The majority of cannabis retailers are unable to accept sales on credit and must resort to cash — and until recently, cashless ATMs — due to the internal guidelines of the credit card networks.

The Secure and Fair Enforcement, or SAFE, Banking Act, which would align cannabis transactions with other consumer goods, remains pending before U.S. Congress, but has stalled amid the Silicon Valley Bank and Signature Bank collapses, according to Sen. Sherrod Brown, D-Ohio, chair of the Senate Banking Committee.

Until the SAFE Banking Act passes, cannabis retailers, and those that collect debt on their behalf, may not be governed by the Fair Debt Collection Practices Act — but they probably should act like it.

The FDCPA is applicable when a third party attempts to collect on a debt that obligates a consumer to pay for property or services that are primarily for personal, family or household purposes.[1]

Given the mixed legal status of cannabis, it is questionable whether a third party seeking to collect debts incurred for purchases of cannabis would be restricted by the FDCPA.

While the scope of the definition of a debt is broad, it does have its limits. For instance, debts incurred by a business are not subject to the FDCPA, nor are business debts guaranteed by an individual.[2]

But what about a consumer debt that arises from the purchase of cannabis bought legally under state law? Is a debt collector constrained by the FDCPA? Put differently, may a debtor of a cannabis retailer sue under the FDCPA if the collector engages in false and misleading practices or fails to send a required written validation notice?

Courts have not decided whether a consumer would have an FDCPA claim where the debt arises from cannabis purchases. In other contexts, however, courts have found that federal law could not provide a remedy where cannabis was at issue.

For example, although cannabis was legal under state law, courts have denied bankruptcy relief where the debtor-cannabis business could not propose a confirmable plan in good faith.[3]

As such, it is reasonable to assume a court would hold that the FDCPA does not provide a remedy to a consumer when the debt obligates them to pay for cannabis.

While a cannabis business may not be bound by the FDCPA, it's still a best practice for debt collectors to be guided by its mandates because most states have their own laws modeled after the FDCPA.

Many of these state laws prohibit the same collection activities that are prohibited under the FDCPA, such as engaging in false, misleading or deceptive practices;[4] resorting to harassing or abusive tactics with the consumer;[5] or disclosing the existence of the debt to unauthorized third parties.[6]

Affirmatively, debt collectors may be required under state laws to provide a mini-Miranda warning[7] during communications with the consumer,[8] or provide a validation notice to the consumer.[9]

Consumer credit reporting agencies, too, should be mindful of the mixed legal status of cannabis if cannabis retailers furnish information to them. Under the Fair Credit Reporting Act, "[w]henever a consumer reporting agency prepares a consumer report it shall follow reasonable procedures to assure maximum possible accuracy of the information concerning the individual about whom the report relates."[10]

If a consumer reporting agency receives information that a consumer has defaulted on a debt arising from the purchase of cannabis, is it accurate to report this on a tradeline? Is a consumer legally obligated to repay a debt from cannabis purchases before the tradeline is removed from the consumer report?

The FCRA does not explain what it means to be "inaccurate," nor does it draw a line between factual and legal accuracy. Courts have, however, recognized this dichotomy and stated that consumer reporting agencies are statutorily obligated to reinvestigate factual inaccuracies, while legal inaccuracies are outside the consumer reporting agency's competencies and fall within the purview of the courts.[11]

Courts have attempted to establish "helpful guideposts" — according to the U.S. Court of Appeals for the Seventh Circuit's 2021 Chuluunbat v. Experian Information Solutions Inc. decision — in distinguishing the factual and legal accuracy dichotomy.[12]

A factual inaccuracy includes incorrect balances, tradeline items not immediately removed once vacated, and inaccurately updated loan terms.[13]

In turn, a consumer addresses a legal inaccuracy when they argue that although the debt exists and is reported in the right amount, the debt is invalid because, for instance, the tradeline is for a debt in violation of state usury laws[14] or the debt is not owned by the purported creditor.[15]

A cannabis purchaser making an FCRA claim that the tradeline on their consumer credit report is inaccurate, arguing a loan to purchase a Schedule I narcotic like cannabis is illegal under federal law, would likely face a quick dismissal.

All federal circuit courts that have opined on whether accuracy in the FCRA context includes legal inaccuracies are unanimous that claimed inaccuracies must be factual, not legal.[16]

A court would likely reject a consumer's argument that the consumer reporting agency knew or recklessly ignored that the debt to the cannabis retailer was void and uncollectible.

Such an argument would amount to a defense to the underlying debt itself, and could form the basis of a claim against the cannabis retailer or other debt collector that furnished the information to the consumer reporting agency.

If a court were to determine that an extension of credit for the purchase of cannabis was invalid and the consumer reporting agency continued to report the tradeline, then the consumer would have grounds for a potential FCRA violation.

Sales on credit can reach new customers and can ultimately increase a retailer's bottom line; however, some borrowers will inevitably default in repayment.

Bills pending before Congress, such as the SAFE Banking Act and the Strengthening the Tenth Amendment Through Entrusting States Act, would put cannabis in alignment with other consumer goods. Until then, those collecting debts arising from cannabis purchases, and the consumer reporting agencies that furnish information concerning such debts, should ensure they implement compliance programs that heed the requirements under state law, the FDCPA and the FCRA.

Reprinted with permission from Law360(c) 2023 Portfolio Media. Further duplication without permission is prohibited. All rights reserved.