8. Preventing marijuana possession or use on federal property.

The Cole Memo was a significant shift in how the DOJ used its resources in enforcing those “enforcement priorities.” The old memos could be categorized as saying the DOJ was going to try to get the most “bang for its buck” and thus it took into account size and scale of an operation, regardless of its compliance; but the new memos focused instead on ensuring that proper regulatory schemes are enacted and followed in those states that decriminalized.

Think of it as kind of like the regulators shifting from prioritizing individual infractions, to instead prioritizing that you have a proper CMS in place in order to minimize the likelihood of infractions.

FinCEN Guidance

Shortly after the Cole Memo, the Financial Crimes Enforcement Network (FinCEN) issued its own guidance for financial institutions on how to meet their BSA expectations. The FinCEN guidance draws heavily from the Cole Memo and the Cole Memo’s enforcement priorities. It emphasizes too that “the obligation to file a SAR is unaffected by any state law that legalizes marijuana-related activity” and that the institution is therefore still required to file a SAR for marijuana related transactions. However, to prevent them from getting overwhelmed with an avalanche of SARs, FinCEN created three different levels of SARs financial institutions must file when it relates to marijuana:

  1. Marijuana Limited SAR Filings: These filings are for marijuana-related transactions, but the financial institution does not have reason to believe implicate any of the Cole Memo priorities;
  2. Marijuana Priority SAR Filings: These filings are for marijuana-related transactions in which the financial institution has a reason to believe may implicate one or more of the Cole Memo priorities;
  3. Marijuana Termination SAR Filings: These are for marijuana-related transactions in which the financial institution deems it necessary to terminate the relationship with the business.

There is much more in the FinCEN Guidance memo, and it is still “effective” as of this post (6/14/2017). Note that doesn’t mean it’s “controlling” or has any real weight in court though. But that brings us to…

United States v. McIntosh

In August 2016, the Ninth Circuit Court of Appeals issued its decision in United States v. McIntosh, 833 F.3d 1163 (9th Cir. 2016). In this case, the Department of Justice brought criminal charges against multiple defendants on federal marijuana charges. The defendants in the case were all involved in their state’s medical marijuana businesses, which was legal under their state law.

The defendant’s made some unusual motions under the circumstances to prevent the Justice Department from prosecuting, and it worked, for the most part. The defense argued that a rider on a federal appropriations bill funding the government prevented the Department of Justice from using any federal funds to “prevent [the] States from implementing their own State laws that authorize the use, distribution, possession, or cultivation of medical marijuana.” The rider was from 2014 and was set to expire in a year, but the rider has since been renewed by Congress in each subsequent appropriations bill since it was included. The defendant’s argued that by spending federal dollars to prosecute the defendant’s for federal Controlled Substances Act violations, the DOJ was violating the rider and unlawfully using funds Congress didn’t give them.

The court agreed, with some reservations, and ruled that the rider only prevented the DOJ from prosecuting medical marijuana businesses who strictly complied with State law. If the business did not strictly comply with the State’s regulations and laws, then they are fair game for the DOJ.

From the Cole Memo to FinCEN guidance, the consistent message has appeared to be “acceptable, with strict compliance.” The McIntosh ruling changed that message though from a policy choice to a mandate imposed on the DOJ by the courts. Thanks to the rider in the funding bill, as long as there is strict compliance with state law concerning medical marijuana, the courts appear to be saying the DOJ has no authority to use federal funds to prosecute violations of federal law (for that limited purpose).

Sessions’s Letter to Congress

Finally, on May 1, 2017, Attorney General Sessions submitted a two-page letter to Congress requesting more authority to prosecute medical marijuana businesses. You may have heard the story framed as “Jeff Sessions Wants to Go After Medical Marijuana” or “Jeff Sessions personally asked Congress to let him prosecute medical marijuana” or that Sessions wants to “crackdown” on medical marijuana.

