[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
FEDERAL RESERVE BOARD AND
TREASURY DEPARTMENT RULE PROPOSAL
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
FINANCIAL INSTITUTIONS AND CONSUMER CREDIT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
MAY 2, 2001
__________
Printed for the use of the Committee on Financial Services
Serial No. 107-12
U.S. GOVERNMENT PRINTING OFFICE
72-396 WASHINGTON : 2001
_______________________________________________________________________
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice BARNEY FRANK, Massachusetts
Chair PAUL E. KANJORSKI, Pennsylvania
DOUG BEREUTER, Nebraska MAXINE WATERS, California
RICHARD H. BAKER, Louisiana CAROLYN B. MALONEY, New York
SPENCER BACHUS, Alabama LUIS V. GUTIERREZ, Illinois
MICHAEL N. CASTLE, Delaware NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California GARY L. ACKERMAN, New York
FRANK D. LUCAS, Oklahoma KEN BENTSEN, Texas
ROBERT W. NEY, Ohio JAMES H. MALONEY, Connecticut
BOB BARR, Georgia DARLENE HOOLEY, Oregon
SUE W. KELLY, New York JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio MAX SANDLIN, Texas
CHRISTOPHER COX, California GREGORY W. MEEKS, New York
DAVE WELDON, Florida BARBARA LEE, California
JIM RYUN, Kansas FRANK MASCARA, Pennsylvania
BOB RILEY, Alabama JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio JANICE D. SCHAKOWSKY, Illinois
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina CHARLES A. GONZALEZ, Texas
DOUG OSE, California STEPHANIE TUBBS JONES, Ohio
JUDY BIGGERT, Illinois MICHAEL E. CAPUANO, Massachusetts
MARK GREEN, Wisconsin HAROLD E. FORD Jr., Tennessee
PATRICK J. TOOMEY, Pennsylvania RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona RONNIE SHOWS, Mississippi
VITO FOSSELLA, New York JOSEPH CROWLEY, New York
GARY G. MILLER, California WILLIAM LACY CLAY, Missouri
ERIC CANTOR, Virginia STEVE ISRAEL, New York
FELIX J. GRUCCI, Jr., New York MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania
SHELLEY MOORE CAPITO, West Virginia BERNARD SANDERS, Vermont
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio
Terry Haines, Chief Counsel and Staff Director
Subcommittee on Financial Institutions and Consumer Credit
SPENCER BACHUS, Alabama, Chairman
DAVE WELDON, Florida, Vice Chairman MAXINE WATERS, California
MARGE ROUKEMA, New Jersey CAROLYN B. MALONEY, New York
DOUG BEREUTER, Nebraska MELVIN L. WATT, North Carolina
RICHARD H. BAKER, Louisiana GARY L. ACKERMAN, New York
MICHAEL N. CASTLE, Delaware KEN BENTSEN, Texas
EDWARD R. ROYCE, California BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma MAX SANDLIN, Texas
BOB BARR, Georgia GREGORY W. MEEKS, New York
SUE W. KELLY, New York LUIS V. GUTIERREZ, Illinois
PAUL E. GILLMOR, Ohio FRANK MASCARA, Pennsylvania
JIM RYUN, Kansas DENNIS MOORE, Kansas
BOB RILEY, Alabama CHARLES A. GONZALEZ, Texas
STEVEN C. LaTOURETTE, Ohio PAUL E. KANJORSKI, Pennsylvania
DONALD A. MANZULLO, Illinois JAMES H. MALONEY, Connecticut
WALTER B. JONES, North Carolina DARLENE HOOLEY, Oregon
JUDY BIGGERT, Illinois JULIA CARSON, Indiana
PATRICK J. TOOMEY, Pennsylvania BARBARA LEE, California
ERIC CANTOR, Virginia HAROLD E. FORD, Jr., Tennessee
FELIX J. GRUCCI, Jr, New York RUBEN HINOJOSA, Texas
MELISSA A. HART, Pennsylvania KEN LUCAS, Kentucky
SHELLEY MOORE CAPITO, West Virginia RONNIE SHOWS, Mississippi
MIKE FERGUSON, New Jersey JOSEPH CROWLEY, New York
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio
C O N T E N T S
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Page
Hearing held on:
May 2, 2001.................................................. 1
Appendix:
May 2, 2001.................................................. 55
WITNESSES
Wednesday, May 2, 2001
Burns, Philip M., Chairman and CEO, Farmers & Merchants National
Bank, West Point, NE, on behalf of the American Bankers
Association.................................................... 36
Hammond, Hon. Donald V., Acting Under Secretary for Domestic
Finance, Department of the Treasury............................ 9
Mendenhall, Richard A., President, National Association of
Realtors....................................................... 33
Meyer, Hon. Laurence H., Member, Board of Governors, Federal
Reserve System................................................. 7
Nielsen, Robert, President, Shelter Properties, on behalf of the
National
Association of Home Builders................................... 37
Parsons, Richard J., Executive Vice President, Bank of America
Corporation, on behalf of The Financial Services Roundtable.... 43
Roebuck, John, CAI, AARE, Chairman of the Board, National
Auctioneers Association........................................ 41
Torres, Frank, Legislative Counsel, Consumers Union.............. 39
APPENDIX
Prepared statements:
Bachus, Hon. Spencer......................................... 56
Oxley, Hon. Michael G........................................ 61
Kanjorski, Hon. Paul E....................................... 59
Kelly, Hon. Sue W............................................ 60
Roukema, Hon. Marge.......................................... 63
Burns, Philip M.............................................. 99
Hammond, Hon. Donald V....................................... 74
Mendenhall, Richard A........................................ 78
Meyer, Hon. Laurence H....................................... 64
Nielsen, Robert.............................................. 121
Parsons, Richard J. (with attachments)....................... 136
Roebuck, John................................................ 134
Torres, Frank................................................ 126
Additional Material Submitted for the Record
Sherman, Hon. Brad:
Section 103, Paragraph 4, Gramm-Leach-Bliley Act............. 175
Mendenhall, Richard A.:
Written response to questions from Hon. Spencer Bachus....... 96
Conference of State Bank Supervisors, prepared statement (with
attachment).................................................... 179
FEDERAL RESERVE BOARD AND TREASURY DEPARTMENT RULE PROPOSAL
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WEDNESDAY, MAY 2, 2001
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Consumer Credit,
Committee on Financial Services,
Washington, DC.
The subcommittee met, pursuant to call, at 9:39 a.m., in
room 2128, Rayburn House Office Building, Hon. Spencer Bachus,
[chairman of the subcommittee], presiding.
Present: Chairman Bachus; Representatives Oxley, Weldon,
Roukema, Baker, Castle, LaFalce, Royce, Lucas, Barr, Kelly,
Riley, Toomey, Cantor, Grucci, Hart, Capito, Tiberi, Waters, C.
Maloney of New York, Watt, Bentsen, Sherman, Sandlin, Moore,
Gonzalez, Kanjorski, Hooley, Carson, Lee, Hinojosa, Lucas,
Shows and Crowley.
Chairman Bachus. The hearing will come to order. This is
the Subcommittee on Financial Institutions and Consumer Credit.
Without objection, Ms. Velazquez will be deemed to be a Member
of the subcommittee to rank immediately after Mr. Kanjorski for
this hearing and subsequent hearings until her election is
ratified by the full committee. And without objection, it is so
ordered.
The first order of business is opening statements. Without
objection, all Members' opening statements will be made a part
of the record. At this time, I'll recognize myself for an
opening statement.
The subcommittee meets today to continue the important work
of overseeing implementation of the historic Gramm-Leach-Bliley
financial modernization legislation enacted during the last
Congress.
Last month, in collaboration with the Capital Markets
Subcommittee, we reviewed rules promulgated by the Federal
financial regulators governing merchant banking operations
authorized by Gramm-Leach-Bliley.
This morning, we will consider a recent proposal by the
Federal Reserve Board and the Treasury to permit financial
holding companies and financial subsidiaries of national banks
to offer real estate brokerage and real estate management
services.
Title I of Gramm-Leach-Bliley allows financial holding
companies and banks through financial subsidiaries to engage in
a broad range of activities that are considered, quote,
``financial in nature'', end quote, or incidental or
complementary to such financial activities. Among those
financial activities specifically enumerated in the statue are
banking, insurance and securities.
Title I also authorizes the Federal Reserve and the
Treasury Department to define additional activities that they
deem to be financial in nature or incidental to such activities
and therefore permissible for financial holding companies and
financial subsidiaries. And in that regard, we mention changes
in the marketplace or changes in the delivery of financial
services.
On January 3 of this year, the Federal Reserve and the
Treasury published in the Federal Register a proposed rule that
would add real estate brokerage and real estate management to
the list of activities considered financial in nature or
incidental to financial activity.
The proposal established a March 2nd, 2001 deadline for
public comment. This proposal in no way changes the prohibition
in Gramm-Leach-Bliley against banks or bank holding companies
making real estate investments or being involved in real estate
development. So we don't need to confuse those two activities.
We're dealing here with brokerage.
Out of a belief that 2 months was simply not enough time
for considered review of a proposal with potentially far-
reaching consequences for consumers and providers of real
estate services, I wrote to the regulators on February 1 urging
them to extend the period for public comment.
On February 21, the Federal Reserve and the Treasury
announced a 2-month extension of the comment period until May
1. With the expiration of the public comment period yesterday,
the regulators must now begin the laborious task of reviewing
and analyzing what I have been told has been a heavy volume of
written comments to determine how to proceed with their
proposal.
My hope is that by holding today's hearing, this
subcommittee can play a constructive role in the deliberative
process in which the regulators are currently engaged. In
addition to giving Members an opportunity to make the
regulators aware of Congressional concerns with the proposal,
the hearing will provide a forum to a broad cross-section of
affected industry and consumer groups, some of whom strongly
support the proposed rule and others which are just as
adamantly opposed to it.
My own reservations about the proposed rule are twofold.
First I believe the wholesale entry of banks into the real
estate business, while not in and of itself undermining safety
and soundness, may serve to erode the long-standing separation
between banking and commerce that Congress most recently
reaffirmed in Gramm-Leach-Bliley.
Second, I have concerns about whether the statutory
criteria that are supposed to guide the regulators'
determination of what activities are financial in nature or
incidental to such activities have been properly applied in
this instance.
And I think part of our questioning today will be a
determination about what is financial, what is commercial, and
what we do when there's a mix of those two.
I recognize, however, that there are strong views on both
sides of the issue. Legitimate arguments can be made for
permitting banks to offer real estate-related services.
Certainly the fact that some depository institutions, including
federally-chartered credit unions and thrifts, as well as
State-chartered banks in a number of jurisdictions, are
authorized to engage in real estate activities while others are
legally barred from doing so raises issues of competitive
equity that should be addressed, must be addressed.
In this connection, I would say that if we continue down
the road we're going, State charters look better and better,
national charters have more and more disadvantages, and we
could find ourselves with a national banking system that is
inadequate.
Before recognizing the Ranking Member for an opening
statement, I want to welcome our witnesses to today's hearing
and remind both them and the Members that because another
hearing is scheduled for 2 o'clock in this room, we're going to
try to strictly go by the 5-minute rule on oral testimony and
on Members' questioning.
Finally, let me conclude by saying both the banking
industry and the real estate industry have served us well, and
we need to keep that in mind as we conduct this hearing and try
to fashion our concerns in an effort to continue their good
service to consumers.
Ms. Waters, you are recognized.
[The prepared statement of Hon. Spencer Bachus can be found
on page 56 in the appendix.]
Ms. Waters. Thank you very much, Chairman Bachus, for
holding this hearing. I look forward to hearing the testimony
of the witnesses. And in the interest of time, I will keep my
remarks to a minimum.
As the Ranking Member of the Financial Institutions
Subcommittee, I believe we have a duty to oversee the
regulations' implementing provisions of the financial
modernization legislation that became law last Congress.
I also believe that it is important for us to monitor the
expansion of banking activities in general to ensure that the
regulations are appropriate to carry out the intent of Gramm-
Leach-Bliley Act, and that the expansion of these activities
falls within the purview of the Congressional intent.
