As the hemp-related product industry continues to grow, institutional lenders now have clarifying guidance to consider as they conduct diligence regarding potential borrowers. Specifically, the National Credit Union Administration (NCUA), the federal agency that insures deposits at federally insured credit unions, recently issued a letter providing additional guidance to credit unions servicing hemp-related businesses.
The recent letter does not provide new expectations or requirements for credit unions, but summarizes key updates in federal law under the 2018 Farm Bill, in addition to providing answers to some frequently asked questions regarding hemp regulation. Importantly, the NCUA letter distinguishes frequent misconceptions with respect to federal and state authority and federal regulatory agency oversight, such as the interplay between the U.S. Department of Agriculture (USDA) and the Food and Drug Administration (FDA) related to various hemp and hemp-derived products.
As noted in previous McGuireWoods alerts, there are many regulatory considerations when lending to operators or investors in hemp or cannabis businesses. The NCUA letter provides important clarifying guidance for monitoring ongoing changes in the industry regulatory landscape and addressing compliance obligations.
Key questions addressed and responses issued by the NCUA letter include the following:
- Does the 2018 Farm Bill interim rule mean hemp can be legally produced in every state? No. Many have incorrectly assumed that the passage of the 2018 Farm Bill de facto means hemp production is legal in every state, which is not the case. The NCUA FAQ clarifies that the 2018 Farm Bill does not pre-empt state or tribal laws and that such laws may be more restrictive than federal law.
- Does the 2018 Farm Bill legalize all hemp-derived products, including cannabidiol (CBD)? While certain states permit and regulate businesses that manufacture and sell cannabis and hemp-derived products, including those that contain hemp-derived CBD, the FDA has repeatedly confirmed that the legality of the sale of CBD products depends on their intended use (as food, beverages, supplements, cosmetics, lotions, etc.), and on their labeling and marketing. Relevant laws such as the Food, Drug, and Cosmetic Act (FDCA) apply to products containing CBD even if the CBD is derived from hemp produced under the 2018 Farm Bill.
- Does the USDA final rule cover hemp-related businesses such as those involved in manufacturing, processing, distribution, shipping or retail? The USDA final rule addresses only hemp production authorized under the 2018 Farm Bill. Although there may be various state-level requirements, currently there is no uniform state or federal plan for other hemp-related businesses.
- Can a credit union provide loans to a hemp-related business? Yes, so long as it is done in accordance with all applicable federal and state laws and regulations for lending (in particular, Part 723, Member Business Loans; Commercial Lending, or the state equivalent) and consistent with sound commercial lending practices. Underwriting should also consider areas such as the strength of the borrower’s management team and experience in the hemp business, in addition to normal considerations such as the borrower’s financial condition and ability to service the debt.
- What should a credit union do to ensure the hemp business is operating lawfully? The level of diligence can vary based on the type of product and business. Customer diligence should ensure compliance with applicable laws and regulations, such as verifying that a hemp grower possesses a valid state or USDA license to grow hemp. Importantly, the NCUA FAQs explain that credit unions are not expected to police the hemp industry for illegal activity.
- Can a credit union decide not to serve hemp-related businesses? The decision to serve any business is made by the individual credit union.
- Do credit unions need to file marijuana-related SARs on legally operating hemp businesses, provided the activity is not unusual for that business? Marijuana-related suspicious activity reports (SARs) are not required to be filed for the activity associated with a hemp-related business; however, credit unions should monitor whether an account owner is engaging in illicit or unusual activities and should follow current FinCEN guidance for filing regular SARs when they suspect a business is engaging in illicit, suspicious or unusual activity.
When evaluating hemp-related businesses, credit unions and other institutional lenders must be acutely aware of the patchwork of state- and local-level requirements, which may impose stricter requirements than the 2018 Farm Bill or have other compliance requirements for related hemp businesses. Credit unions and other institutional lenders should stay current with federal, state, local and tribal laws that may govern the hemp-related businesses they serve.