Federal Law Prohibits Banks, Escrow, and Title Companies from Participating in the Sale of Marijuana-Related Businesses

The sale and consumption of marijuana, both medicinally and recreationally, is a pretty controversial topic throughout the United States. Some view marijuana as a dangerous substance that should be banned, comparable to hard narcotics like cocaine or methamphetamine. Many others view marijuana as a substance that should have limitations (similar to the sale of alcohol and tobacco), but not be completely illegal. Then, there's the even deeper issue of medicinal versus recreational usage. Some believe that marijuana should only be used when absolutely necessary (i.e. as a diagnosed treatment for a legitimate medical condition like glaucoma or nausea caused by chemotherapy), and some believe that cannabis isn't dangerous enough to be limited much, if at all.

The main difference between cannabis and substances like tobacco and alcohol is a lack of information. While there has been plenty of research done on the health effects of tobacco (cancer, asthma, etc.) and alcohol (impaired motor skills, liver disease, etc.) and even the effects on a fetus, there really isn't enough evidence to make a conclusive ruling on marijuana. However, for a while, it didn't matter whether marijuana was healthy or not. It didn't matter if it could impair motor skills or give a smoker asthma, because the sale and/or consumption of marijuana was illegal in the U.S., both on a federal and state level.

Over a decade ago, several states (California being one of the first) began to legalize medical marijuana, which could only be purchased from a licensed dispensary with a prescription from a doctor. Then, much more recently, states began legalizing recreational marijuana usage. However, that doesn't mean much from a business standpoint, because although marijuana is now legal in California, it's still illegal according to federal law. That may change within the next several years, but as of this moment, the law is the law, and that's all there is to it.

Because marijuana is still illegal federally, many businesses that must comply with state law (such as escrow/title companies), are not permitted to participate in any transactions regarding businesses that handle the sale of marijuana. In fact, in April of 2017, several national title companies received a memorandum from the Office of the Chief Underwriting Counsel that if the title company gets any indication from a buyer, seller, or broker that the Land will be used for growing, processing, distributing, or dispensing any types of marijuana-based products, they aren't allowed to be involved in the handling of any escrow or other funds of any type, issue any type of zoning coverage, or issue title insurance (except with the inclusion of an exception related to violation of federal law). This policy even applies to an entrepreneur looking to buy property that they will then rent out to tenants who may be involved in the marijuana industry,

Federal laws are taken very seriously by businesses involved in escrow and the transfer of funds, including banks. Banks are federally chartered, insured by the FDI, and use the Federal Reserve wire system. If those banks start breaking federal laws (even laws that don't exist at the state level), the bank can lose its charter and FDIC insurance, and eventually get shut down altogether. Just like banks, escrow companies lose their legal ability to operate if they break federal laws, especially in the financial realm, and for most of those businesses, it simply isn't worth the risk of getting involved in any transaction that might violate federal law.

For that reason, escrow companies (just like title companies and banks) don't take part in transactions involving property (or businesses) that are connected to the marijuana industry. It can be next to impossible for an entrepreneur to start that kind of business with a loan from a bank, because banks won't provide the loans and title companies won't close the sale (a closing is usually required by a lender). However, in some situations (where the sale is an all-cash offer, with no financing), there are law firms with real estate experience that can close real estate transactions. As of now, federal law makes it nearly impossible to do business in the cannabis industry if you need bank financing or plan to go through an escrow company. The laws may change in the future, but for now, it is what it is.

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BEWARE - You and Your Clients Are a Target For This Real Estate Scam

Cyber-criminals are finding new methods every day to steal personal and financial information. Their techniques range from phishing scams to buffer overflow techniques and brute-force password hacking. Banking institutions have found themselves under attack far more than usual in recent years, and have in turn begun to incorporate stronger security measures in an attempt to block hackers. As a result, many scammers/hackers have moved on to what they believe are "easier targets." focusing on normal people rather than financial institutions, Just last week, the Federal Trade Commission and the National Association of Realtors issued a warning to consumers that they must be hyper-vigilant in order to avoid recent phishing schemes that have been targeting closing costs on real estate transactions.

The National Association of Realtors, along with the Federal Trade Commission, issued their statement warning people to be on the look-out for a specific scheme targeting those involved in a real estate transaction. First, the hackers gain access to the email account of a customer, real estate agent, or escrow officer, and use the information to keep up-to-date on the transaction and determine the closing date. When they have figured out the closing date, the scammer sends an email that has been masked in such a way that they are able to impersonate the escrow company, title company, or real estate agent, telling the customer that the wiring instructions had a last-minute change. If the customer takes the bait, they send their funds to the scammer's account, which can be emptied in minutes.