We are here today to discuss the proposed rule that would
permit financial institutions to engage in real estate
management and brokerage. These activities would be deemed
financial in nature under the Gramm-Leach-Bliley Act.
I have to say that during the many times that various
financial modernization proposals were considered over the last
decade, I've never advocated for the mixing of banking and
commerce.
It is interesting that on this issue both Congressman
Bachus and I have signed a letter expressing strong concerns
with the proposed rule. I've also sent a similar letter in
which I was joined by a number of my colleagues from California
allowing banks into the real estate business would be a true
breach of the division between banking and commerce.
During consideration of financial modernization, we
considered this issue, and Congress decided to maintain the
separation. We decided the interests of consumers would not be
served by allowing Microsoft-NationsBank-Gap conglomerate to
exist. We certainly did not want to model our banking policy
after the Japanese system, which serves as an example to all of
what can happen when the separation between banking and
commerce is breached.
I am very concerned that the Fed and Treasury would be
embarking on a slippery slope if real estate brokerage activity
is considered a financial activity. Where would it end? Would
appliances, cars, and anything purchased with a credit card be
deemed financial in nature?
With that in mind, I look forward to hearing the views of
the witnesses, and I thank you in advance for your testimony. I
yield back the balance of my time.
Chairman Bachus. Thank you.
At this time, I recognize the Chairman of the Full
Committee, the gentleman from Ohio.
Mr. Oxley. Thank you, Mr. Chairman. And good morning and
welcome to Governor Meyer and Under Secretary Hammond and our
other witnesses.
As Chairman Bachus indicated in his statement, the Fed and
the Treasury have acted deliberately and thoroughly in their
handling of this proposal, and I commend Chairman Bachus for
holding this hearing and giving this subcommittee an
opportunity for the Fed and the Treasury to discuss further the
issues raised in their proposal.
This issue, like so many others, must be viewed in the
context of the Gramm-Leach-Bliley debates that have led to this
hearing. These debates, while contentious, resulted in a law
that passed Congress by an overwhelming margin and with strong
bipartisan support.
As I consider this proposal, I ask myself two basic
questions. First, is it consistent with the Gramm-Leach-Bliley
Act? And second, does it promote fair competition within the
financial services industry? Generally corporations may engage
in any lawful activity. However, financial holding companies
and financial affiliates of national banks may engage only in
activities authorized under the Gramm-Leach-Bliley Act.
GLB significantly expands the activities of financial
holding companies beyond the activities permissible at that
time for bank holding companies. When we wrote the list of
activities that are financial in nature into the statute, we
tried to incorporate all existing activities of the banking,
securities and insurance industries without authorizing the
complete mixing of banking and commerce or indeed try to
provide a definitive list.
At the same time, we recognize there might be activities we
failed to include. To address this possibility and the need for
the industry to evolve over time, we created a specific process
to allow the Fed and the Treasury to periodically update the
list of activities that are financial in nature or incidental
to such activities.
This proposal represents the first significant application
of the process we created. Striking a balance between the
separation of banking and commerce and the promotion of
competition is never an easy task. For years I watched the
insurance, securities and banking industries battle each other
to protect themselves from competition. Those efforts continue
to this day, most recently by opposition to the repeal of the
70-year-old ban on the payment of interest on business checking
accounts.
But there continues to be broad agreement in Congress that
our financial services laws must be updated on a regular basis
to account for changes in the marketplace and to foster full
and fair competition.
It takes courage for an industry to adapt to a new
regulatory structure, particularly when that structure creates
many new competitive opportunities. Competition, however,
ultimately makes the industry stronger, because it forces the
industry to meet new challenges and to provide more and better
services for consumers. I have seen the positive impact of the
competition between these former adversaries has had for both
consumers and the overall safety and soundness of the financial
services industry.
At the same time, competition must be fair, with adequate
consumer protections against tying or other coercive practices.
I agree with the Treasury Department that in moving forward on
this proposal, the regulators must work closely together to
ensure that this and other rulemaking under the financial-in-
nature authority are consistent with the criteria and legal
process Congress prescribed and the public interest.
And I might add, Mr. Chairman, that indeed the legislative
record will have a significant impact I trust on the
decisionmaking process by Treasury and the Fed.
I have full confidence that the Fed and Treasury will
discharge the duties entrusted to them by Congress in the
Gramm-Leach-Bliley Act and look forward to a spirited
discussion of their proposal this morning.
Mr. Chairman, thank you. And I yield back the balance of my
time.
[The prepared statement of Hon. Michael G. Oxley can be
found on page 61 in the appendix.]
Chairman Bachus. Thank you.
Other Members of the subcommittee will now be recognized
for 3 minutes for opening statements. I have Mr. Sherman, Mr.
Weldon, Mrs. Roukema and Ms. Kelly. If there are other Members
who wish to making opening statements, if you'd advise us. And
at this time, I'll go to Mr. Sherman.
Mr. Sherman. Thank you, Mr. Chairman. I'd like to pick up
on some of the earlier opening statements. My colleague from
Los Angeles points out that we shouldn't call a transaction a
financial transaction simply because it's financed with a
credit card. When I bought this tie, I used a credit card. I
didn't think I was engaging in a financial transaction.
The Chairman of the full Committee correctly points out
that we gave to the regulatory agencies the right to update the
list as changes occurred. And yet this proposal was made less
than a year after Gramm-Leach-Bliley was enacted into law and
does not seem to arise from any change between late 1999 and
late 2000 in the nature of real estate or banking, but rather a
desire to amend and to add to Gramm-Leach-Bliley that which
Congress did not put there.
I do want to thank you, Mr. Chairman, for holding these
hearings. You and I and many others asked Chairman Greenspan
and the Secretary of the Treasury, Mr. O'Neill, to delay these
regulatory proposals until May. I would like to put Gramm-
Leach-Bliley Section 103 Paragraph 4, into the record here.
[The information referred to can be found on page 175 in
the appendix.]
I don't have time to read it. But it lists all of the areas
that exemplify financial transactions. And one thing is clear
from looking at that list. It involves intangible property,
choses in action, investments, situations where you get a
certificate of deposit or an insurance policy, a piece of
paper. The law is very clear, and I have to confess to being a
lawyer. There's a difference between intangible property and
real estate, which is the most real, the most tangible
property.
And if we are going to say that real estate is to be put in
the same category as intangible assets and what the old law
called choses in action, then we really have gone to the
Japanese system that my colleague from Los Angeles pointed out.
That may or may not be in good public policy, but it's not
public policy that should be made by regulatory agencies. If we
are going to dramatically expand Gramm-Leach-Bliley, it ought
to be done here in this Committee, and there shouldn't be a end
run around the authority of Congress where we are told that
less than a year after we pass a bill it needs to be updated by
putting something into it that many of us who supported the
bill never intended. Thank you.
Chairman Bachus. I thank the gentleman.
Mr. Weldon.
Mr. Weldon. Thank you, Mr. Chairman. I want to thank you
for calling this hearing. I share some of the concerns you
stated about this proposed rule. Unfortunately, I have another
important hearing I have to go to.
I just wanted to share with the witnesses that I will be
reviewing your testimonies and monitoring the actions taken by
the Fed on this issue very closely. And I yield back.
Chairman Bachus. Thank you.
Mr. Kanjorski.
Mr. Kanjorski. Thank you, Mr. Chairman. In the interest of
time, I have submitted my statement for the record.
I want to support my colleagues who have indicated to the
regulators that it was not the intention of Congress, or at
least in our interpretation, to break down the firewalls
between banking and commerce. Some of us were very specific
about maintaining those firewalls, and we interpret this
regulation as doing exactly the opposite.
It is unfortunate that this is the first regulatory
interpretation of Gramm-Leach-Bliley that attempts to make this
unusual expansion. I urge the regulators to listen carefully to
the 40,000 critics of their regulatory rule, particularly the
critics on this subcommittee and this Congress.
It would be unfortunate if we have to modify or further
examine this law, because of regulatory interpretations
expanding what authority was intended and, in fact, granted by
the Congress. Thank you.
[The prepared statement of Hon. Paul Kanjorski can be found
on page 59 in the appendix.]
Chairman Bachus. Thank you, Mr. Kanjorski.
Mrs. Roukema.
Mrs. Roukema. Thank you, Mr. Chairman. And again, in the
interest of time, I would ask that my full statement be
included in the record.
But I do want to specifically associate myself with the
issues you raised, Mr. Chairman, in your opening statement, and
very specifically, the concerns regarding safety and soundness
in the separation of finances and commercial activity.
And as the Chair of the Subcommittee on Housing, we will be
looking at the Real Estate Settlement Procedures Act, the
RESPA. And there are reforms that we are going to be looking at
this year with respect to RESPA. But the implications here I
think are specific, and we will be looking at that measure as
well. And I thank the Chairman.
Chairman Bachus. Thank you.
At this time, Ms. Kelly, unless there's a Member of the
Minority. Ms. Kelly.
Ms. Kelly. Thank you, Mr. Chairman. I will submit my
statement for the record. I just want to say that in the Gramm-
Leach-Bliley, when we gave the discretion to the Fed and
Treasury to determine what kind of activities are financial in
nature, I think some of us were a little surprised that this
proposal to allow the financial subsidiaries of banks to engage
in real estate activities came out in January.
I think the proposal raises a number of questions about how
an activity is determined to be financial in nature and I think
we have a number of questions--I certainly do--for the Fed and
the Treasury about this proposal.
I thank you very much, and I look forward to the testimony.
[The prepared statement of Hon. Sue W. Kelly can be found
on page xx in the appendix.]
Chairman Bachus. Thank you. That concludes the opening
statements of the Members. Am I correct?
At this time I will introduce the first panel. Laurence J.
Meyer, Governor Meyer, Member of the Board of Governors,
Federal Reserve System, and Under Secretary Donald V. Hammond,
who is the Acting Under Secretary for Domestic Finance,
Department of the Treasury.
We welcome you two gentlemen, and at this time, without
objection, your written statements will be made a part of the
record and you will each be recognized for a 5-minute
summarization of your remarks. And at this time, Governor
Meyer.
STATEMENT OF HON. LAURENCE J. MEYER, MEMBER, BOARD OF
GOVERNORS, FEDERAL RESERVE SYSTEM
Mr. Meyer. Thank you. Chairman Bachus, Chairman Oxley,
Congresswoman Waters and other Members of the subcommittee,
thank you for the opportunity to testify on behalf of the
Federal Reserve Board with respect to the joint invitation by
the Board and the Secretary of the Treasury for public comment
on whether real estate brokerage and real estate management are
activities that are financial in nature or incidental to a
financial activity, and hence permissible for financial holding
companies and financial subsidiaries of national banks. The
agencies published the request for comment on January 3, 2001.
Because of the significant public interest in the proposal, we
extended the public comment period through May 1, 2001.
The recently enacted Gramm-Leach-Bliley Act allows a
financial holding company to engage in, and affiliate with
companies engaged in a broad range of financial activities. The
activities specifically authorized by statue include lending;
insurance underwriting and agency; providing financial advice;
securities brokerage; underwriting and dealing; and merchant
banking activities.
In addition, the GLB Act permits financial holding
companies to engage in other activities that the Board
determines in consultation with the Secretary of the Treasury,
to be ``financial in nature or incidental to a financial
activity.'' The GLB Act includes this flexibility as a result
of Congress's recognition of the practical difficulties of
comprehensively defining in legislation a complex concept like
``financial activities'' for a marketplace that is continuously
evolving.
With the real estate and other recent proposals, the Board
and the Treasury are exploring this new standard. The GLB Act
establishes certain factors that the Board and Treasury must
consider. But otherwise, it leaves to the agencies significant
discretion and very little guidance regarding what is and what
is not a financial activity.
The factors that the agencies must consider are very broad.
For example, the agencies must consider whether the proposed
activity is necessary or appropriate to allow a financial
holding company to compete effectively with any company seeking
to provide financial services in the United States, efficiently
deliver financial information and services through the use of
technological means, or offer customers any available or
emerging technological means for using financial services. In
addition, the agencies must consider changes or reasonably
expected changes in the marketplace in which financial holding
companies compete, as well as changes or reasonably expected
changes in the technology for delivering financial services.
