Going Green

PRMG recently expanded its Non-QM programs to allow employees and business owners in the medical or recreational cannabis industry to apply for loans.

“It’s been pretty seamless because all we’re using are the same Non-QM features that we’ve had all along. We’re just opening a doorway to more borrowers, who unfortunately were sitting on the sidelines,” Jones says. “It’s been interesting to see how many borrowers are in this space that are sitting on a tremendous amount of cash who have not been able to participate in home buying or refinancing the homes they already own.”

Watch it on The Interest: Blazing New Trails

A mortgage professional for 21 years who holds a medical marijuana card in his home state of Florida, American Bancshares Mortgage Unconventional Lending Program Director Derek Bissen saw a need and met it.

“We started to get phone calls about this … banks were turning down what seemed like perfectly normal, everyday loans that we would approve under any other circumstances except for the borrower’s employment,” Bissen recalls.

One of the most common calls his office gets is from someone who has already been through 95% of the origination process with another lender.

“They have gone under contract on a home, purchased an inspection, purchased an appraisal. They’ve got their insurance lined up; their loan is actually underwritten and approved. And then the day before they’re supposed to go to the closing table, their loan officer calls them and says, ‘I’m sorry, but we can’t fund your loan.’ And it is crushing, especially for first-time home buyers.”

On the Books

The lenders who deny have their reasons: federal law, public perception, risk mitigation. Cannabis workers are indeed barred from the government-backed USDA, VA, and FHA loans, and limited to conventional and Non-QM loans.

Most banks’ charters stipulate that they operate within the confines of all federal, state, and local laws. But those are changing.

In a letter dated Aug. 29, 2023, the U.S. Dept. of Health and Human Services called upon the Drug Enforcement Agency to consider reclassifying marijuana as a Schedule III substance within the framework of the Controlled Substances Act. The recommendation is still under DEA review, and no timeline has been established. Analysts say the move would have far-reaching impacts on banking and finance.

Additionally, the Senate passed the Secure and Fair Enforcement Regulation Banking Act on Sept. 27, 2023, easing marijuana businesses’ access to banking and insurance services.

“Naturally, banks are more risk averse, so they tend to stay in a narrow pocket of lending,” Jones says. “They can hold money from people that are in these businesses legally, but they’re resistant. There’s still a little bit of a stigma to offering solutions because the federal government hasn’t recognized cannabis nationally. Some banks are open to it, but very few are.”

Fannie Mae allows marijuana dispensary workers to apply for loans as long as their income is legal under state law, among other stipulations.

Homestead Financial Mortgage, out of St. Louis, Missouri, serves 10 states and lends to cannabis workers in all of them.

“Because Fannie is its own entity, that’s where this thin line of distinction lies,” explains Homestead CEO and co-owner Jayson Hardie.

Conventional loans require the borrower to have a larger down payment and/or credit score, so sometimes, his LOs have to work a little bit harder to help these folks get there.

“However,” Hardie says, “you’ve got a real cooperative borrower because they weren’t sure if they could qualify, and they needed somebody to hold their hand and navigate the landscape of their special circumstances.”

Bissen likes to joke that it might be easier for a borrower who sells cocaine as a side hustle to get a loan than the marijuana worker whose source of income is legit. Cocaine is a Schedule II drug, a government classification designating it for “safe and accepted medical uses.”

Marijuana is and always has been a Schedule I, connoting it has high abuse potential like a Schedule II, but “no currently accepted medical use.” Huh?

“Until that changes, these banks are looking around, reading the terrain and saying, we would rather not take the risk on a particular loan and jeopardize our entire business,” Bissen says. “They’d rather play it safe, and understandably so. We’re all aware of the regulatory environment in our industry.”

How it’s done

American Bancshares is licensed to originate residential loans in 29 states, which is more than some of the other lenders who serve this niche market.

“Many of the competitors I see are limited to one state or two states,” Bissen points out. “Because of my experience in it, generally I get the calls internally on, ‘what we need to do to make sure that this customer gets to the closing table?’ So I’m constantly training loan originators on this particular subject.”

Cannabis workers wanting to buy a home someday must be mindful they don’t keep their money in a piggy bank or buried under the shed for too long.

“We find, unfortunately, people who have what we call mattress money,” Jones says. “They leave it in a safe somewhere, and then they need to have it in a bank seasoned in order to even use it for the program. So, they might have to wait several months to move that money into those accounts. And then it becomes an issue with sourcing those funds.”

Pulling in business carries the same strategy applied to other Non-QM types. Go to the places where these types of potential borrowers are plentiful.

“No pun intended, it’s grassroots marketing,” Jones says. “We’re trying to get more of our loan officers to really pound the pavement and use good old-fashioned marketing to introduce themselves to the spaces where these borrowers and potential borrowers exist. The key with Non-QM is understanding the niche and knowing where to go find it instead of waiting for it to come to you.”

LOs can’t simply post up outside their local dispensary and see who’s buying. But nowadays, there are cannabis capital conferences, online communities and even celebrities who are open about their use and their sources.

Qualifying Income

"It’s a very supportive industry because of the challenges,” Jones says. “So there are referrals.”

Bissen keeps a blog, so that, combined with word of mouth, has led to success in tracking down these particular borrowers. The hard part is making sure they are income-qualifying.

PRMG calculates a potential borrower’s income upfront before submitting the full case to underwriting to ensure the income is workable.

