Can you obtain a mortgage to buy a home in Massachusetts if you are in the Marijuana business?
Massachusetts just became the first state on the East Coast to legalize recreational marijuana. On November 8th, 2016 cannabis became legal for both medical and recreational uses in the state of Massachusetts. As marijuana becomes legal in more parts of the country, those in the mortgage industry are finding the new laws and mortgage disclosures have implications for borrowers who are looking to apply for a mortgage to buy a house.
Depending on your level of involvement in the marijuana industry, you could have a more difficult time obtaining a home mortgage. Independent contractors who have a relationship with the cannabis industry are not permitted to count marijuana-related income toward mortgage qualification. if you own 25% or more of any business in the marijuana industry, you are also considered to be self-employed, and that income cannot be used to qualify for a mortgage. However, Fannie Mae recognizes income earned by W-2 employees who own less than 25 percent of the business, but when it comes to mortgages most large banks and credit unions still deny this borrower.
Under federal law, marijuana continues to be illegal. This creates a difficult environment for banks, the payment industry, and their regulators. While data is scarce, it appears that regional Federal Reserve banks are taking different approaches to marijuana banking, with different consequences for businesses operating in those states.
In December, Senator Elizabeth Warren (and several other senators) sent a letter to FinCEN requesting it issue increased guidance to banks. Specifically, Senator Warren and the other senators wrote that more guidance is necessary to address how ancillary services providers can secure financial services as the 2014 FinCEN guidelines are silent on this issue. The senators’ letter specifically stated that:
"The 2014 FinCEN guidance did not distinguish between state-sanctioned marijuana businesses and the [ancillary] businesses that service the marijuana industry, leaving it up to individual financial institutions to determine how to classify and treat [ancillary] businesses. Limitations on access to financial services have become increasingly problematic for legal businesses and will only present a larger problem as more states legalize marijuana . . . since FinCEN’s 2014 guidance was released, less than 3% of the nation’s 11,954 federally regulated banks and credit unions have chosen to serve the cannabis industry".
If a borrower acquires a bank loan with the secret intention of operating or leasing to a cannabis business, that borrower is running the risk of foreclosure, the bank has the option, under contract, to call the loan. This means the bank can declare the entire mortgage balance due and owed on the spot. In practice, if a loan is in good standing it won’t always get called; but if a bank learns that cannabis is being traded on the property, a real possibility exists that the mortgage will get called, and refinancing with the lender will be all but impossible. Your standard institutional mortgage contains language allowing the mortgagee/lender to call the loan if the property is being used to conduct “illegal activity.” Lenders won’t budge on that provision: it relates back to federal lending guidelines, and attempting to pare back that language is impossible.
It will take some time until the banking industry and the government establish clearer regulations on this matter. Conditions are subject to change for borrowers looking to get a mortgage.
NOTE: The information that I am providing here does not represent my institution or the mortgage industry in general, it's just an informational blog to provide awareness of the new dynamics of the Marijuana industry in Massachusetts.