How an overlooked Colorado law helped pot credit union get charter

If not for a quirky bit of law passed by Colorado legislators 33 years ago, during the dawn of the savings and loan crisis, the world’s first credit union for the marijuana industry would not have been a possibility so soon.

Discovered by organizers of the Fourth Corner Credit Union soon after a morale-dropping phone call with federal regulators, the law appears to allow the pot credit union to open for business — perhaps as soon as Jan. 1 — while awaiting approval of required federal insurance.

That small distinction fundamentally changed how Colorado’s commissioner of financial services approached Fourth Corner’s application.

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Ordinarily, the credit union’s state charter would be withheld until it had obtained deposit insurance from the National Credit Union Administration.

“I thoroughly read and re-read that section, that one sentence,” state financial services commissioner Chris Myklebust said. “I didn’t sleep very well for three weeks. The argument, in my mind, was between the letter of the law and my discretion as commissioner, and the black-and-white letter of the law is the only choice I could make.”

The 1981 law reads, in part: “No credit union shall be granted a charter by the commissioner unless such credit union has applied for (NCUA) insurance on its shares and deposits.”

The organizers had done that, according to attorney Mark Mason, but NCUA said on Oct. 30 that it could take as long as two years for the agency to determine whether to issue the coverage.

“We were upset, dejected,” Mason recalled of the conference call. “We thought we had scoured every period of the statutes, understood them all. We were down, believing it would be another two years.”

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Colorado’s burgeoning marijuana industry had struggled under its own astonishing success since legal recreational sales began Jan. 1. Millions of dollars flowed through entrepreneurial businesses with no place to go.

Federal law still considers marijuana an illegal drug. That has left most banks with little choice than to refuse to work openly with cannabis-related businesses.

Despite efforts at easing that difficult relationship — from rules to allow the banking relationship without legalizing it, to directives for bank examiners to follow when reviewing any bank that worked with marijuana clients — there’s been little substantive progress in finding an all-inclusive decision. Banks still are leery of working with the marijuana trade, which is just as suspicious about working with bankers.

“Businesses were making tax payments in cash, money orders purchased at King Soopers, deposits at ATM machines,” said Douglas Friednash, another of the organizers’ lawyers. “The industry needed this credit union.”

As Mason trudged to his downtown Denver office, the prospect of a two-year wait a looming reality, he jerked to a stop.

“I remembered, not that clearly though, a bit of the statutes that talked about insurance,” Mason recalled. “I hustled to my office, called up the statute and there it was, crystal clear, that once you’ve applied for deposit insurance you could have your charter.”

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Why the law came to be is unclear, though Mason suspects it had much to do with the S&L crisis and the lag by the NCUA in approving insurance applications for new credit unions.

“We are in the fortunate position of a state law really helping us out,” he said, “even if it was written for some other reason.”

Myklebust said he hoped NCUA would move quickly, allowing the process to run as it has for years — first the application, then the insurance, then the charter.

But it didn’t.

“I did know about that law, but I was hoping to see the NCUA come to its own determination. I was strongly supporting a credit union having its federal deposit insurance in hand first,” Myklebust said. “But when a federal insurer says it will take about two years, I was inspired to move under state law. There was no other reason to hold up the process.”

There was some question about approving an unconditional charter to operate without the insurance.

“There was certainly question on its interpretation,” Myklebust said, “but at the end of the day, they got their charter.”

With a routing number already in hand and a master account at the Federal Reserve System expected by Dec. 10, the credit union could land its first depositor by New Year’s Day — in time to celebrate the state’s first anniversary of legal recreation pot sales.

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Any cannabis-related business can be a member, as well as anyone who is a member of a nonprofit group that supports legalized marijuana. Initial funding comes from the credit union’s nine organizers who make up its board of directors, and the deposits of those who join.

Having the credit union reviewed while it is in operation, Mason said, is a way to ensure a fair and thorough assessment before NCUA decides on the federal insurance.

NCUA spokesman John Fairbanks on Friday said the review process will be comprehensive and methodical, though he said he’s prevented from confirming the existence of any application.

“The safety and soundness of the credit union is the focus, and NCUA’s review includes such considerations as the credit union’s funding, the quality of its management, particularly in the area of financial expertise, the state of its financial operations, and its field of membership,” Fairbanks said in an e-mail.

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While the NCUA decides, Fourth Corner can operate with private insurance that covers theft and other losses. NCUA insurance covers the insolvency of the institution and, Mason said, there is no plan, at least not at first, to do the kind of banking that requires the coverage, such as lending and investing.

Because it won’t invest despositor funds or lend them, the credit union plans to make money at first with the fees it charges for services, such as compliance reporting to the federal government.

“All the banking services that allow the businesses to pay bills and meet payroll,” Mason said. “There is to be no use of deposits for uninsured activity.”

This story was first published on DenverPost.com