ABA Comment Letter to USDA on Interim Rule for Hemp

Docket Clerk
Marketing Order and Agreement Division
Specialty Crop Program, AMS, USDA
1400 Independence Avenue SW
STOP 0237
Washington, D.C. 20250-0237

Dear Sir or Madam:

The American Bankers Association (ABA) appreciates the opportunity to provide comments on the interim final rule issued by the United States Department of Agriculture (USDA) to establish rules and regulations relating to the production of hemp. We commend the USDA for quickly developing these rules and regulations in an effort to provide clarity ahead of the 2020 planting season. The movement to allow for the production of hemp has been followed closely by the banking industry. Clearly, though, challenges remain for the financing of hemp, and this comment letter will offer some needed changes to the current interim final rule to help ease the financing of hemp going forward.

Given its relationship to cannabis, hemp has some unique challenges compared to other commodities. In order for banks to provide financing for the hemp industry, several key points must be addressed in the final rule. First, bankers must be able to determine whether a hemp producer is appropriately licensed through a simple and easily accessible format. Second, the testing mechanism to determine whether hemp complies with the restrictions of the 2018 Farm Bill must be easily applied and readily available to all growers. Third, bankers must have assurances that the risks associated with concentration levels of THC in hemp can be appropriately addressed and mitigated.

Licensing

ABA has many questions and concerns around licensing for hemp producers and the database for these producers.

Recently, the federal banking agencies and the Financial Crimes Enforcement Network (FinCEN) issued interagency guidance to help banks finance hemp growers and producers. One of the expectations for bankers is to ensure that the grower is properly licensed in accordance with the USDA regulations. Therefore, bankers need to be able to determine the eligibility of a licensed grower quickly and across state lines. The interim final rule provides that the USDA will create a national database of all relevant and required information, but the database will only be accessible to federal, state, local and tribal enforcement officers. ABA recommends that USDA make the database available to financial institutions looking to provide financing for hemp producers. Access to this database would help banks that operate across multiple states to track compliance of hemp customers across jurisdictions by centralizing information that would otherwise be segmented in each state’s individual reporting structure. Since hemp producers may have licenses to operate in more than one state, the ability to reference a centralized database will alert a bank to potential problems in other jurisdictions that they might not otherwise be aware of. Without access to a national database, it will be much more difficult for a banker to determine if they can finance a hemp producer.

Additionally, we have some questions surrounding the renewal of hemp producer licenses. When a bank makes loans for long term equipment and capital purchases, there needs to be an assurance that the producer will be able to produce hemp for a long enough period to support the term of the loan. The interim final rule provides that licenses are valid until December 31 of year three after the year in which the license was issued. The rule does not provide for automatic renewal of licenses, and does not appear to offer a streamlined process for licensees whose information has not changed. While we appreciate the need to recertify the eligibility of producers, it would be helpful to have some assurance that applications for renewal will not be denied absent a disqualifying change in the licensee’s application.

Last, we have concerns about what would happen if a producer were to pass away or become incapacitated before harvest of their hemp crop, and what impact that has on the license for that producer’s crop. The interim final rule creates a licensing system tied to individual producers, which can be problematic when unanticipated events, such as a death or illness, occur between planting and harvesting. The rule states that “licenses may not be sold, assigned, transferred, pledged, or otherwise disposed of, alienated or encumbered” and no provision appears to be made to provide for continuity of operations should something happen to the licensee. This would be particularly problematic for smaller farming operations, where the licensee is likely to be a sole proprietor.

To account for that uncertainty, USDA should amend the rule to clarify how a licensed crop can be harvested in the event of unexpected changes to individual licensees. Whether that is accomplished through exemptions that address this specific scenario, or by tying the license more directly to the land on which the hemp is grown, the solution should address mechanisms for completing a current harvest, as well as a streamlined procedure that allows for continuity of licensure for a given property where another acceptable individual is able and willing to assume the license. As noted above, financing for necessary equipment and capital purchases often requires an extended timeline of repayment, and mechanisms that ensure streamlined retention of necessary licenses from one owner to the next where possible and appropriate will ensure greater access to necessary financing, especially for smaller farming operations.

