Credit Unions Look to Serve Marijuana Businesses

This isn’t your father’s credit union.

Credit unions, long known for loans to everyday Joes, are looking into a controversial new market: the cannabis industry.

Since the state began licensing dispensaries, interest in marijuana-related businesses in Michigan is rising.

This could allow credit unions and other financial institutions to legally offer money management accounts to these businesses.

“We’re researching to see if we can find a way [to serve the cannabis industry] without putting our depositors at risk,” said David Leusink, CEO of 4Front Credit Union in Traverse City. “We know it’s coming.”

Voters will decide in November whether to make Michigan the tenth state – the first in the Midwest – to legalize the sale and use of recreational marijuana. Several polls have indicated strong support for the measure.

Credit unions in the state will have a chance to debate the topic at its annual convention in Traverse City this month. On the docket: How credit unions in Colorado, which legalized recreational marijuana in 2014, provide services to the cannabis industry there.

Credit unions are interested in offering services to what has been an all-cash industry, not only for a new market opportunity, but as a way of making marijuana businesses safer in the communities where they operate.

“Anyone in this industry is managing their business with cash,” Leusink said. “There’s a concern about personal safety. It would be ideal if we could offer them a debit or credit card for moving money.”

The problem is that marijuana is illegal under federal law. Banks and credit unions that establish accounts for marijuana businesses could be prosecuted and lose their charters.

There is conflicting guidance from the federal government for financial institutions looking to serve marijuana businesses. In January, the Justice Department revoked an Obama administration policy that provided a “safe harbor” from prosecution for financial institutions doing business with the cannabis industry.

But a federal Department of Treasury policy protects those institutions that serve licensed businesses and ensure that they are not involved in money laundering.

“This is a complicated space to be in,” said Ken Ross, president of the Michigan Credit Union League. “It’s not something where you just turn a key and it happens. It requires director and staff education and compliance to make sure at the end of the day that you know you are not involved in money laundering.

“You run the risk of putting your charter in danger and facing multi-million dollar fines,” added Ross, who formerly was Michigan’s top financial institution regulator. “It’s not something that’s going to happen overnight.”

The emerging marijuana industry, proposed changes in financial institution regulation and upcoming elections have created a hot climate for political and policy action by credit unions.

Most pressing is a move by Congress to ease regulatory requirements for credit unions and community banks enacted after the financial crisis a decade ago.

Credit union executives say the Dodd-Frank reforms added burdensome paperwork requirements and made it more difficult for them to issue home mortgages.

“Smaller institutions already had conservative practices in place,” said Karen Browne, CEO of TBA Credit Union in Traverse City. “We had the burden of meeting the new requirements without the resources available to larger institutions.”

Credit unions are lobbying for passage of legislation in Congress that would ease lending restrictions and reporting requirements on smaller banks and credit unions.

“That’s something we feel pretty strongly about supporting,” Browne said.

The legislation has pushed credit unions and banks, two longtime rivals, to work together to pass it.

Banks have long complained that credit unions have an unfair advantage in offering more attractive interest rates to customers because of their nonprofit status.

“For the first time in history, I went to Washington with the head of the Michigan Bankers Association [to lobby for passage of the legislation],” Ross said. “It had never been done before.”

Such lobbying proved effective. President Donald Trump signed the legislation on May 24.

The increased number of data breaches, mostly involving credit and debit cards issued by business customers of financial institutions, is also a big worry for credit unions.

“A merchant data breach can cost a financial institution hundreds of thousands of dollars,” Ross said.

The Michigan Credit Union League is supporting a state Senate bill that would require a business that discovers a security breach to quickly notify financial institutions that issued compromised credit or debit cards of the breach. The league is battling the Michigan Retailers Association, which opposes the bill as being onerous and unworkable.

Credit unions also are opposing state legislation that would allow payday lenders to offer larger loans for longer terms at high interest rates.

Ross said the credit union league regards the legislation as promoting usury.

“Usury is the original enemy of the working person,” he said. “Our history is rooted in anti-usury.”

The flurry of legislative activity has promoted the league to make an early endorsement of Sen. Debbie Stabenow for reelection in November. Other endorsements of candidates at the state and federal level will follow.

“Our main criteria is that elected officials understand the role credit unions play in people’s financial lives,” Ross said. “[Sen. Stabenow] has been a longtime supporter of credit unions going back to her days in the state Legislature. Her endorsement was a no-brainer for us.”

Credit unions are generally prospering in a strong economy. But interest rates that are rising for the first time in years are slowing mortgage and other consumer loan activity.

“It definitely has us thinking strategically on how we deal with higher interest rates,” Browne said. “We’re learning to manage that.”

But demand for commercial loans remains strong, local credit union executives said. And membership is rising.

Membership by Traverse City area credit unions rose six percent in the third quarter of 2017, according to the latest data from the credit union league. That was the biggest increase of any region in the state.

“Times are good in the credit union environment,” Leusink said.