Sepulveda Escrow utilizes encrypted and secure email when sending documents with sensitive and confidential information. In addition, documents can be returned via email through this secure portal. Sepulveda Escrow has also instituted new procedures to contact Clients directly to confirm details, rather than relying on email or contact through a third party. (Please see end of this blog for some helpful tips.)

It is imperative to know that cyber criminals don't always need to be able to break through firewalls or use high-tech software to get your personal information or access your computer's data. Quite often, hackers use more subtle tricks to gain access. Phishing schemes are one of the most common ways by which they trick potential targets. One example of phishing is when a hacker sends a mass email to a group of people, and makes it look like the email comes from a bank or other online payment platform. The email requests that the recipient verify their login information by following a link. The link leads to a page that closely resembles the actual login page for the financial institution, but when the user inputs their login information, the hacker records the username and password, thereby enabling them to access the account and steal their money.

Another example of phishing is when a hacker contacts a target or a group of targets under the guise of an Official informing them that they have been the victim of a scam. They then tell the recipient that they can help them fix the damage, but first ask for certain sensitive information like Social Security number or bank information, to "verify" what data had been "stolen."  While you may look at this and think that the scheme is too obvious to be effective, statistics show that approximately 0.4% of recipients fall prey to such attacks. In other words, if a mass email is sent to 10,000 people, about 40 of them will have their information successfully stolen.

While phishing is historically the easiest and most effective method by which hackers are able to steal personal or financial information, there are several other methods. A buffer overflow attack, used by more sophisticated hackers, involves inputting many lines of code into an online form in order to overload the system and allow the hacker to steal data inputted by previous customers. A brute-force password hack involves a computer program that inputs all kinds of combinations of letters, numbers, and symbols, until the correct password has been found and the hacker has gained access to an email or other kind of online account.

Finally, hackers often package viruses or worms into free online software or as attachments to mass emails. Such viruses can enable the hacker to record keystrokes, thus giving them access to many of your passwords, or enable them to access built-in microphones or webcams on laptops. Simply opening such an email or downloading an infected attachment can lead to a virus being installed on your computer or mobile device. Fortunately, anti-virus software can often help to detect and remove these viruses, but hackers are constantly finding new ways to avoid detection by your anti-virus program. The best way to avoid getting such viruses is to be careful when downloading anything, and to avoid opening any emails that seem suspicious or come from unknown or unreliable sources.

Here are some tips to help you avoid being affected by similar scams. First and foremost, if something doesn't look right or feels even a little bit suspicious, don't hesitate to double-check it. Don't rely too much on emails. Instead, pick up the phone and call your escrow officer or realtor to make sure that everything you have received is correct. Don't open email attachments you aren't expecting. Additionally, you shouldn't trust financial information that has been sent via email, nor should you send any of your own financial information via email, because it usually isn't secure. In general, wiring instructions are sent by fax or encrypted email message. When inputting personal information on a website, check the address for "https," of which the "s" stands for secure, meaning that your information will be better protected.

Be very careful when opening attachments or downloading anything from an email, no matter who sent it to you. Just because you recognize the email address, doesn't mean that the message actually came from the person you associate with that email address. It's possible that a scammer could have hacked a friend's email, or could have disguised their email to appear as if the message came from a friend's email address. Proceed with caution. Being aware and cautious can save you a lot of hassle in the long run. 

Biggest Tip: Following up on the phone after sending an email may seem burdensome, but we at Sepulveda Escrow find that it is always worthwhile to go the extra mile to avoid financial losses and potential lawsuits.

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San Francisco's Anti-Airbnb Proposition Narrowly Fails

Short-term home or apartment rentals, usually through online platforms like Airbnb and VRBO, have been steeped with controversy in recent months. Some cities have even tried to ban such rentals while others have embraced them wholeheartedly. Most recently, San Francisco put forth a proposition to limit the ability of landlords to use such websites for renting their property. Tracey Lien, in her L.A. Times article, discusses how Airbnb affects both landlords and tenants, and how this new Proposition F may affect the city.

