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Federal Prohibition of Marijuana Restricts Lenders Ability to Issue Loans to Borrowers Employed in Marijuana Industry

A Rhode Island mortgage lender recently rescinded approval of a loan application because the prospective borrower reported income from his employment in Rhode Island's medical marijuana industry. The lender was aware of the borrower's source of income at the time it issued a pre-approval letter, but ultimately denied the loan because the Federal Housing Authority (FHA) will not purchase or invest in a loan where the borrower is employed by, or receives compensation related to, the marijuana industry. FHA's Single Family Housing Policy Handbook provides that a lender may only consider a borrower's income if it is legally derived. Since marijuana remains illegal under federal law, any income derived from the cannabis industry cannot be considered as effective income for purposes of underwriting a loan. The denial of the loan came days after the United States Attorney General rescinded the Cole Memorandum, an internal justice department policy enacted during the Obama administration, which directed federal prosecutors to limit enforcement of federal marijuana laws in states that legalized and regulated cannabis.

The conflict between federal and state law regarding the legal status of marijuana is likely to continue impacting access to credit for those working in the cannabis industry. While the Obama administration seemed content to leave enforcement of marijuana laws to the states, the Attorney General's rescission of the Cole Memorandum suggests federal prosecutors may proactively enforce the Controlled Substances Act in legalized jurisdictions and pursue financial institutions providing services or loans to the marijuana industry. In an effort to clarify the incongruity between state and federal law, state treasurers from California, Illinois, Oregon and Pennsylvania, where some form of marijuana is legal, requested a meeting with the Attorney General, but no meeting has been set to date. Without further guidance on the federal government's position on enforcing federal marijuana laws in legalized states, lenders will have to adhere to all federal laws and regulations, which consider marijuana illegal.

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