“So if I have someone who’s just paid a W-2 and has a pay stub, we can qualify them using those standard methods,” Jones says. “But then we move to the self-employed business owner, and we’re going to use things like bank statement loans with as little as 12 months of business or personal bank statements and qualify them with pretty simple methodology.”

They can also qualify with a 1099, a verified profit and loss statement, or by treating assets like income without requiring they be pledged or liquidated.

“And the best part is,” Jones says, “any of those things that I just described, we can combine them. So we can leverage multiple income streams at the same time for an individual borrower or multiple borrowers.”

He applies Non-QM standards to loan applicants, keeping referral partners apprised of the timeline for structuring the loan.

“You really have to do your homework with these products. You really have to dig a little bit deeper into the guidelines. Everyone’s slower now, right? Whether they like to admit it or not, we have more time on our hands. And why not invest in yourself and your future and other borrowers by learning these products more?”

The advice he has for LOs who are ready to take on cannabis worker-borrowers?

“Recognize your resources, leverage them, capture a full 1003 as soon as you can and review your credit reports for trade lines. All those things are just part of making sure that loan will perform on the secondary market. And that’s important.”

The Secondary Market

"The secondary market really appreciates Non-QM,” Jones says. “They love these loans because they perform very well. They have a very high margin, which is good in times like this when margin compression is still occurring with traditional products. These are not subprime loans. The borrowers, on average, if you look at the securitizations, have a weighted CLTV of 70%. We call that skin in the game.”

Some of the cannabis workers who are applying for loans at the company are not only out to fund their primary residence, but also investment properties.

“There’s always an ongoing array of borrowers out there, despite whatever is happening in the economy with concerns about inventory and rates,” Jones says. “If you look at the agencies today, they’re not really in love with those types of occupancies at certain LTVs, and the loan level price adjustments have been pretty painful. So the consumer who’s maybe not even your typical Non-QM borrower right now is taking part in some of these products because of the rate opportunity and just offsetting some of the other costs in other products. So the performance is great. The securitizations are in the hundreds of millions at a time.”

The Unconventional Lending program at American Bancshares takes two different avenues. They offer conventional financing for W-2 wage earners, but self-employed applicants, they need the OK from private investors they work with.

“We do have servicing rights to hold paper. And that is key,” Bissen says. “That’s critical for us being able to lend in a conventional environment. And we have investor channels, and arrangements and relationships with these investors to make sure that they’re okay with this type of income. This is one of those gray-area-kind-of loan requests that is not always written into the standard guidelines, so it requires that as an originator we dig and understand the actual guidelines for the program we’re offering. If you understand it, then you know whether or not the company you work for has avenues for your borrower so that you can either approve them or deny them quickly and let them move on to a different source for funding.”

Bissen recommends LOs be upfront with investors, underwriters, servicers and title companies.

“A staffing agency can conceal the source of the income a little bit. But It may not cover it 100%. So you can always make money betting on the side of the underwriter figuring things out. They’re very crafty and intelligent people.”

Mistreatment

Sometimes, people pivot their financial strategy after being denied by other institutions and are not as forthcoming with the information needed to get them qualified, according to Jones.

“It’s always pretty seamless for the most part, but every once in a while, a borrower might be a little hesitant to disclose so much information on their business bank statements using that income to qualify,” he says. “There might be confidentiality in terms of who they’re working with, if they’re growing cannabis, and if there’s business networking opportunities. So, there’s still some friction from time to time with the borrower. But we’re much more accommodating and flexible than banks can be due to a lot of the regulations. We can move through different product options that banks don’t have. So it makes it a lot easier.”

Hardie calls it “amazing” that more financial institutions haven’t jumped into this space yet, where there is still so much opportunity.

“They’re just not educated enough in this space to be able to get people to qualify,” Hardie says. “It’s just another niche component of mortgage lending that you have to be familiar with. And if you’re comfortable in that niche, it just becomes a niche that you exploit.”

It’s not a huge market, but it is an underserved market. And these days, LOs need all the borrowers they can get.

“What I like most about it is that we’re able to help people that the banking and finance industry have kind of pushed to the curb,” Bissen says. “It’s tragic to see the way the lack of knowledge about this particular topic intersects with our industry. If your company can’t handle cannabis, then knowing that upfront will enable you to be a more efficient originator as well. If you can’t help them, you need to be able to send them on their way to the next call. And if you can help them, be reassuring and let them know that this is something that your company does and that you’re OK with it.”

A People Business

The lenders in the know all agree on the fact that these borrowers are taxpayers, and that makes them eligible for home financing to the same degree as anyone else.

“There shouldn’t be a stigma about where you get your money, in my opinion,” Bissen says.

Being an LO often means playing double duty as a therapist.

“We’re in the people business. So we want to make sure that we’re treating people with sensitivity, professionalism, empathy, and efficiency as well.”

If federal officials were to make moves that open up this market, the competition might increase for these lenders, but that would be good for these borrowers.

“The change of stigma is a slow, glacial-moving thing in this country, no matter what the topic is,” Jones says. “But I think it would open up greater awareness for the borrower. It would free them up to weigh their options and consider their next financial steps more succinctly.”

At the end of the day, success in lending all depends on the borrower, no matter where they get money for the mortgage payment.

“The people that apply for mortgages that work in the cannabis industry are no different than anybody else,” Hardie says. “They’ve got a wife, kids, a spouse, and plans. They pay their bills. They’ve got to be able to try and make a living, and they’re trying to buy homes too. They’re trying to have a life.”