The controversy behind services like Airbnb is mainly one of a fight between a capitalist economic theory and one in which people deserve fair treatment. On the one side, tenants in San Francisco fear that the increasing prevalence of Airbnb will eventually lead the owners of their rented homes and apartments to evict them in favor of the larger sums paid by short-term renters. It is these tenants who would vote for the proposition since it limits landlords' use of Airbnb and their ability to turn normal rentals into short-term ones quickly. The proposition aims to prevent or at least slow down the conversion of apartment buildings into pseudo-hotels.

Some see it differently. While services like Airbnb could convince landlords to evict tenants in favor of the faster income, the free market could take care of any issues that arise from it. Eventually, if enough landlords raised prices enough to match the rising demand by tourists, ten the average worker would not be able to afford to live in the city. If workers are forced to move out, then business and regular city work will grind to a halt, When the economy halts in such a way, tourists will not want to visit, which will force landlords to lower their prices back to normal rates in order to get tenants. While this situation could probably work itself out, Proposition F aims to avoid it altogether.

Even for some landlords, Airbnb has uncomfortable implications. One Balboa Park resident, who had only ever rented his units out on a long-term basis voted against Proposition F. He worried that his tenants might use Airbnb to rent out his unit for short-term stays, a concept that he wasn't completely comfortable with. However,different from many tenants, he said that he would have voted yes on the proposition if he was in their shoes for that same reason: the ability to rent out the apartment in which one is living while out of town for short periods of time.

Unfortunately for those passionate about the topic, voter turnout for the proposition was extremely low. In-person votes were in the low hundreds, and mail-in votes reached about 9,000. In the end, Airbnb beat the bill, but even while celebrating, the San Francisco-based company expects further assaults in the near future. They believe that the proposition failed mainly due to its highly specific and extreme stance regarding the short-term rentals. Even so, the vote was close, with about 45% of voters supporting the proposition. Airbnb fears, rightfully, that behind the scenes, lawmakers in places like Los Angeles and San Diego may be getting ready to start the fight all over again.

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Devaluation of the Yuan Affects California's Economy

To shopping centers throughout the Southland, busloads of Chinese tourists are a necessary and regularly expected source of income. Especially in summer months, some places like the Beverly Center get an average of 70 such buses per month, full of tourists ready to spend. Shan Li, Samantha Masunaga, and Andrew Khouri wrote recently in their L.A. Times article about how recent devaluation of the Chinese yuan could have positive and negative effects on various California businesses.

Where 2.2 million Chinese tourists to the U.S. spent nearly $24 billion in 2014, 12.6% more than in 2013, many expect that such spending will likely slow down in the coming months. Up until recently, tourists found that their money would stretch much further on brand-name products in California than in China, but as the yuan loses value, that is beginning to change. Furthermore, even as a decrease in tourism hurts stores and shopping centers, it also affects sales on a larger scale. For certain luxury brands, like Coach, a decrease in sales to tourists leads to a decrease in earning, which causes stock prices to fall.

The current economic trifecta in China (slowing of the economy, devaluation of the currency, and a crackdown on political corruption) has led tourists to become more careful with their spending, according to Li, Masunaga, and Khouri. However, they point out that while the yuan loss in value hurts local retailers, it can actually be quite helpful for importers. For U.S. businesses that import Chinese products, the devaluation of the yuan means that the dollar stretches much further than it did before. Since importers will take advantage of this situation and increase purchasing, experts predict that California's ports will get plenty of use in the coming months. This will help to provide jobs for dockworkers, truck drivers, and warehouse workers.

Unfortunately for exporters, such positive outcomes are not likely. They are expected to suffer far more than local businesses due to the fact that import taxes in China can range as high as 20 to 30%.
Some tourists who come to the U.S. regularly anyway to visit family or send their children to summer camp may continue shopping in the U.S. for such luxury goods, but it wouldn't make economic sense for Chinese companies to continue importing American goods when the value of the yuan is so far outweighed by the value of the dollar. Costs would be much higher, especially on top of the exorbitant import taxes, and so it would be unlikely that American exporters would find business improving while the yuan's devaluation continues.

As Louis Glickman once said, "The best investment on Earth is earth." Analysts expect that as the yuan's value continues to plunge, Chinese investors will slow down the purchase of American products and focus on American real estate. Since the dollar remains relatively steady, many such investors will prefer to "park" their money in a building, rather than hold onto the quickly-devaluing cash. The increasing prevalence of property investment could help to dull the effects of the reduction in retail. However, economists warn that China's economy is connected to our own. If China's economy starts to fail, then that won't be good news for the U.S.