One thing that is clear is that Congress intended the
``financial-in-nature'' test to be broader than the previous
test for authorizing new activities for bank holding companies
under the Bank Holding Company Act. Before passage of the GLB
Act, bank holding companies were permitted to engage only in
activities that the Board determined were ``closely related to
banking.'' The closely related to banking test was tied to the
activities of banks.
The GLB Act neither specifically authorizes nor
specifically forbids financial holding companies or financial
subsidiaries of national banks to engage in real estate
brokerage and management activities.
Soon after the passage of the GLB Act, three trade
associations asked the Board and the Treasury to determine that
real estate brokerage activities are financial in nature and
one asked the agencies to define real estate management
activities as financial in nature.
The Board and Treasury responded to these requests by
seeking public comment. We have found the public comment
process to be a useful means of gathering information from
experts, practitioners and analysts with an understanding of
the relevant issues and activities. Our final rules often
include significant modifications as a result of the comments
we received on the proposed rules.
As I indicated earlier, the comment period on the proposal
was open for approximately 120 days. The speakers on the next
panel, which include members of the trade associations that
represent various parts of the banking, real estate and housing
industries, will detail their positions for and against the
proposal. Their remarks will give you a good sense of the
comments that we are receiving and reviewing.
These are difficult issues, and both sides feel very
strongly about their position. While we do not relish being in
the middle, we believe that a debate on these matters is the
best way to allow the agencies to identify and sort through the
issues and to reach an informed decision, and is precisely the
type of the debate envisioned in the GLB Act.
Thank you.
[The prepared statement of Hon. Laurence J. Meyer can be
found on page 64 in the appendix.]
Chairman Bachus. Thank you.
At this time, Mr. Hammond.
STATEMENT OF HON. DONALD V. HAMMOND, ACTING UNDER SECRETARY FOR
DOMESTIC FINANCE, DEPARTMENT OF THE TREASURY
Mr. Hammond. Thank you, Mr. Chairman. Chairman Bachus, Ms.
Waters, and Members of the subcommittee, I appreciate the
opportunity to appear today to discuss the Joint Federal
Reserve-Treasury Rule Proposal on whether to permit financial
holding companies and financial subsidiaries of national banks
to engage in real estate brokerage and real estate management
under the Gramm-Leach-Bliley Act.
The 4-month public comment period for this proposal ended
yesterday. And based on the substantial number of comment
letters that we have received, there clearly is wide public
interest in this proposal. We received comments from several of
the Members of this subcommittee and witnesses as well at
today's hearing, and I note that the hearing transcript will be
made part of our rulemaking record.
Because the rulemaking is pending, I will not be able to
discuss the Treasury's views on substantive issues involved in
making a final decision about the proposed rule. Instead, my
remarks will briefly describe the process and factors we
considered in making the proposal and where it stands today.
The Gramm-Leach-Bliley Act permits financial subsidiaries
to engage in a broad range of specific activities as well as
other activities the Treasury determines in consultation with
the Federal Reserve Board to be financial in nature or
incidental to a financial activity. We and the Board are
working cooperatively in making these determinations as the
Joint Proposal clearly demonstrates.
In making determinations, the Act requires us to take into
account among other factors the Act's purposes, changes in the
marketplace in which banks compete, changes in the technology
for delivering financial services, and whether the activity is
necessary or appropriate to allow a bank and its subsidiaries
to compete effectively with any company seeking to provide
financial services in the United States.
The current process started informally more than a year ago
when the Treasury and the Board received requests from the
American Bankers Association, the Financial Services
Roundtable, and the New York Clearinghouse Association asking
that we determine that real estate brokerage and real estate
management activities are financial in nature or incidental to
a financial activity.
In March of 2000, Treasury issued an interim final rule
setting forth specific procedures for requesting determinations
under the Act, and we invited the ABA and the Financial
Services Roundtable to resubmit their requests to conform to
these procedures.
The American Bankers Association did so in July, and a
month later, Freemont National Bank submitted a request as
well.
After due consideration of the requests and consultation
with the Federal Reserve Board and its staff, in December we
agreed with the Board to issue a Joint Notice of Proposed
Rulemaking with a 60-day comment period. That proposal was
published on January 3rd.
Because of wide public interest and requests for an
extension, we jointly decided to extend the comment period
another 60 days to give the public ample opportunity to
consider the proposal and comment on it.
Since the comment period is now closed, we are beginning
the comment review phase. We are in the process of reading and
analyzing the comment letters, and we will give serious
consideration to all the views expressed.
Mr. Chairman, let me highlight just a few points about the
proposal itself. In assessing the requests we received, we
concluded that a threshold case can be made that direct
competition exists between real estate brokers and banking
organizations. According to information provided by the
Conference of State Banking Supervisors, 26 States appear to
permit their State-chartered banks or subsidiaries to act as
general real estate brokers.
In addition, banks and bank holding companies participate
in most aspects of the typical real estate transaction other
than brokerage.
Banks and bank holding companies also engage in a variety
of activities that at first glance seem functionally and
operationally similar to real estate brokerage, including
finder activities and securities and insurance brokerage.
Buyers and sellers of real estate increasingly may look to a
single company to provide all their real estate-related needs.
The proposal also notes that existing Federal and State
laws should operate to mitigate any potential adverse effects
of combining banking and real estate brokerage.
In addition, because the proposed real estate brokerage
services are activities conducted as agent with no principal
risk involved, the proposed brokerage activity does not appear
to present significant financial risks to banking organizations
or their depository institution affiliates.
We expressed some doubts in the proposal as to whether all
aspects of real estate management are financial in nature or
incidental. For example, our proposal would preclude a
financial subsidiary or financial holding company that provides
real estate management services from itself repairing or
maintaining the required real estate.
In conclusion, Mr. Chairman, we intend to carefully
consider the issues raised by all the commentors, including the
views expressed at this morning's hearing. As we move forward,
the Treasury will work closely with the Federal Reserve to
ensure that this and other rulemakings under the financial-in-
nature authority are consistent with the criteria Congress
prescribed, the legal process and the public interest.
Thank you very much. I'll be happy to answer any questions.
[The prepared statement of Hon. Donald V. Hammond can be
found on page 74 in the appendix.]
Chairman Bachus. Thank you.
Let me ask both panelists this question. Have you
considered the consumer and the benefit to the consumer by this
proposal and if any protections are going to be necessary as
part of the proposal?
Governor Meyer.
Mr. Meyer. Well, certainly we've considered the benefits of
the consumer in the form that when there's increased
competition for financial services----
Chairman Bachus. Would you pull the mike a little closer?
Mr. Meyer. When there is increased competition for
financial services, consumers typically benefit. That's one
aspect.
Second, there is an evolving system where consumers often
prefer to have one-stop shopping. And so there are synergies
between activities. And that's another potential benefit that
consumers might obtain if they were able to do real estate
brokerage as well as all the other real estate-related
transactions at banks, as they are allowed to do in some other
places.
In terms of protections, of course there are a lot of
protections that are already in place through State licensing
laws and qualifications, as well as Federal anti-tying laws,
and we have certainly taken those into consideration.
Chairman Bachus. Have you come up with any concrete
proposals on what protections may be necessary for the consumer
other than what's already in the law?
Mr. Meyer. No. We haven't come up with any proposals of
additional protections that we thought jointly would be
necessary with this proposal.
Mr. Hammond. I think it's important to note as we look at
the proposal that what we've put forward is a threshold test
for public comment.
What we've done is we've ascertained, based on the requests
received, that certain evidences of activity incidental to
financial services are evident in real estate brokerage. What
we haven't done is fully considered the entire record. That's
what the public comment period is all about.
We have obviously looked at some of the provisions, such as
anti-tying laws, other consumer protections, were factored in
to meeting the threshold test. But as we are all aware, that
this is a proposal and not a final rulemaking at this point in
time.
Chairman Bachus. What makes the sale of a house financial
as opposed to commercial?
Mr. Meyer. That's what this whole process is all about.
That's what we're trying to sort through. And it's very
important, because this is our first attempt really to draw
that line. So I can't fully answer that question, because
that's what we have to sort out in finally reaching this
decision.
But I would point out two considerations. One, sometimes we
want to approach this from the standpoint of a philosophical
dividing line. And one of the Members of the subcommittee noted
that a financial asset is an intangible asset, and real estate
is a tangible asset. That would be a philosophical drawing
line.
Now you could have written that into the Gramm-Leach-Bliley
Act and said it's very simple; that's what it is, period. But
you didn't. You wrote a much more subtle, much more flexible,
much more nuanced piece of legislation. And you told us to
consider as well such aspects as the competitive nature of the
financial services industry.
So in particular, and Mr. Chairman, your statement at the
outset was very balanced, as we are trying to be with the
proposal that is outstanding. And you yourself noted that we
also have to take into consideration whether these activities
are appropriate or necessary in order to allow banks to compete
effectively in the financial services industries when other
depository institutions have authority to do this, when other
non-bank financial institutions have the opportunity to offer
these services.
So both those competitive issues on the one hand, and the
philosophical issues on the other, have to be weighed.
Chairman Bachus. My final question is the broker often
represents the seller as opposed to the buyer. In fact, they
normally sign a form saying they're representing the seller.
The bank at the same time is going to be representing the
seller in getting the highest price they can get. But then
they're hoping to represent the buyer in getting a loan for the
buyer. So they're trying to get the buyer the best price, but
they're trying to get the seller the most value.
Is there a conflict of interest or potential conflict of
interest in that they are financing the arrangement for the
buyer, but they are actually acting on behalf of the seller and
trying to get the highest price? And it is to their advantage
to actually get the very best value for----
Mr. Meyer. This is a very good example of issues on the
other side that had been brought up that there might be some
adverse consequences to consumers of allowing banks to offer
real estate brokerage, and specifically these conflicts of
interests. And those are some of the issues that we will have
to take up as we consider this fully.
Chairman Bachus. Mr. Hammond.
Mr. Hammond. I think that kind of conflict or apparent
conflict is an interesting question as well, because you can
also look at it from the standpoint of the financial
institution being interested in the seller's interest and the
buyer being able to obtain financing. So you run into the
inherent question of do they in fact apply the appropriate
standards in underwriting the loan as you go forward.
So it is not clear to me, as in many aspects of this
proposal, there is a lot of gray area that needs to be
carefully considered. That's why the comment period I think is
so welcome in this regard.
Chairman Bachus. There was a similar argument in Gramm-
Leach-Bliley. I argued unsuccessfully that financial
institutions shouldn't be allowed to write insurance, title
insurance insuring their own portfolios. In fact, they were
insuring themselves. I lost that argument. But I saw a conflict
there.
At this time I recognize the gentlelady from California.
Ms. Waters. Thank you very much.
Let me just start by asking, I understand that you have
received somewhere between 40 and 45 thousand comments in
opposition to the proposed change. What role does that play in
the final decisions to move forward with this? I mean, how do
you factor in the comments?
Mr. Meyer. Of course, the comments play a very important
role. They help to identify the key arguments in favor and
opposed. But on the other hand, we do not weigh the number of
responses on either side. We weigh the substance of the
responses.
But what this does indicate is that this is a very
controversial proposal. We should very, very carefully
deliberate on it, and we should think long and hard about how
we proceed on it.
Ms. Waters. As I look at your testimony, Mr. Hammond, Under
Secretary, Treasury, Acting Under Secretary Donald Hammond, you
correctly point out that in making determinations, the Gramm-
Leach-Bliley Act requires you to take into account the Act's
purposes, changes in the marketplace in which banks compete,
and you kind of talked about the purposes. And you talked about
the gray areas. And you talked a little bit about what you
think was intended and the area that gives you the opportunity
to move in.
What changes in the marketplace would be applicable to this
consideration? Are there changes in the marketplace?
Mr. Hammond. We think that there has, in fact, been an
evolution in the marketplace that raises some interesting
questions over time as to the bundling of financial services,
particularly with regard to real estate transactions.
As you look at the level playing field from a competitive
standpoint, one can make an argument that financial
institutions could be disadvantaged in certain circumstances
vis-a-vis non-insured financial institutions by virtue of the
ability to offer real estate brokerage services.
