Could hemp be your bank’s next lending market?

The 2018 farm bill opened the floodgates for banks looking to service hemp growers and businesses. But there are still decisions that state and federal regulators, as well as community banks and producers, need to make regarding this market.

By Katie Kuehner-Hebert

While Congress debates whether banks can serve cannabis-related businesses, the federal government is now paving the way for banks to serve those that produce or sell hemp. The Hemp Farming Act provisions in the Agriculture Improvement Act of 2018, better known as the 2018 farm bill, defines hemp as any part of the cannabis plant and all derivatives with a THC level of no more than 0.3%. It also removed hemp and its derivatives from the list of controlled substances, established hemp as a legal agricultural commodity to be regulated by the U.S. Department of Agriculture (USDA), and authorized the production, consumption and sale of hemp and hemp-derived products.

The USDA is now working on regulations for hemp, says Mark Scanlan, ICBA’s senior vice president of agriculture and rural policy. There are two ways for producers to get licensed. “One is under a state plan approved by the USDA,” Scanlan says, “and a second option is through the national program that the USDA issues when final regulations are published this fall for the 2020 crop, since not all states will administer a hemp program.”

The farm bill also permits the USDA to sell crop insurance for hemp, but the agency has yet to develop a product, Scanlan says. The ICBA had urged the USDA to offer a basic program in time for the 2019 growing season, but the agency is waiting until it approves final regulations. Scanlan expects the USDA will offer some type of crop insurance plan for the 2020 season.

There will be some growing pains, but agricultural hemp is predicted to be a significant market, doubling to more than $2.5 billion in the U.S. and approximately $15 billion globally within the decade, according to various reports. “There’s going to be a lot of interest in banking hemp farmers, but some banks are going to tread carefully,” Scanlan notes.

“There’s going to be a lot of interest in banking hemp farmers, but some banks are going to tread carefully.”
—Mark Scanlan, ICBA

Banking regulators are also waiting on the USDA’s regulations before they proceed with their own guidance on how banks can legally make loans and provide other services to hemp farmers and companies that sell hemp-derived products, Scanlan says. ICBA continues to recommend that regulators clearly communicate that banks do not have to file suspicious activity reports (SARs) for hemp and hemp-derived products that meet the guidelines of the 2018 farm bill. Moreover, no regulation should require banks to be enforcers of the legal mechanisms of the law at the state or federal level.

The paths ahead for banks

Shane Bauer is first vice president of compliance, Bank Secrecy Act and security officer at $772 million-asset Bankers’ Bank in Madison, Wis. He says the opportunity for farmers to grow hemp can benefit them, especially given the agricultural sector’s obstacles. “The cost of their commodities is so depressed and has been for so long, that there are a great deal of farmers now looking at other product lines to supplement income, so they can try to keep the farm in their family,” Bauer says.

The challenge for banks is that there aren’t clear guidelines for how a bank can deal with a hemp customer, he says. Even if a community bank is in a state that has legalized marijuana in some form, states may not have addressed hemp according to the new federal guidelines. And in states that have approved hemp programs, there are still no guidelines from regulators on how banks should handle farm customers that grow hemp. However, the FDIC has said that they are training examiners on changes to the legal status of hemp and advised that FinCEN SAR filing requirements do not apply to hemp businesses.

“Banks have some choices now,” Bauer says. “They can decide to not take on hemp-related business because they don’t know the rules and regulations about taking on these customers. They may also decide not to do this because of reputational risk, as not everyone in their community may be on board with the idea of hemp and many of their other customers disapprove of that kind of business.”

Banks may also want blanket minimal compliance risk, and so they shy away from hemp customers because of the uncertainty, he says. “Some banks may decide to say yes, they do want to help hemp customers,” Bauer says. “If so, they need to contact their local and state agencies to find out exactly what has been done for their customers to legally grow hemp according to the new federal guidelines.”

Risk management

Banks will also need to create policies and procedures around know-your-customer (KYC) rules so they can assess and monitor higher-risk customers, Bauer says. Before taking on a hemp customer and the regulatory exams that follow, banks should make sure regulators are in the loop.

Some banks are not lending to hemp customers but are providing other services on behalf of those customers, such as check processing and other kinds of payments, he says.

A third choice would be for banks to say that they “sort of have” hemp customers, by following a “don’t ask, don’t tell” strategy, Bauer says. “They deliberately choose to not know what these customers are doing, including if they are growing hemp in a way that is legal,” he adds, “but, in my opinion, that’s the place you can’t be in.”

Right now, Bauer says taking on hemp-related business “is like getting on a brand-new highway where the traffic signs aren’t up yet.”

“Banks need to decide whether they want to drive now on that highway,” he says. “If not, they may be missing a big opportunity, but if they decide to do it, they need to be comfortable with some uncertainty and develop rules that make sense for their bank.”

Katie Kuehner-Hebert is a writer in California.