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Santa Monica Council Bans Short-Term Rentals

5/20/15 - Hundreds of property owners, especially those living in vacation destinations, rely on the income that they earn when they rent out their homes, condominiums, or spare bedrooms to short-term visitors. Because of new laws passed in Santa Monica, these individuals may find themselves struggling to find tenants. Tim Logan, in his L.A. Times article, discusses the implications of Santa Monica’s law banning short-term rentals.

Tourists who come to places like Los Angeles, New York, and San Francisco are not generally there for a month at a time, but that is what this law will require. The law, in an effort to deter short-term renters and protect the hotel industry, bans rentals that last less than 30 days, and force individuals renting out a room to pay extra taxes similar to those paid by hotels. This, however, is not to say that the Santa Monica officials are only interested in protecting hotels. The council claims to be introducing these regulations in response to the complaints of annoyed neighbors and advocates for affordable housing in the neighborhood.

Home-sharing, the term given to the practice of renting out a room for a short period of time, has grown exponentially over the past few years. Websites like Airbnb, on which people post their rental listings, have become the place to look for anyone needing a place to live, albeit on a short-term basis. According to Logan, the home-sharing industry is booming and unlikely to slow down anytime soon. Profits are large and demand is high, so even with the new laws, people will likely find some way to keep doing what they are doing.

Some people providing housing through Airbnb are entrepreneurs, managing multiple residences and earning money left and right. Others are elderly and retired, who rent out their apartment when they go out of town to visit family. They encompass two ends of the spectrum, but both feel the same way: the regulations need to be changed. Many understand that home-sharing should be regulated to some extent; they just believe that an all-out ban is the wrong way to do it.

While some people fear that similar laws will be proposed in cities other than Santa Monica, Logan believes that the spread will be limited. Usage of online platforms like Airbnb is hard to keep track of, which is why the government may be afraid of its continued progression toward becoming an integral part of society. Logan recommends wariness when doing business with anyone, but especially with strangers met online. Some feel that laws and governmental oversight would reduce risks. Others believe that the government getting involved would just create hurdles and reduce profit. It's hard to tell which side is correct. Santa Monica may be the guinea pig that the rest of the country needs to test these risky waters.

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Buying vs. Renting: Pros and Cons

9/19/14 - Prior to the Great Recession, the question of buying versus renting was never really an issue at all. If you could get a mortgage, then buying was the best way to go. Even after the housing market crash, there was still plenty of interest in buying rather than renting. If people had some money to do it, then buying was generally their course of action. However, with real estate prices, especially in Southern California, on the rise, and very few “bargain homes” available, potential buyers are being much more careful in deciding whether they really want to enter the market. In a Los Angeles Times article, Tim Logan discusses the potential positive and negative aspects of either buying or renting.

The decision is a hard one for many. Yes, the housing prices have gone up dramatically, but the interest rates on mortgages are lower than they have been in years. Renting makes it easier to pick up and leave, but owning a home has a huge payoff in the long term. According to Logan, a survey of renters showed that most do plan to buy, but are unsure as to how soon. Furthermore, some statistics presented by Logan show that, over the span of seven years, buying can cost you over 20% more money than renting.

The prices of homes are not the only thing deterring potential buyers. It's all about location, location, location. In some areas in Southern California (Lancaster, San Bernardino, etc.), foreclosures make the monthly mortgage payments lower than average rent payments. In other areas (San Marino, Newport Beach, etc.), the return of seven-figure price tags make rent much more affordable than mortgage. Besides the costs of homes and apartments in certain areas, differences in construction choices can limit a home-hunter's options. For example, some areas are busy building new apartment buildings, while others are designing condos and houses. If there are very few houses available in your area, then buying might not be an option. According to Logan's sources, new construction has been mostly for rental properties, likely due to developers' fears of another housing crash.

Apparently, members of the younger generation are statistically more likely to want to rent, not yet willing to “tie themselves down” to something like home ownership. However, even “prime” first-time buyers (married, early 30s, income of at least $95,000) have lately become hesitant toward buying property. Logan's sources claim that this hesitation is due to the housing crash. These first-time buyers witnessed the colossal blow that the recession made on their parents' financial situation, and are leery as to how good of an investment home ownership really is.

As Logan states, this hesitation can be a good thing, preventing buyers from jumping into the realm of home-ownership without the necessary means to make their monthly payments. By making sure that they know what they are getting into, this new, more realistic, outlook of buyers will hopefully prevent another crash in the near future.