Testing

The interim final rule requires testing for THC to be done at Drug Enforcement Agency (DEA) registered labs. One significant problem facing growers is the lack of readily accessible DEA-registered laboratories. For example, in the state of Maine, which is already establishing viable hemp farming operations, there are no DEA-registered laboratories. The final rule must take into consideration access to appropriate testing facilities by creating some alternative means for testing when DEA-registered laboratories are not readily available. Moreover, ABA urges the USDA consider if it is truly necessary to restrict the testing to DEA-registered laboratories to ensure appropriate quality controls.

Another concern, particularly with the limited number of available testing facilities, is the requirement that testing must be completed within 15 days of harvest. This puts an unnecessary strain on both testing facilities and growers. ABA recommends that the final rule allow a broader window between testing and harvest to accommodate the often unpredictable challenges (such as weather) that can impact a harvest timeline.

Another factor that raises concerns is the requirement in the interim final rule that testing must be done by lot. Since there can be many wide variations in growing acreage, and since there can also be variations in THC concentration levels across lots, ABA urges the USDA to better define what constitutes a lot so that there is a uniformity and consistency to how the testing is done. The current interim final rule defines a lot as, “a contiguous area in a field, greenhouse, or indoor growing structure containing the same variety or strain of cannabis throughout the area.” That allows for a great amount of variation between and across growers. While such an open definition might be acceptable for other types of agricultural commodity, the impact from testing for THC concentration requires a more specific and detailed definition of what constitutes a specific “lot.”

At the same time, the final rule should ensure testing can be done in different areas of a lot to ensure that the concentration levels are not limited to one corner of what could be a large lot. Depending on how a lot is defined, there could be variation in concentration levels across a lot that the current approach to testing would miss, unfairly penalizing some farmers and inappropriately benefitting others, depending where samples are taken, since the rule does not establish a precise sampling methodology. Furthermore, the current approach has the perverse incentive to encourage growers to define lots as small as possible to minimize the impact from potential crop destruction if the level exceeds the 0.3% threshold.

Risk Management

For bankers, the ability to effectively manage and mitigate risk is of paramount importance when deciding whether or not to enter a new product line. For hemp, there are several areas of legal and regulatory risk that bankers must consider in addition to the standard risks that come with financing any agricultural commodity. To the extent that USDA can clarify remaining ambiguities regarding the legal status of hemp when traveling in interstate commerce, when it tests above the 0.3% THC limit, and how it will be treated under the crop insurance program it would be incredibly helpful for banks that are trying to understand and account for the various challenges presented by this crop and its close relationship with cannabis, which remains a Schedule I drug.

Interstate Commerce

In the context of interstate commerce, the interim final rule provides that no State or Indian Tribe may prohibit the transportation or shipment of hemp or hemp products lawfully produced under a State or Tribal plan or USDA license through their territory. However, the rule also provides that “all cannabis that tests as having a concentration level of THC on a dry weight basis of higher than 0.3%” is “Marihuana” for purposes of the CSA. Since THC thresholds in hemp continue to fluctuate after harvest, it is possible that hemp lawfully produced and harvested below the 0.3% THC threshold could test above that 0.3% threshold if stopped and tested again during transportation or shipment. For hemp producers whose growing and processing are not vertically integrated, there appears to be a real risk of triggering CSA liability (as well as having product seized and destroyed) for moving hemp across state borders – even if it had previously passed inspection. The rule should clarify that documentation of the results from an official State, Tribal or USDA sanctioned delta-9 tetrahydrocannabinol concentration level test verifying that the product tested at or below 0.3% provides conclusive evidence that the product is considered hemp and not marijuana under all provisions of Federal, State, Tribal or local law.

Controlled Substances Act Liability

There is a great deal of concern for bankers in connection with hemp exceeding the 0.3% THC threshold, both for the potential of triggering Controlled Substances Act (CSA) liability and because of the challenges involved in financing a crop that may ultimately need to be destroyed, resulting in a total loss for the farmer and, potentially, the bank. Greater clarification on how the banking industry will be treated in regards to repeated violations of the 0.3% THC threshold, especially through no fault of the grower, is needed. This is especially true since, despite the best efforts of a producer, external factors like sunlight, rain, or other climate conditions can have an impact on the THC content. ABA does acknowledge the need for some of the clarification to come from the banking regulators as well, but USDA can help to clarify some of the remaining ambiguities regarding the legal and regulatory standards for hemp.