It was that bundling of services combined with the overall
competitive landscape which brought us to the first threshold
test, which was is this something worthy of putting out for
public comment?
Ms. Waters. What changes in technology?
Mr. Hammond. I think what you're seeing--our sense is that
we are seeing a lot of internet-based financial shopping. We
are seeing the capability to do one-stop shopping, which
consumers have expressed interest in, certainly in certain
environments, and the ability for institutions to enter that
marketplace is somewhat dependent upon their ability to offer a
full range of services.
Ms. Waters. When you talk about one-stop shopping, do you
have on the record--have you done hearings? Have you done
something that places on the record this so-called preference
for what you call one-stop shopping, or is this just kind of
your basic feeling about it?
Mr. Hammond. That's a very good question. I think it
reflects the nature of where we are in the process.
Ms. Waters. Have you done something that would lead you to
believe that the real estate industry does not have the ability
to have the technology that would appeal to its clients or
customers in some way that the banks would have?
Mr. Hammond. I'm sorry. I must have confused you in that
I'm not talking about the inability for the real estate
industry to take advantage of certain technology. What we're
looking at based on the requests that we received was, is there
a legitimate question about the ability of technology and the
need to bundle financial services going forward to put people
on a level playing field?
We are in the comment period at this point in time in the
process. That is exactly the type of information we hope to get
out of the comment period is those types of observations as to
is this really in consumers' best interests? Is there a
competitive inequality?
But based on the requests that we received, we felt that
they met the threshold test for putting this issue out under
the statute and seeking public comment on it.
Ms. Waters. Lastly, and I thank you very much, Mr.
Chairman, this is rather soon after the Act that you are moving
with this consideration. Don't you think that it's too soon?
And what caused you to move so rapidly to give consideration to
this change?
Mr. Meyer. The timing of the proposal reflects requests
that were made by three trade associations. So they made the
request, and we appreciated that we had a difficult job ahead
of us under Gramm-Leach-Bliley of defining what financial-in-
nature is, setting those boundaries. And this looked like an
appropriate opportunity for us to begin to work on those
issues. And that's really what determined entirely the timing
of it.
Ms. Waters. Did you at any time consult any of the players
on both sides of the Act about their feelings about moving at
this time? And I know that you've gotten requests to extend the
comment period. But did you consult or talk with anybody about
whether or not this was too soon? Whether or not we should wait
to hear from others on the issue before moving with this?
Mr. Meyer. To my knowledge, we didn't talk to Members of
Congress about whether or not it was appropriate or not to move
on requests that we got as to whether activities were financial
or not. It seems to me that was our responsibility under the
Act when we get these requests.
We either have to say, no, we're simply not prepared to
fulfill our responsibilities under the law to determine whether
or not this activity is financial, or we have to engage in a
public comment period to try to sort out the issues.
Ms. Waters. But then you know that if any of the Members
here, and particularly any of the Members of the Majority party
feel that there are areas that need to be clarified, need to be
made clear, that a simple amendment passed perhaps without a
hearing anywhere would clear it all up just like within
minutes?
Mr. Meyer. Congressional intent is very important here. I
completely agree that regulators should not overstep the
boundaries of their authority. We tried to do an exhaustive
search to try to see whether or not there was clear legislative
intent.
There was nothing in the law that either expressly allowed
or forbid it. And indeed, the law gave clear directions about
how we were to respond and what standards we were to apply to
requests. And that's really what we're trying to do here.
Ms. Waters. Thank you, Mr. Chairman.
Chairman Bachus. Mr. Baker.
Mr. Baker. Thank you, Mr. Chairman. I really tried very
hard to stay out of this, but I unfortunately cannot constrain
myself any longer.
[Laughter.]
Mr. Baker. I was a realtor. I was a homebuilder. I was
president of a homebuilder's organization when I was rational
before losing my mind and coming to this occupation.
My son is now a realtor. So I'm making all these
confessions in advance of my statement, really no question. I
think there's a simple solution, Governor Meyer. If you took
the Fed's original merchant banking rules and applied them to
the real estate business, everybody would go home happy. You
simply couldn't do it at all. And I'm not clear where merchant
banking rules are applicable to this set of issues.
But there is one legitimate concern I have as to an
affiliation, not a subsidiary. I know that direct investment in
real estate would be prohibited with the subsidiary structure.
I'm not sure if there was an affiliation under the proposed
rule with a real estate brokerage firm that chose to get into
direct investment that it would not open up the holding company
to exposure of risk of loss where those types of activities.
That's just a general question. I don't know the answer to it.
But I wanted to raise it, because I think that's something that
does deserve legitimate evaluation.
However, in talking with most realtors, including my son,
who was the first to call me about your proposed regulation,
the criticism is that it's big versus little, not merchant
banking, not commerce and finance. Most folks in the real
estate business don't get into those discussions.
It's the ``Bill Gates'' syndrome. When we had it during
Gramm-Leach-Bliley, it was my word that Bill Gates is going to
own every bank in America. And that obviously has not
transpired. But if it is big versus little, and we're worried
about the aggregation of financial assets in a limited number
of hands which would then preclude small operators from the
marketplace, I would point to the real estate industry as a
prime example.
There are ten large firms in this country which in
aggregation were responsible for 800,000 transactions in 1999
at an aggregate sales volume of $200 billion. One firm was
responsible for 362,000 transactions for an aggregate sales
volume of $95 billion.
Now, if I were a realtor in Louisiana, I would be very
worried because we didn't have $95 billion worth of sales in
Louisiana last year and may not for the next decade, given what
we've been through in the 1980's in the oil patch.
My point is, is if it's big versus little, we've already
got that problem. Now if we throw that out the door and we want
to talk about commerce and finance or banking and finance or
commerce and banking or whatever the concern might be of a
particular group, let's analyze what the real estate industry
is doing today.
I have advertisements--I just got them off the internet
this morning--of a couple of really nice firms. I do business
with them. I think they're probably very professional. They
have, you know, ``push your button here and if you don't have
time to look at houses, we'll e-mail you back with floor
plans.''
There's even a firm in Southern California that has a
camera that goes in and does a 360 degree view of the
neighborhood so you can stand at the front door, look down the
street, and see what the neighbors look like, look inside the
house. I mean, it's fabulous technology. All this is available
today.
But, if you don't want to deal with all these other folks,
like lawyers at closings, or insurance agents at the time of
sale to insure the home, you know, all of that business, firms
are doing all of that as a real estate brokerage operation.
Full service. And we don't have the sales volumes on those
insurance sales or those loan-closing transactions or the legal
services fees being paid, but I would bet it's pretty
significant.
I think I have discovered a public policy crisis. The
breach has been made between the barrier between commerce and
finance, and it's happening in the real estate market.
Civilization is in peril.
Now I would merely point out that if we are going to wave
the flag--and I'm a realtor, and I'm in real trouble back home
with my realtors for this statement--and that's the principal
reason driving this debate, and all of us being so antsy about
it. They're doing it. If A can do it to B, B ought to be able
to do it to A. If you don't like the threat, quit doing it
yourself. That's the bottom line.
In talking to the small, independent realtors who do a few
hundred thousand dollars or a few million dollars in business
each year, they don't like the big boys doing this either, the
big realtors that is. They are in jeopardy. And all the mergers
and acquisitions we thought were going to happen as a result of
Gramm-Leach-Bliley with financial institutions has happened
between the big boys. We still have 8,500 banks, the bulk of
which are small. They're not going to Bunkie, Louisiana and
getting in the crop loan business. And the big realtors aren't
going to come to Baton Rouge and gobble up all my small
realtors.
A professional organization who delivers a professional
service will continue to prosper and do quite well in a
competitive environment.
Now I don't know how we got on all this banking and finance
and commerce and finance and all of those concerns. That's not
the debate. It's whether the big banks are going to come to our
home towns and gobble up small realtors. If that is the issue,
big realtors are going to gobble up small realtors. That's the
more likely aggregation than anything else. And I am concerned
about that.
I am very concerned about financial assets of the big
people in this country, like the Wal-Marts, buying up the
hardware stores, the linen store, the feed and seed store, and
exporting the home town payroll to wherever that place is
located. I think that's bad public policy. So I'm worried about
big versus little.
I don't think the rule as proposed has that effect. But I
have an open mind. Thank you.
Chairman Bachus. Would you like to answer his question?
[Laughter.]
Mr. Meyer. I would point out that these are two issues that
are relevant and that we have to factor in. One is what is the
impact on the competition in this industry. And it can be
fairly subtle in terms of what the impact is going to be.
And second, as you point out, we have to talk about
competitiveness in the market for financial services. And that
isn't just what other banks are doing. It's not just what other
financial services firms are doing, but what real estate firms
are doing as full service providers of both real estate
brokerage, mortgage loans, and so forth.
Chairman Bachus. Mr. Watt.
Mr. Watt. Thank you, Mr. Chairman. I'm I guess a little
confused about what the Fed and the Treasury's role here is.
And let me see if I can clear that up before I get into any
substantive questions.
Mr. Hammond, you indicated that you can't discuss the
substantive considerations that will lead you to a final rule
on this or to throw out the rule. That you had the authority to
make the rule, which I don't argue with. The bankers' groups
requested that you make this rule. And you found a threshold
case to make the rule.
I guess I had always thought that when the Fed and the
Treasury proposed a rule that they were advocating, there was
somebody inside your body who advocated for the proposed rule.
Is that or is that not the case here? Are we engaging in what
would in effect be a rule promulgated for debate purposes to
clarify the law, or are you all advocating this rule? I still
don't know even after hearing your testimony and after hearing
your responses to the questions that have gone so far.
Mr. Hammond. I think that's a very good question, because
it gets to the heart----
Mr. Watt. Give me a very good answer, then.
[Laughter.]
Mr. Hammond. All right. I think it gets to the heart of the
question of what we are confronting here. This is a very
different type of rulemaking from my standpoint in that this is
not a regulatory action in the traditional sense where a
regulatory agency is looking at a practice and trying to
determine whether or not it is appropriate within the construct
of its broader mission, say, safety and soundness.
As I look at it, this is a rulemaking designed to interpret
the statute. The statue granted certain authorities. It gave
the gatekeeper responsibilities for those authorities to the
Treasury and the Federal Reserve. A request came in----
Mr. Watt. But it sounds like you all have thrown a rock and
you're hiding your hand now. And I guess the question I'm
asking is, is there an advocate inside the Fed or are there
advocates inside the Fed or the Department of the Treasury for
this rule, or are you all just putting it out there because you
think you have to do it in the context of the law?
Mr. Hammond. We think, at Treasury at least, we think it
very clearly met a threshold standard, that the request came
in, met enough of the statutory requirements to put it forward
as a proposal.
I will hedge my comments to the extent that since the time
the Treasury has put out the rulemaking, the Administration has
changed. And so those that were incumbent upon making the
initial decisions to put forward the proposed rulemaking, those
positions are in the process of changing.
Mr. Watt. But the composition of the Fed really hasn't
changed, and the Treasury really hadn't changed except for I
guess the leadership. You're saying that the change in
Administration is likely to change your position on this? Why
didn't you withdraw it and start over again after you got a
feel for what was going to happen here?
Mr. Hammond. I was trying to answer your question about
whether or not there is an advocate within the Treasury
Department, and I think the answer to that question, speaking
just with regard to the Treasury Department is, is that we went
through a process leading up to----
Mr. Watt. The answer is probably yes or no?
[Laughter.]
Mr. Hammond. It depends what you mean by ``advocate.'' At
what level in the organization.
[Laughter.]
Mr. Watt. OK.
Mr. Meyer, maybe we can find out whether there's an
advocate at the Fed, since we've been so successful in finding
out whether there is one in Treasury.
Mr. Meyer. I think in most cases when we put out a proposed
rule, while it doesn't have to require an advocacy and it only
has to meet a standard that has to be reasonable enough to put
it out and get public comment, most of the time it really is
backed up by some sense of advocacy.
I think in this case, as this was the first attempt to deal
with a very difficult issue, there were really more questions.
It met, as Mr. Hammond noted, that threshold test. There
were reasonable arguments that could have been made in support
of it.