A more accurate statement is that Sessions was writing because he wants the rider cited in McIntosh gone. His letter specifically mentions the case, and urges Congress to remove the rider from the next appropriations bill. This would give the DOJ much greater freedom to set its own policy and agenda, and to pursue cases without fear of “losing” funding. (They won’t really lose funding, they would just be able to be enjoined from continuing to prosecute.)


So that is the brief history of how we got to where we are regarding the federal government’s position on the medical marijuana business. (Note again that none of this applies to recreational use.) The federal policy position appears to be in a state of flux at the moment with a lot of uncertainty, which is never a good time to start making decisions. But the point is there is a huge market developing and it is going to need to be served at some point, and the best way to stay ahead is to stay informed.

Bryan T. Noonan, Esq.
Regulatory Compliance Consultant
501 John Mahar Highway, Suite 101
Braintree, MA  02184
781-356-2837 (fax)

Disclosing Construction vs. Refinance Loans

This is a question I received recently, and I think it’s a situation that might not come up often enough to remember all the rules about it. So it’s always helpful to review.

Here’s the situation: A borrower comes to you and is seeking a loan to make major additions to their home. They have an existing home, so the original structure is there, but the new additions will be more than double the size of the home, and increase the value more than two times. You consider this to be a construction loan given the size of the project. It’s a 30 year loan with a one year interest only construction period.

Because there is an existing structure though, there is also an existing lien already on the property. Therefore, part of the loan, in addition to financing the construction of the addition to the home, will be used to pay-off and replace the existing loan.

How should you characterize this type of loan for TRID purposes? How is it disclosed?

First, it’s not a purchase transaction because the borrower has already purchased the existing structure on the property, so that’s already off the table. That’s a simple answer. So it comes down to construction, refinance, or home equity then.

Home equity is the catch-all for loans secured by the property but is not for the purpose of purchasing the property, constructing it, or refinancing an existing lien. If it doesn’t fit into one of those categories, it’s probably a home equity loan. But it’s preferred; it’s a fallback. So, unsurprisingly, it’s down to a construction or refinance loan.

It’s tempting to think this loan is a construction loan for TRID purposes. The work that will be done is extensive and worth more than the original property, the loan is more than twice the amount of the original lien, and the new loan is even structured with a 1 year interest-only payment period. For all intents and purposes, it looks like a construction loan, and maybe even internally you consider it to be a construction loan.

Be careful though. The definition of a construction loan is found in 12 C.F.R. § 1026.37(a)(9)(iii), and a significant part of the definition is that a construction loan is, for TRID purposes, only when the credit will be “used to finance the initial construction of a dwelling.” In our situation here then, the dwelling is already there; it’s just being massively updated. Therefore, because the loan is for additions to an already existing structure, it is not for financing the initial construction of a dwelling.

The loan is actually a refinancing then. There is an existing lien which will be “satisfied and replaced” by the permanent financing of the new loan, and this is an essential element for identifying refinancings.

This falls outside the normal situation for refinancings, so I understand any hesitation or uneasiness with calling the transaction a refinancing. But the definition of refinancing is broad, and only has a few elements to it. A refinancing must be 1) a new extension of credit, which will be used to 2) satisfy and replace an existing obligation, and 3) is secured by the subject property. That’s pretty much it. So even though this transaction might not be the typical refinancing transaction, it still falls under TRID’s refinancing definition.

Finally, don’t forget the priority order for TILA. If a transaction has multiple purposes, the preferred order is 1) Purchase, 2) Refinance, 3) Construction, and 4) Home Equity. So even if this transaction is both a construction and refinance transaction, refinance is preferred over construction, and therefore should be reported first.

This may be just a long-winded way of looking at the construction vs. refinancing rules, which you may already know quite well. But it doesn’t hurt to revisit the rules from time to time, especially when you have unconventional transactions come across your desk.


Bryan T. Noonan, Esq.
Regulatory Compliance Consultant
501 John Mahar Highway, Suite 101
Braintree, MA  02184
781-356-2837 (fax)