For example, the rule provides that “all cannabis that tests as having a concentration level of THC on a dry weight basis of higher than 0.3%” is “Marihuana” for purposes of the CSA. However, the rule also creates a regulatory structure that includes an enforcement mechanism for violations of state and tribal plans, including exceeding the 0.3% THC concentration level. The regulation provides that negligent violations of state, tribal, and USDA plans shall not result in a producer being subject to “any criminal enforcement action by the Federal, State, Tribal, or local government.” This creates some ambiguity for banks regarding potential CSA exposure and Bank Secrecy Act (BSA) obligations for customers who exceed the 0.3% THC concentration limit, but nevertheless are operating within the confines of the USDA regulatory structure.

The rule provides that growers who exceed the 0.3% threshold, but “make reasonable efforts” to stay below 0.5% do not trigger a negligent violation (i.e., the crop is destroyed, but nothing else happens). If the producer exceeds the 0.3% threshold and did not make reasonable efforts to grow hemp below the 0.5% threshold, they will be cited for a negligent violation and required to comply with a corrective action plan to cure the negligent violation. A producer that has three negligent violations in a three year period will have their licensed revoked and will be ineligible to produce hemp for 5 years.

From a banking perspective – what are the regulatory expectations for banks when a customer exceeds 0.3% but stays below 0.5% and does not trigger a violation of their license? In addressing Notices of Violation, at what point is the bank expected to terminate the relationship with the customer? If there are repeated violations for exceeding the THC threshold, but those violations are deemed to be negligent instead of culpable, does the bank need to file a Suspicious Activity Report (SAR)? Does the bank need to file a SAR if a hemp customer’s license is revoked for negligent violations (THC related or otherwise)? A culpable violation would almost certainly result in a SAR, and that customer would also be directly reported to law enforcement in accordance with the USDA regulations. While FinCEN will ultimately have to answer these questions for the banking industry, it would be helpful for USDA to provide as much clarity as possible surrounding the legal implications of a hemp producer landing in each of these regulatory buckets (below 0.3%, between 0.3% and 0.5%, and above 0.5% THC).

Crop Insurance

Section 107 of the Additional Supplemental Appropriations for Disaster Relief Act, 2019 required the availability of whole farm revenue protection (WFRP) for hemp producers. While this is an encouraging development, banks still need clarification of what will actually be offered to hemp producers. Without a whole farm revenue protection product, it will be very difficult for bankers to provide financing to hemp producers. ABA would like to see a full suite of options for crop insurance programs for hemp producers, similar to other commodities.

Fundamentally, banks need to have tools to manage risk when financing a commodity, particularly hemp. According to an announcement from the USDA, the WFRP will provide crop insurance for hemp during the 2020 growing season, although there is no mention of coverage for 2021 and beyond. ABA would like to see a longer term commitment to provide crop insurance for farmers who may be making significant investments to enter this market.

More important for bankers financing hemp growers, the crop insurance protection program does not cover instances where, despite the best efforts of the grower, the crop exceeds the restriction of 0.3% THC concentration. Since concentration levels can be impacted by climate conditions that are completely outside the control of the grower, this risk is significant. As a result, bankers will be either less likely to accept the risk and finance the crop or, if the bank does accept the risk, will be required to price the loan at a significant cost to reflect the risk. ABA urges the USDA to change this approach to grant some additional flexibility. If a farmer can demonstrate that they have taken reasonable steps to ensure that the THC concentration stays within acceptable tolerance levels, then crop insurance should be available in those cases where the crop must be destroyed due to excess concentration of THC. For example, USDA could offer crop insurance for crop loss due to THC concentration as long as the concentration level does not amount to a negligent violation (currently 0.5% THC). This approach would be consistent with the general principal of offering insurance for loss resulting from factors outside of the farmer’s control.

Conclusion

ABA appreciates the opportunity to comment on the USDA interim final rule on domestic hemp production. We believe that, with important changes to the rule, farmers will be encouraged to consider a crop which has a great deal of promise for a variety of uses, including clothing, construction, and as a replacement for plastics. However, some of the practical limitations, as discussed above, must be addressed to ensure that risks are appropriately mitigated and that farmers and their lenders feel comfortable supporting this industry.

Sincerely,

Ed Elfmann
SVP, Agricultural and Rural Banking Policy
American Bankers Association