But we also did recognize that this was going to be a
difficult issue and that we were going to benefit enormously
from the comment period.
That's all we needed to do. I can't really talk for my
colleagues and to say I could pin them down and say that they
were 100 percent in favor of this proposal or just wanted to
put it out to get comment.
At this point, once a proposal is out, the situation
changes quite a bit, because it's incumbent upon us to become
very objective and to be very open minded as we receive those
comments. And that's the reason why I cannot come here and take
any advocacy position today, because I am open minded, and I am
going to be reviewing those comment letters on their merits.
Mr. Watt. Mr. Chairman, I didn't do very well. I still
don't have a clue of whether this is an academic discussion or
whether this is a serious rule that somebody is advocating for.
So if I could just use 30 seconds more, Mr. Chairman, I
hope you all will pay close attention to the wording of the
statute, whether an activity is necessary or appropriate to
allow a financial holding company and the affiliates of a
financial holding company to compete effectively with any
company seeking to provide financial services in the United
States.
I take that to mean that that's about competition between
financial services companies, not competition between financial
services and realtors, unless realtors are providing a
financial service----
Mr. Meyer. Mortgages.
Mr. Watt. Got the point. OK. So unless there is competition
already between those who can and cannot inside the financial
services institution or unless real estate companies are
themselves providing competition, then I think you are treading
on very thin ice. And so I'm assuming that you all being as
impartial as you are and not having an opinion on this will
evaluate this carefully.
Thank you, Mr. Chairman.
Chairman Bachus. Thank you.
Ms. Kelly.
Ms. Kelly. Thank you, Mr. Chairman.
I have a concern that involves the affiliates of the banks.
Given the anti-tying rules as they're written now in Gramm-
Leach-Bliley that would prevent the banks from conditioning
credit loans on the use of other banking services, if the banks
were to become brokers, I want to know what would prevent self-
dealing within the bank. That is, if the broker is a part of
the bank, an affiliate of the bank, what would prevent them
from offering the bank affiliates REIT, for instance, a
property? And that's effectively removing the property from the
full market forces. It's self-dealing, and I want to know if
there is any--it seems to me that there is a potential here in
that regard to weaken the market.
And I also wanted to know if there's any kind of a self-
dealing firewall that you've thought about.
Mr. Meyer. I think that would come under 23A. I mean, 23A
requires that those kinds of transactions between a bank and
affiliate be on market terms and not more favorable than the
bank could do with a non-affiliated firm.
So I do believe there are protections already in existing
statutes to deal with this.
Ms. Kelly. My concern is that in the brokerage market, a
property will come on, and we all know that these are very
often, they aren't done--somebody doesn't just come in and sign
a contract with a broker. They'll just call up and they'll say,
I'm thinking about selling this ten-story building and I'm just
wondering, would you like to come and appraise it? And then
we'll give--you've got a bank affiliate that's going to get
that.
And then what's going to happen is the person who is the
broker, who plays golf with the friend over at the REIT, is
going to pick up the phone and say I think I've got a ten-story
building that's going to come on the market, and maybe you want
to take a look at this. That's what I'm concerned about. I'm
concerned that this ten-story building will never get out into
the market. That has the potential to weaken the market.
Because some of these things may never get out into the market.
They may just be passed from one affiliate to the other of a
major bank.
Mr. Meyer. The banks cannot own real estate.
Ms. Kelly. I understand that.
Mr. Meyer. Except under merchant banking.
Ms. Kelly. But an REIT can. There are investments there.
Mr. Meyer. Yes, but banks can't own REITs because they own
real estate.
Ms. Kelly. But, the affiliate structures own and invest in
the REITs. Under securities, no?
Mr. Meyer. No, they can't. Because they own real estate,
and banks cannot directly or indirectly do that.
Ms. Kelly. I'm still--I'm sorry.
Mr. Baker. Will the gentlelady yield?
Ms. Kelly. By all means.
Mr. Baker. Let me ask you a question. What happens when a
bank repossesses property and they call it REO? Does the bank
own real estate? I'm just curious about that.
Chairman Bachus. There is a prohibition in the Act
against----
Ms. Kelly. There's a prohibition in the Act----
Chairman Bachus. ----Investments or development of real
estate activity.
Mr. Meyer. That applies to financial subsidiaries.
Financial subsidiaries are expressly prohibited from engaging
in real estate development or investment.
Ms. Kelly. But affiliates are not, sir.
Mr. Meyer. Not under that particular statute, but it is not
a permissible activity for banks or affiliates of banks. Banks
cannot own REITs. They are allowed to advise. They are allowed
to act as advisers to REITs, but they cannot own them.
Ms. Kelly. I'm sorry, but I'm still a little confused by
your answer. I think perhaps this is something that's a little
more thorny. I would like to see a strong firewall against
self-dealing if this is going to happen at all.
I have serious concern that within the larger structure of
a gigantic banking financial services corporation that there
could be self-dealing.
We have written in Gramm-Leach-Bliley the firewall that
protects the consumer. But in a sense, if there is self-dealing
with a broker and an REIT, for instance, through affiliates,
there is nothing written as far as I can find in the Gramm-
Leach-Bliley Act. And I think perhaps we need to look at this,
because it does have the potential to affect the entire real
estate market.
Mr. Meyer. Why don't you allow us to be in contact with you
and work on this a little bit more closely, make sure we
understand thoroughly your position, and see if we can provide
you with information on this?
Ms. Kelly. Thank you very much. There is one other question
I have. There was an opinion written in The American Banker by
William Seidman that expressed concerns permitting banks to
engage in real estate brokerage and management activities that
might ultimately lead to the mixing of bank and commerce. And
that's been a disaster in a couple of areas, in the Asian
economies in Japan and Thailand. I want to know if you feel
that that's a legitimate concern here.
Mr. Meyer. First of all, the issue is whether this
constitutes a mixing of banking and commerce. That's what this
rulemaking is all about. But, let's put that aside and talk
about just the activity itself. Would this be a risky activity?
I think you have to understand that this is an agency
activity. This is not owning the real estate and the potential
losses that could come from changing the value of that real
estate.
Now, I was here not too long ago, and we were talking about
merchant banking activity. Now there's an activity that's
risky. But the Members of this subcommittee seem to want to
have fewer restrictions on it, seem to want to have less
capital than we wanted to propose against it, but we said now
that's a risky activity. That's subject to significant losses,
because they hold those assets on their books.
Now, a real estate agency is a very different activity, and
I don't think we should confuse what's going on with the
Japanese banking system with providing banks with an
opportunity to engage in real estate agency activities.
Ms. Kelly. It's the potential for changed value that I'm
exactly addressing with my prior question. Thank you very much.
Chairman Bachus. Thank you.
Mr. Bentsen.
Mr. Bentsen. Thank you, Mr. Chairman.
Governor Meyer, let me go you one better, though, because
you're right in bringing up the merchant banking. But as I
recall over the last several years, it was the Federal Reserve
that was very adamant about any attempt by this subcommittee or
any other committee to provide any level of mixing of banking
and commerce, whether it was a 5 percent rule or a 20 percent
rule.
And the argument was always on the basis that--at least
this was the Chairman's argument, and I don't want to hold you
to his opinions--but the argument was always on the basis,
well, if you start at 10 percent, it will be like Section 20,
and then you'll come back, and once you hit that cap, then the
institutions will come back and they'll want more.
And what I see in this proposal is in this I have to say
rather tenuous argument by the nature of the prohibition in
Gramm-Leach-Bliley to real estate investment, that somehow that
meant that we open the door to real estate agency services. I'm
not sure I recall that as being our intent. But I'm not sure
any of us recall exactly what we were doing when we were
writing the bill.
Mr. Baker, I think, does.
[Laughter.]
Mr. Bentsen. And I think that Mr. Baker would go further in
banking and commerce, and I agreed with him in some of those
issues.
But as much as the rule says that you still specifically
preclude investment, if this were to go forward, how long
before the institutions are back saying, ``Well, gee, we need
to go one step further in real estate investment? And, oh, by
the way, you know, you in Congress or Congress has given us
merchant banking rules and allowed us in merchant banking and
affiliates and subsidiaries, and through our affiliates through
the holding company structure, we can engage at least in some
real estate underwriting.'' And I don't know exactly what the
rules are with respect to underwriting REITs or not.
So I think what my concern is that your proposal and some
of the comments really are taking us down the road of banking
and commerce, which is contrary to where the Fed was before.
And we know that the Treasury--and I won't hold you to
this, Mr. Hammond, but we know the Treasury has had mixed minds
on this over the years.
But I have to say, the argument that because some financial
institutions have it as provided by law either under the thrift
charter or under State laws, doesn't necessarily give you
regulatory fiat to then change the Holding Company Act, in my
opinion.
And I appreciate the fact that the gentleman raised the
issue of REO and creditor issues related to property, but there
are rules associated with that. And, for instance, banks are
allowed to hold oil and gas properties that are debtor
properties. But there is a time limit on the period in which
those properties can be held.
And on the issue of engaging in lending and the like, why
is there a difference between a real estate asset and an
automobile asset? I mean, banks are lending to automobile
buyers. They're lending to automobile dealers. They're lending,
arguably, from time to time, to the automobile manufacturing
industry. So why is there not a tie there? Why is there not a
tie to inventory management? Banks lend to widget manufacturers
for their inventory management. Why would it not at some point
be appropriate for banks to engage in actual inventory
management?
So I think a lot of these arguments are rather tenuous that
are put forth, and I really have to say that--and this may be
where we want to go--but I'm not sure that I see where the Fed
and the Treasury have the authority to expand this far in what
I think really is going into banking and commerce.
And again I say I'm one of the Members who was willing to
explore that. But I think that this is where you may be headed.
Now it may not be your intent. But I'm curious. You know, why
is this different than automobiles? And what are you going to
do if you go through with this when they come back and they
say, ``Well, we need more authority now to underwrite and we
need to go back to where the thrifts had authority?''
Mr. Meyer. I think those are two very, very interesting
questions. The first is, how could the Federal Reserve, given
our opposition to the mixing of banking and commerce, even
consider this proposal? I think the answer to that is, we
didn't get to consider this on the basis of the bill that we
would have written. We got to consider it under the bill that
you wrote.
And you wrote a very nuanced bill with a lot of
flexibility. On the one hand, you considered and rejected a
broad mixing of banking and commerce. But in three ways, you
provide opportunities for mixing banking and commerce.
We've talked about merchant banking. And by the way, in
that case, we were saying we want to differentiate this from
the broad mixing of banking and commerce. We want restrictions
on routine management, or you had restrictions on routine
management. We wanted to put them into the regs. We wanted to
put into the regs something specific about holding periods, and
you told us, loosen up. This mixing of bank and commerce, this
is OK within the merchant banking authority. OK, that's one.
Number two, you put into the bill something called
``complementary activities''. What are they? They're non-
financial activities that are related to financial activities.
You put that in there, clearly a mixing of banking and
commerce, but in some way related to the synergies and
strategic direction.
Mr. Bentsen. Well, if I might interject. And I want to hear
the rest, but I may interject that as you recall, at least my
understanding was at the time it was viewed as a compromise to
deal with the evolving marketplace where technology might cause
financial institutions and the ability to provide services to
have to engage in other activities.
I'm not sure real estate is a new technology that's come
about.
Mr. Meyer. OK. And the third is the way in which you set
out the factors for consideration for an activity to be judged
financial. It wasn't simply is it an intangible asset as
opposed to a tangible asset? It was also the nature of the
competition within the financial services industry. So you gave
us a difficult task. It really is a difficult task. This is not
an easy one at all.
But you gave us the authority and the discretion to try to
sort out these issues under that language.
Now the next question you ask, well, where will it all
lead? Well, we considered this proposal under its own merits.
Dealing in real estate development and investment is quite a
different story. That involves the holding of tangible assets,
the ownership of those tangible assets. That's quite a
different story than the agency activity that we're considering
today.
And then with respect to automobiles, again, the equivalent
for automobiles would be an agency activity where the bank
didn't hold automobiles, didn't own the automobiles, but acted
as an intermediary between buyers and sellers. That would be
the analogy. Could it go in that direction, and that's a
legitimate question: Where would you draw the line? But it is
not at all owning real estate--an automobile dealership. That
would be clearly forbidden.