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Banks Held Responsible for Housing Market Crash

9/12/14 - Three of the country's largest banks have been facing all kinds of financial and legal repercussions in the aftermath of the housing crash that contributed greatly to the Great Recession. Bank of America, who, in 2008, bought out a couple of failing firms: Countrywide Financial Corp. and Merrill Lynch & Co., are now suffering the consequences of “the worst deal in banking history.” An article by Jim Puzzanghera and Walter Hamilton, of the L.A. Times, described the various legal problems and penalties that Bank of America, JPMorgan Chase & Co., and Citigroup Inc. have had to face over the past year.

Even between BofA's record-breaking $16.65 billion settlement, JPMorgan Chase & Co.'s $13 billion settlement, and Citigroup Inc.'s $7 billion settlement, these three penalties only make up a fraction of the total amount gathered from such financial institutions. According to Puzzanghera and Hamilton, approximately $125 billion in settlements related to the financial crash have been paid by the six largest banking institutions alone. While some of BofA's penalties are due to the pre-recession actions of Merrill Lynch and Countrywide, every bank has problems of its own.

Out of the many billions of dollars paid in penalties and settlements by these banking institutions, over 50% of this money goes to several federal agencies, including the Securities and Exchange Commission, as well as a few states that were most affected by the banks' practices. California by itself has been designated $300 million from the settlements to help reimburse two of its largest pension funds: the Public Employees' Retirement System and the Teachers' Retirement System. The rest goes toward “ consumer relief,” which involves write-downs of mortgage principal or reductions in interest rates on the mortgage. According to Puzzanghera and Hamilton, rates could be reduced to as low as 2%.

While many people and federal institutions blame Bank of America for many of the practices that contributed to the housing crash and the Great Recession, others feel that it is unfair to punish BofA shareholders for the actions taken by executives and employees at Merrill Lynch and Countrywide. While criminal suits against Angelo Mozilo, the former Countrywide chief executive, have been dropped since his involvement didn't quite “rise to the level of a crime,” many prosecutors are continuing to pursue civil cases against him in the hopes of finding some way of holding him responsible for his actions and the actions of his employees.

Now that these proceeding are, for the most part, done with, investors can hopefully breathe easier in the coming future. According to experts, these penalties will only affect the current quarter, and that by the third quarter, profits should be back up to their usual levels. While it is great that these financial institutions are being held responsible for their decisions, I personally am skeptical as to how these penalties are going to have a long-lasting effect on pulling us out of the Great Recession. I guess we will just have to wait and see.

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Sale Price vs. Mortgage Rate: Which Would You Prefer?

7/31/14 - Which is worth more: a lower price on a home, or lower monthly mortgage payments? An article by Kenneth Harney of L.A. Times takes a shot at answering this question. What with slowing sales, price erosion, and rising of mortgage rates, realtors and home sellers are looking for better and newer ways to stimulate the housing market.

A relatively new topic for home resale, it appears that a strategy called “interest rate buy-down” has become more prevalent in the housing market of recent years. This method, as described in detail by Harney, involves the seller making a cash payment to the buyer's lender in order to lower the buyer's interest rate and thus reduce the size of monthly mortgage payments. In this way, both sides win.

Since the buy-down lowers the monthly payments, the buyer is able to afford a higher sale price on their dream home. Since the buyer pays more than they would have previously paid, the seller has the capital necessary to pay off the lender. The more a seller buys off, the lower the monthly payments are and the higher the sale price a buyer can afford. An extra positive for the seller: the money they pay for the interest rate buy-down is a deductible expense under IRS rules!

While buy-downs may be the way of the future for some, other buyers prefer a lower sales price than lower mortgage rates. Furthermore, according to Harney, a buy-down of half a percent of the mortgage price could cost the seller two percent or more, thus lowering net income and making the scenario less than ideal.

Basically, although an interest rate buy-down isn't the best choice for all sellers and buyers, it certainly should be available for those who want it. While a mortgage buy-down may mean a higher sale price, the lower interest rates and monthly payments can definitely make the trade-off worthwhile. That being said, if interest rate buy-downs sound interesting to you, look into it and talk to your local loan officer to find out more!

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Find out more about us at www.sepulvedaescrow.net. Any Questions? Contact our Escrow Expert! Sepulveda Escrow Corporation (818) 838-1831. Follow our company on Facebook, Twitter, LinkedIn, and Google+.

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