Mr. Bentsen. But--and my time----
Chairman Bachus. I'm going to----
Mr. Bentsen. Well, I'll talk to you about it another time.
Thank you, Mr. Chairman.
Chairman Bachus. Mr. Riley.
Mr. Riley. Thanks, Mr. Chairman.
To follow up on what Mr. Bentsen was saying, I think he
makes a legitimate point. The one thing that we were adamant
about in our Gramm-Leach-Bliley bill is that we do not want to
mix banking and commerce.
If we start down this slope, which I think is a very, very
slippery slope, I don't know how you ever crawl back up. You
can make a legitimate case--and I was in the automobile
business for a while. And I promise you, there is more
financial activity in an automobile dealership than there is in
any real estate brokerage company in this country.
If you can make a legitimate case that you can have a
financial instrument, which is another point that I want to
discuss with you. If I just buy something from you, is there a
financial transaction, or is that complementary? How that be
classified? If there was no mortgage? Could a broker do that
and not mix commerce and banking? I don't think so.
But to elaborate I guess, if you get to the point that we
allow any financial transaction to make a determination whether
or not that is financial in nature, then I think what we've
done is essentially allow total mixing of banking and commerce.
When my wife uses a credit card to buy groceries, that
becomes a financial instrument that the bank has control over,
and you could even make a case that the bank loans her the
money to buy her groceries. Well, does that mean that a bank,
because of this involvement with the credit card company, has
the option then to go and own a grocery store? Should they be
able to own an automobile dealership?
I don't know where you stop. Actually, I think it's harder
to make a case for real estate brokerage than it is for an
automobile dealership because there is so much involved in
insurance and financing and everything that the bank would
normally be associated with.
But there are so many things in real estate. If I lease a
piece of property from you, I don't think that becomes
financial in nature. If you and I have a transaction between
ourselves, that is not financial in nature. So if we allowed
this to happen, I cannot consider--it's hard for me to realize
any point where any transaction that you did with any other
business in this country wouldn't be financial in nature.
Because fully 30 or 40 percent of the real estate
transactions in this country do not involve mortgages. And if
that's the case, then should a broker be able to sell directly
without a mortgage? I don't think so.
So I think you have a weaker case to make with real estate
brokerage than you probably would with automobiles, as Mr.
Bentsen said, with a grocery store, with a Visa card, with
almost anything.
We need to go back, and if we need to redefine what we did
with Gramm-Leach-Bliley, then maybe this subcommittee should do
it. But again, the one thing that we were adamant about is that
we do not want to go down the road that Asia went. We do not
want to mix commerce and banking. And this, to me, would open
the floodgates for opportunities to consider any transaction
that a bank might be a participant in to become financial in
nature, and then you have total mixing of banking and commerce.
Mr. Meyer. It's the very purpose of this proposal to sort
out precisely those kinds of issues about where to draw the
line. And I am completely sympathetic with your view that you
don't want to get on this slippery slope. You don't want to say
anything that's financed you can own because it's financed.
Mr. Riley. Right.
Mr. Meyer. That's absolutely clearly unacceptable. The
difference here might be that we're really talking about an
agency activity that doesn't involve owning the real estate.
Mr. Riley. So you're saying if there was an automobile
leasing company or an automobile brokerage company, then that
would be financial in nature?
Mr. Meyer. Not leasing, but----
Mr. Riley. Well, I think that's utterly ridiculous.
Mr. Meyer. I don't know that anything like that exists. But
that's what we'd have to consider.
Mr. Riley. Sure they exist. And if they don't exist, when
you open this door, they will exist within 6 months. And that's
why I'm saying, if we need to redefine in this subcommittee
what we meant, then maybe we should look at it here and give
you some better direction.
But I think once we make this kind of breach of what the
trust in this subcommittee tried to----
Mr. Meyer. It would be very helpful for us to understand
better what the subcommittee meant when it said that we should
take into account what activities are necessary or appropriate
to allow banks to compete effectively in financial services.
Mr. Riley. Well, I think what Mr. Bentsen said is right.
There is evolving technology out there today that is a part of
and inherent in and a part of a financial holding company. And
as that develops, we don't want to do anything that would
hinder that type of technological advantage that that company
might develop.
But on the other hand, there was never any question, at
least in my mind, with other than Mr. Baker, my good friend
here, about whether or not you should mix commerce and banking.
And I think this subcommittee was very adamant in our
opposition to it.
And if we need to redefine that, I think that is a better
approach than trying to take each individual, specific item
that could possibly come up over the next 5 years and have a
specific ruling dealing with one specific trade group or
whatever.
Mr. Hammond. In my mind, if I might add just to that, it
strikes me that in the course of the discussion, the confusion
arises over whether there is a bright line standard or a bright
line principle within Gramm-Leach-Bliley which says that there
shall be no mixing of banking and commerce.
Then within the statutory language itself, it is much more
flexible, much more open to interpretation, and lays out
standards dealing with competition and competition in financial
services. So what you have is a bright line principle that is
in some regards at odds with the construct within the statute.
Mr. Riley. And I appreciate that. I honestly do. And I know
you have a difficult task in trying to accomplish and interpret
what we mean. But it seems to me that the more obvious way to
handle this is for this subcommittee to come back and revisit
it and give you specific information on how we would like for
you to handle it rather than you having to make an
interpretation on any and every possible thing or contingency
that might come up over the next 2 or 3 years. Because they're
going to continue to come. If you make this exception, I
promise you, you will have 200 other exceptions that will be
requested within the next year.
It makes more sense to me for this subcommittee to go back
and redefine what we did if we need to rather than your
agencies having to go in and make these kind of determinations.
Thank you, Mr. Chairman.
Chairman Bachus. Thank you. We might let the Housing
Committee take those issues up.
[Laughter.]
Chairman Bachus. Mr. Gonzalez.
Mr. Gonzalez. Thank you, Mr. Chairman.
My questions are not as interesting as the others, because
they don't have real case scenarios. But really process and
policy as you go about this, because we have delegated that
responsibility to you. So we're looking to you to do your jobs.
The first, how you perceive the role of Congress in the
rulemaking process. And this is a good example. We really don't
know. And I'm not sure where you think we should come in, at
what point should we be consulted? When should we consult? When
do we have an active role?
Question number two really has to do with what you need to
take into consideration. And this is kind of fundamental, I
guess, but it's regarding changes in the marketplace, changes
in technology, and then what's happening out there in the
marketplace to allow banks to be competitive with other
entities that somehow are providing some service.
When we say ``changes'', I've always anticipated that
that's the reason we passed the Act. As things existed at that
time in 1999, and then prospectively, what other changes might
occur. Do you see that if you could not specifically say
there's been a change in the marketplace, technology or
anything happening with other entities that provide financial
services since 1999, that you would not be able to promulgate
any rules that would allow financial institutions to get
involved in other activities?
So I guess I want your timeline. Where do you draw that, if
any? I assume that you don't. But that was just an assumption.
But listening to the debate or the discussion, I now have a
question.
Another consideration is, as you go about this rulemaking,
if in fact you determine that wherever the financial
institution now will have some activity that it could result in
market domination, undue influence, conflict of interest, does
that basically kind of trump all the other considerations? Or
is it going to be a decision that's made and you say, hey,
that's the marketplace? If that happens, that happens.
The last part of my question goes back I guess to what the
other Members have already touched on, and that's conceptually
I'm thinking. As you determine other areas for financial
institutions, affiliates, subsidiaries and so on to venture, do
you then have an ever-expanding universe? In other words, once
you identify that new activity, then do you have the potential
for other things to be related complementary to and so on that
didn't exist before? It will be a nexus, what I'm saying, to
the next step, which I think some Members have already touched
on.
But I'm just thinking again in the way of policy and how
you go about this, because this is the first question before
you. But it will set a standard. And we will be looking to you
as to what precedents you're going to be establishing now as
you fulfill your duty, which we did delegate to you.
Mr. Hammond. I think it's very clear as we look at applying
the statutory construction that in whatever final outcome we
reach, we have to clearly delineate how we address those very
important issues.
It's important for us to be clear on what those standards
are and how they're being applied, and it's important for us to
explain the rational basis for any decision going forward.
It's my understanding with regard to your first question
with regard to the timing that the statute does not speak to in
terms of from Gramm-Leach-Bliley going forward, but in fact
talks about changes in the marketplace in a more general
construct. That's certainly been the way we've been looking at
it at this point in time.
With regard to the competitive questions, I think that's
something that we very much want to look at. Competition is an
important element in this rulemaking process. How we look at
those competitive standards and what that means is going to be
a key part of the deliberative process going forward.
With regard to your third question regarding add-ons or
supplemental activities, if I understand it, kind of a domino
effect or chaining of activities, once again, I think you have
to look back to the underlying construct of the statute: Are
they, in and of themselves, related to--incidental to the
financial activities of the bank?
And so, you have to make sure that you maintain a
discipline in how you look at and evaluate each of those
proposals. But I don't doubt that that's an incredibly
difficult continuum as time goes on as you look at more and
more issues and their various relationships.
Mr. Gonzalez. Where do we come in as far as Members of
Congress and this subcommittee in the rulemaking process, in
your mind?
Mr. Hammond. I think that's always--agencies always look to
Congressional intent in implementing any statutory delegation
of authority. Obviously with new delegations, there's more
consultation involved in the process to try to divine the
intent and to make sure that it's consistent with the
underlying purposes of the statute.
I think obviously when you're dealing with something that
is brand new, you have probably a higher obligation than you do
in a situation where you have existing statute for some period
of time.
Mr. Gonzalez. Time's up. Thank you very much.
Chairman Bachus. Let me say this for the record. I think
it's important because of some of the questions.
At the present time, with the Gramm-Leach-Bliley, you are
charged with continuing to look at whether or not our national
banks are competitive, and coming to us with proposals when
they're disadvantaged.
So the fact that there's some resistance to this particular
proposal, I hope won't have a chilling effect on your statutory
charge to continue to bring to us other issues that might be
more receptive.
I hope you're following what I'm saying, because we very
much are anxious to have a strong national banking system. And
part of Gramm-Leach-Bliley was to allow banks to be competitive
with other financial institutions, and I think we all agreed
that they were at a disadvantage, at least as passed, we did,
and we charged you all with continuing to look and make
proposals.
And the fact that there's some resistance, it's still a
charge that you have.
Mr. Barr.
Mr. Barr. Thank you, Mr. Chairman.
I share a little bit of the confusion I think that's been
indicated by some of the other Members. I think Mr. Watt, for
example. And I'm a little bit curious as to why the Board and
the Department are jumping into this with both feet right now,
so early in the process. That process being Gramm-Leach-Bliley
is still a very new animal.
We have been asked, for example, to look at going back and
taking another look at the privacy regulations, the privacy
aspects, and a lot of us feel that the best course of action is
to just give Gramm-Leach-Bliley a little bit of time to sort of
settle in and filter out, and then come back and take a look at
it. Let's let it work itself out a little bit.
There's nothing in the statute, despite the very broad
power, to make the determinations that you all are considering
that's given to the Department and to the Board that requires
either the Board or the Fed to initiate these proposed rules,
is there?
Governor Meyer. No. But what we have done here is to
respond to a request. Now we could have said, it's just too
early, and although we have authority and responsibility to
entertain requests for new authorities, we're not going to
fulfill that responsibility because the bill is new.
That didn't seem to me appropriate.
Mr. Barr. Well, I think the way you've cast that sort of
colors it a little bit. It's not that you're telling people
we're not going to follow our responsibility. Certainly the
only response to that will be well of course you have to follow
your responsibility. So I think your characterization of it
presupposes the answer you'd like to have, which is
justification for putting the proposed rule out.
The Board and the Treasury could simply say, we're not
abrogating our responsibility to make a determination of the
statute; we just think it's premature. That wouldn't be
abrogating any responsibility, would it?
Governor Meyer. No. But I think that in this case, we
recognized that these choices were going to be difficult, these
were going to be nuanced decisions.
Mr. Barr. Why rush into it then?
Governor Meyer. Nothing is a rush. We're taking our time
and at some point we have to begin to sort out these issues and
these requests.
Mr. Barr. Well why would you choose as the starting point
for sorting out these issues, two proposed rules that
presuppose that the services that the banks are requesting are
indeed proper financial services related to or are incidental
to.
Because that's the way the rules are cast, the proposed
rules are cast, they presuppose that. And I suppose you all
could have come out with a more neutral proposal or a proposal
on the other side.
Why did you cast them this way if your intent was simply to
get information to begin sorting out the process?
Governor Meyer. Well, I think it would have been unusual to
put out a proposal to say that we don't think these are
permissible activities.
Mr. Barr. With a new animal here, why would that be any
more unusual than this?
Governor Meyer. This seemed like the appropriate way. There
was a threshold case that could be made. There were reasonable
arguments that could be made.
We put it out in this form to get the discussion going, to
get the feedback from practitioners, from market participants
from both sides to help us sort out the issues and hopefully
make a very informed decision, and also begin to draw the line
that we're going to have to draw on what constitutes
financial----
Mr. Barr. Why are you going to have to? I thought there was
nothing in the statute that requires?
Governor Meyer. It says that we are supposed to rule on new
activities. If we get new requests, it seems to me, we're
supposed to consider them.
Mr. Barr. So you do read into the statute an obligation?
Governor Meyer. Not an obligation to put out a proposal in
any case, but to consider those requests.
Mr. Barr. But there's no requirement in the statute to
propose a rule simply because you get a request?
Governor Meyer. No.
Mr. Barr. OK.
Under Gramm-Leach-Bliley Section 103, it looks like it says
that the ``Board shall not determine that any activity is
financial in nature or incidental,'' and so forth, ``if the
Secretary of the Treasury notifies the Board that the Secretary
of the Treasury believes that the activity is not financial in
nature or incidental,'' and so forth.
Treasury did not communicate that to you, is that correct?
I mean, Treasury never made that determination, did they?
Governor Meyer. That's correct.
Mr. Barr. OK.
The next paragraph then says ``The Secretary of the
Treasury may recommend that the Board find an activity to be
financial in nature and incidental to a financial activity.''
Did Treasury do that?
Mr. Hammond. Reach a final conclusion with that regard? No.
Mr. Barr. Under that language there, Treasury
recommendation, which is under the paragraph entitled
``Proposals Raised By the Treasury,'' it says, ``The Secretary
of the Treasury may, at any time, recommend in writing that the
Board find an activity to be financial in nature or incidental
to a financial activity.''
Did the Secretary of the Treasury do that?
Mr. Hammond. I don't believe we reached that point in the
process, no.
Mr. Baker. [Presiding.] Mr. Barr, you've expired your time
and since we've got a vote pending, may I move on to another
Member now?
Mr. Barr. I beg your pardon?
Mr. Baker. I said your time has expired, and since we have
a vote pending, I'd like to move on to another Member to try to
get more Members in before the vote.
Mr. Barr. OK, could I just get a definitive answer on that?
So the answer is no, the Secretary did not make that
recommendation?
Mr. Hammond. No, we did not. Correct.
Mr. Baker. Thank you, Mr. Barr.
Mr. Kanjorski.
Mr. Kanjorski. Thank you, Mr. Chairman.
I think some of the previous questions from Members of this
subcommittee indicate that we have done several things. Maybe
the Congress made a gross error in delegating legislative
authority to the regulator and to the Secretary. I am probably
predisposed to believe that we shouldn't have done that. And
maybe it would be right that you send back this law and, I
think, make that determination.
Let me ask this question. Did you make a determination
whether or not there was an unconstitutional delegation of
authority by the Congress to the regulators or the Federal
Reserve or the Treasury?
In fact, listening to your answer, Mr. Hammond, I sort of
thought that you felt you had an obligation to start
legislating here.
Mr. Hammond. No, we have certainly not looked at the
constitutional question that I'm aware of.
Mr. Kanjorski. Well, should you not maybe look at that?
With the predisposition of the Supreme Court today being more
conservative regarding what the Executive Branch and
independent agencies can do, maybe you should sit down and say,
look, it is up to the Congress, not the regulators to define
what is commerce and what is financial services.
Mr. Hammond. Well, I think we----
Mr. Kanjorski. And by forcing you to do that in the Act, we
have delegated that legislative authority to you.
Now, putting that question aside, I think you could
understand the intent of the Act from the committee hearings
and conference reports where the issue of commerce and
financial services was addressed.
It was not like we did not address that issue. And, as I
recall at that conference, although I was ill at the time, I
think we agreed to absolutely maintain that firewall.
So the question seems to pose itself, and I think Mr. Barr
and Mr. Gonzalez addressed that. What happened that suddenly
what we all presupposed, at least on the side that wanted to
maintain the firewall, that somehow this moved from a commerce
to a financial services problem.
Now, having said all those things, I approach this issue in
an entirely different direction. I think we want
competitiveness in the banking system. We want to level the
playing field. But in some of your comments earlier, I got the
indication that you are driving toward the least common
denominator.
You are saying because 26 States allow some of this
activity to go on, we are going to have to allow all the States
to do it under the Act.
If that is the case, we are going down that slippery slope
anyway. I am sure I could find some State legislature or
regulator in this Union willing to allow banks to sell
automobiles and finance them out of the bank.
So we are going into that business. And if we can persuade
any one of the 50 States to approve something else, then you
are going to say this is now competition, and you have to
approve it?
Why not look at the other side? You are not talking to us
about the interests of the consumer. As you know, the banks can
pretty much take care of themselves, and so can the realtors.
But, there are more than just California consumers, and there
are more than just New York City consumers.
There are consumers in Pennsylvania. Where we have gone in
the last 10 or 15 years in this country? In fact, we have wiped
out most small bankers. Well, we said that was necessary, so we
accepted it. We have also wiped out most independent insurance
agents, or soon will wipe them out. Now we are going to wipe
out the realtors. I think you could extend this thinking to the
legal profession, too. I am sure there are so many financial
transactions that banks can buy legal firms and run them. I
have no doubt about that.
What is going to be left in our local communities for
leadership? Everybody is going to be working for three or four
huge, gigantic institutions that are 100, 500 or 1000 miles
away from their community.
Aren't the consumers the people that live in these
communities? I have personal experience from it. I know when I
entered Congress, we had 40 or 50 community bankers in my
district; today, we have five or six.
I know when we would have a United Way fund drive, we could
call on the insurance agencies, call on the lawyers, and call
on the realtors. They are, however, starting to disappear,
because of, as Mr. Baker pointed out, larger institutions.
Now we can not change the march of progress and time, but
we do not have to rush down that road with the conviction that
we are going to homogenize this country to such an extent, and
the communities that are made up of the consumers be damned.
That is what you are doing with this proposal.
Mr. Baker. Mr. Kanjorski, if I may, you've exceeded your
time. Mr. Hinojosa is the last Member to be heard. We might be
able to wrap this up if we get Mr. Hinojosa in here real quick.
We've got about 9 minutes left till the vote, and then we'll
recess.
Thank you, Mr. Kanjorski.
Mr. Hinojosa. Thank you, Mr. Chairman.
I want to identify with and agree with Chairman Baker on
the interesting challenge before us here in our Financial
Services Committee.
I have an open mind on this proposal before us on the
proposed rule.
As I looked at Under Secretary Hammond's remarks, you say
that in making determinations, the 1 year old Gramm-Leach-
Bliley Act requires us to take into account, among other
factors, the third bullet: changes in the technology for
delivering financial services, and fourth, whether the activity
is necessary or appropriate to allow a bank and its
subsidiaries to compete effectively.
And I like competition, and so I want to keep an open mind
before I make a decision.
I was one of the ones who said that I wanted to think out
of the box at a time where technology facilitated internet
shopping, and has made it popular, at a time when one-stop
capital shops are being sought out by homebuyers, at a time
where homes have sold for more than what the asking price for
the home started out.
An example is that I've been renting a townhouse and very
near two blocks from my home here on the Hill, a refurbished
home went on the market, and within 10 days it sold for not the
asking price of $300,000, but for $340,000.
There were bids taken, and by the time it was over, it sold
for more.
So times are changing, as Chairman Baker pointed out, and
those of us who have very close relationships with realtors,
like I do with my son, who is a realtor, I find it difficult to
just simply say that we have to continue to do business as in
the past.
So I repeat, I like the competition, but what and how do
you feel about taking care of the low-income and the middle-
income families who, in many cases, are not the customers that
the big banks are going to seek.
How are we going to take a look at the Community
Reinvestment Act so that big banks can put back into the
business the moneys that they are taking from everybody in that
community, so that if this proposed rule should get 51 percent
of the votes out of this subcommittee and move forward, that
they too can benefit from this competition.
What are your feelings about that?
Mr. Hammond. I think that, in general, competition benefits
all consumers, and to the extent that you foster an environment
of fair and open competition, everyone stands to benefit in the
marketplace.
With regard to your specific questions, I think those are
issues of addressing the low- and moderate-income communities,
those are issues that are addressed in other aspects of the
legislation and other existing statutes.
And they factor into any decisionmaking as they would
factor into the competition questions.
But specifically, the standards with regard to those
communities are addressed in different statutory requirements.
Mr. Hinojosa. Time is running out. We need to go vote. I
want to be sure that there is specificity, that there is
specificity that says, just like in the Community Reinvestment
Act, that all banks are going to put back into their community.
And so I want to be sure that I'm vocal, that if I am to
support this, that we look at how banks are going to make sure
that they welcome the low- and the middle-income families into
being served.
Mr. Baker. Mr. Hinojosa, we're down to about 4, 3 minutes,
30 seconds.
Mr. Hinojosa. Thank you, Mr. Chairman, I appreciate the
opportunity to say what I had on my mind.
Mr. Baker. Thank you, sir.
I wish to thank both the gentlemen for their tolerant
participation this morning.
Just a couple of comments for the record. And I should
state, not on Chairman Bachus' behalf, but clearly on my own.
If we're going to clear this up, we need to look at credit
unions who, through service organizations, can have brokerage
operations today under current law.
I don't know that the subcommittee is aware of the credit
unions' violation of common sense.
Second, if we're going to be risk adverse, we need to look
at the 25 percent equity position a bank may take under current
law in a private corporation, or worse yet, the 40 percent
position it can take in a foreign corporation, which certainly
is going to be suspect.
Finally, we need to understand that, in the history of this
subcommittee, we not only voted for a commercial basket in
which a bank could own part of a commercial firm with certain
permissible activities--obviously a breach of commerce and
finance--which was inexcusable. But, we also passed on this
Committee, although it did not become law, a reverse basket
where commercial enterprises could own banks. Now that was
absolute heresy which never made it to the floor.
We have a lot of equalizing we need to do in this seriously
flawed marketplace. If we're not going to pursue the rule which
the Fed is proposing today, then this subcommittee needs to be
instructed to correct the errors of the past.
With that comment, I'd like to call this subcommittee
hearing to recess, and we will return, and Chairman Bachus will
return momentarily.
[Recess.]
Chairman Bachus. The Subcommittee on Financial Institutions
and Consumer Credit hearing on Federal Reserve and Treasury
rulemaking will now come to order.
Let me introduce members of the second panel. I appreciate
your attendance and your patience.
Our first panelist, going from your right, is Mr. Richard
A. Mendenhall, President of the National Association of
Realtors.
The second panelist is Mr. Phillip M. Burns, Chairman and
Chief Executive Officer of Farmers & Merchants National Bank of
West Point, Nebraska on behalf of the American Bankers
Association.
The third witness is Mr. Robert F. Nielsen, President,
Shelter Properties, Inc., of Reno, Nevada, on behalf of the
National Association of Home Builders.
Mr. Frank Torres, Legislative Counsel for Consumers Union.
Mr. John Roebuck, Chairman of the Board, National
Auctioneers Association.
Mr. Richard J. Parsons, Executive Vice President, Bank of
America, testifying on behalf of the Financial Services
Roundtable.
We appreciate your attendance.
Mr. Mendenhall, if you will lead off.
STATEMENT OF RICHARD A. MENDENHALL, PRESIDENT, NATIONAL
ASSOCIATION OF REALTORS
Mr. Mendenhall. Thank you, Mr. Chairman.
Good morning. I'm Richard Mendenhall, President of the
National Association of Realtors. I am from Columbia, Missouri,
where I own three real estate firms specializing in single
family and commercial brokerage and property management.
I've been a realtor for over 25 years and I'm the fifth
generation in my family in the real estate business.
I'm pleased to represent the nearly 760,000 members of the
National Association of Realtors who participate in all aspects
of the residential and commercial real estate market.
First, let me thank you sincerely for holding this hearing
today. The issue before us is an extremely important issue and
raises many concerns as it affects not only the banking and
real estate industry, but more importantly, consumers.
As you know, over 175 of your colleagues in the House of
Representatives have written letters to the Federal Reserve and
Treasury expressing their concern about their proposal to
classify real estate brokerage and property management as
financial activities, and therefore permissible for financial--
--
Chairman Bachus. Mr. Mendenhall, would you pull the mike a
little closer. And let me ask all the gentlemen to do that.
Mr. Mendenhall. Be glad to.
As you know, reclassifying real estate leverage and
management as financial activities therefore makes them
permissible activities for financial holding companies and
financial subsidiaries of national banks.
The National Association of Realtors opposes this proposal.
We oppose it because it violates congressional intent. At no
time during the debate of the Gramm-Leach-Bliley Act did
Congress, nor the banking industry, for that matter, suggest
that real estate brokerage and property management were
financial in nature, or should be included in the newly defined
activities.
It was clear that the issue at hand was to permit banks to
engage in securities and insurance activities. Also clear was
congressional intent to maintain the separation of banking and
commerce.
In fact, on at least three occasions, Congress debated and
voted decisively to keep them separate. Real estate brokerage,
as a commercial activity, was considered off the table.
The Gramm-Leach-Bliley Act is perfectly clear. As you can
see from the chart to my right, a chart of permissible
activities, real estate brokerage and property management are
conspicuously absent.
Furthermore, since 1972, the Federal Reserve has maintained
that real estate brokerage and property management activities
are not closely related to banking.
Banking industry representatives say that because a home is
financed, real estate brokerage is incidental to banking.
To apply this standard to all activities deemed attractive
business opportunities for banks will most certainly lead to
banks entering all other commercial activities.
Will bankers soon be selling cars, boats, washing machines,
and other tangible products that involve financing?
The act of financing real estate or any other tangible
asset or durable goods simply does not transform that asset
into a financial instrument. Banks have it backward. It is the
mortgage that is in fact incidental to buying real estate.
Let me put this in perspective. There are two parties to
every real estate transaction; a buyer and a seller. The seller
requires no financing for his part of the transaction.
Therefore, right off the bat, 50 percent of the transacting
parties handled by real estate firms involve only the marketing
and selling of the property.
These sellers are not shopping for a loan or any other
lender services.
The other 50 percent represent the buying side. You might
assume that these buyers require a mortgage. However, according
to the 1999 American Housing Survey, approximately 20 percent
of home purchases are made without financing.
This means that if this proposal is adopted, it places the
Federal Reserve in the embarrassing position of permitting
financial holding companies to engage in a commercial activity
where 70 percent of the consumers involved in the transaction
require no financing.
I'd like to repeat that again. Seventy percent of the
consumers involved in the transaction would require no
financing.
Some say that the real estate industry is afraid of
competition. On the contrary, we welcome competition as long as
the rules are fair. I would point out to you that a financial
holding company and national banks already have at their
disposal Federal advantages and subsidies, as listed on our
second chart. Pitting federally-subsidized, highly advantaged
entities with a high barrier to entry against unsubsidized,
less-advantaged real estate firms with a relatively low barrier
to entry is a recipe for trouble.
Cash-rich banks could use profits from taxpayer insured
operations to subsidize real estate functions, freeing more
resources to consolidate market power.
Some real estate firms would be forced to close their
doors. With less competition, consumers would be at risk and
disadvantaged. Consumers will be hurt by this proposal in a
number of ways, including limited choice, unfair treatment, and
possible increase in cost.
However, the concern that resonates most when asked is the
treatment of their financial and personal information under a
bank-owned brokerage scenario.
In conclusion, I've identified some of the reasons we
oppose the proposal before us today.
We hope that the Treasury Department and Federal Reserve
will agree with us and deny the petitions to define real estate
brokerage and property management as financial activities.
We also encourage Congress to reaffirm its commitment to
maintain the separation between banking and commerce. This is
not only necessary, but essential if we are to ensure that the
real estate market, one of the largest sectors of the economy,
remains fair and competitive.
We must protect consumers and their rights to the greatest
selection of providers in buying or selling of their property.
I would like to thank the subcommittee for your time and
attention to this critical issue.
[The prepared statement of Richard A. Mendenhall can be
found on page 78 in the appendix.]
Chairman Bachus. Mr. Burns.
STATEMENT OF PHILIP M. BURNS, CHAIRMAN AND CEO, FARMERS &
MERCHANTS NATIONAL BANK, WEST POINT, NE, ON BEHALF OF THE
AMERICAN BANKERS ASSOCIATION
Mr. Burns. Thank you.
Mr. Chairman, first I would like to thank you for holding
this hearing.
The issues we are here to discuss are not new, in fact,
they have been debated in this legislative body for years.
What is new is that in 1999, Congress enacted the Gramm-
Leach-Bliley Act. The fundamental tenets of that Act are to
promote competition among providers of financial and related
services and to ensure that financial services holding
companies can adjust to the marketplace.
Congress recognized that regulatory flexibility was vital
in a dynamic marketplace. Congress expressly left it to the Fed
and the Treasury to determine what additional services could be
offered by banking organizations.
In putting forth the proposal on real estate brokerage and
management, the Fed and the Treasury are following exactly the
process Congress created when it passed Gramm-Leach-Bliley only
18 months ago.
In my small town in Nebraska, I would like to offer my
customers the same services as our competitors, and that
includes real estate brokerage and management. In fact, the
ability to offer real estate services may be more important for
smaller banks like mine in rural areas.
In these communities, the bank is perceived as having the
best information on properties offered for sale, including
farmland acreage. Small banks would likely partner with
existing real estate brokers in order to provide these
services.
In my statement today, I would like to make three key
points:
One, competition will be enhanced by bank involvement in
real estate brokerage;
Two, consumer protections would be even greater with bank
involvement; and
Three, the regulatory process should be allowed to work as
Congress intended when it passed Gramm-Leach-Bliley.
And I would like to briefly touch on each point.
The benefits of competition are well known. Competition
improves efficiency, pricing and service levels, all to the
benefit of homebuyers. Not all banking organizations will
choose to offer real estate services, but those that do will
enter the market because they believe they can do a better job
serving customers.
While realtor opponents of competition try to block bank
participation, many realtor firms offer both real estate and
banking services.
Congressman Baker, earlier in his comments, made reference
to looking up ads by realty firms this morning on the internet,
and today I have brought a sample of such an ad, which is to my
right.
The ad on display here, from Long & Foster, this area's
largest brokerage firm, makes no bones about providing end-to-
end services. This ad touts Long & Foster as being more than a
great real estate company, but also a great mortgage, title,
and insurance company too.
The ad goes on to say, ``Imagine the convenience of buying
a home, securing the mortgage, arranging the title work, and
getting homeowners' insurance all in one place.''
And Long & Foster is not an isolated example. Century 21,
Caldwell Bankers, GMAC, Prudential, and many others all combine
financial services like loans and insurance with real estate
brokerage.
This is exactly the type of marketplace change that Gramm-
Leach-Bliley was designed to have the regulators address. In
that regard, I note that credit unions can and do offer real
estate brokerage.
Importantly, bank involvement is consistent with safe and
sound banking. All consumer protections that apply to
independent realtors would also apply to bank affiliated real
estate agents, including all State licensing, sales practices
and continuing education requirements.
Banks already must meet tough privacy requirements and are
subject to anti-tying regulations. And because brokerage and
management are agency activities, they pose no risk to the
soundness of the bank.
After more than 20 years of debate, Congress recognized the
importance of regulatory flexibility when it enacted Gramm-
Leach-Bliley. Congress could have excluded real estate
brokerage and management explicitly, as it did for real estate
development, but it did not.
Rather, Congress left that decision to the Fed and the
Treasury. Thus, the National Association of Realtors is now
asking Congress to intervene in the very process Congress
created only a year-and-a-half ago.
The Fed and the Treasury should be allowed to follow the
process that Congress created.
In conclusion, increased competition benefits customers. It
is a catalyst for innovation, more customer choice, better
service and competitive prices. My customers would certainly
benefit if my small bank could offer real estate services.
Again, Mr. Chairman, I'd like to thank you for this
opportunity to testify.
[The prepared statement of Philip M. Burns can be found on
page 99 in the appendix.]
Chairman Bachus. Thank you.
Mr. Nielsen.
STATEMENT OF ROBERT NIELSEN, PRESIDENT, SHELTER PROPERTIES,
INC., ON BEHALF OF THE NATIONAL ASSOCIATION OF HOME BUILDERS
Mr. Nielsen. Chairman Bachus and Members of the
subcommittee, my name is Bob Nielsen, and I'm President of
Shelter Properties, Incorporated, a company which builds and
manages multi-family properties.
I'm also Chairman of the National Association of Home
Builders Housing Finance Committee, and past chair of the
Federal Government Affairs Committee.
I'm here on behalf of the 203,000 members of the National
Association of Home Builders to express our views on this
proposal.
We oppose the proposal and believe that real estate
brokerage and property management are inherently in nature,
anti-competitive, and would adversely effect consumers.
For these reasons the proposal arguably violates both the
letter and the spirit of the law.
First, I'd like to speak to the proposal as it relates to
financial holding companies and national banks engaging in real
estate management services.
The term ``real estate management'' encompasses numerous
activities. As a property management company owner, we perform
such functions as preparing and overseeing marketing plans,
finding tenants, negotiating leases and renewals, developing
operating and capital budgets, preparing maintenance and repair
schedules, purchasing equipment, materials, and supplies,
supervising employees or contractors that perform repair,
maintenance, and landscaping work, collecting rents, and
holding security deposits.
I submit that these functions are intrinsic to the day-to-
day operation of a commercial enterprise. Classification of
these activities as financial, or incidental to financial
activity, blurs the line between banking and commerce so as to
render it non-existent.
If this proposal is allowed to go forward, it would be
difficult to predict what activities would not fall under such
a heading.
Allowing financial holding companies and national bank
subsidiaries to engage in real estate management would also
create an unfair competitive environment for real estate
management firms not affiliated with banks.
It would deprive the current participants of their right to
compete in the marketplace without undue influence by banking
entities.
I, as a real estate property manager, must disclose
proprietary data on rental market conditions and projections,
business plans, and data on specific properties. This would be
a sensitive situation for a real estate development firm that
has a property management unit in that data on both development
and management operations could be required to support loan
decisions.
This information, if shared by the bank with its property
management affiliate, could give that entity an unfair
competitive advantage over other firms in the market.
Also, this proposal would create conflicts of interest when
banks must make decisions about financing involving companies
with competing property management operations. Banks may be
unwilling to provide financial services including loans to
competitors, or may provide such services at terms that are
less attractive than those extended to its property management
affiliate.
Second, I will address the proposal that would allow bank
holding companies or national banks to engage in real estate
brokerage.
Real estate brokerage involves bringing together parties
for the purposes of accomplishing a real estate purchase, sale,
exchange, lease or rental transaction. Again, these activities
are commercial in nature, not financial.
Just as with real estate management activities, the
financial components of real estate brokerage are incidental to
the commercial elements of the transaction.
Real estate brokerage activities do not satisfy the test of
being financial or incidental to financial activity.
Finally, this proposal would be harmful to consumers.
Despite the assertion that consumers benefit from one-stop
shopping, there is a significant risk to consumers who utilize
brokers affiliated with banks.
Consumers utilizing these services might not have access to
independent sources of information that they would have if they
used an independent real estate broker.
Also, a consumer could reasonably fear that they might not
be approved for financing of a real estate purchase if they do
not use the brokerage and other services of the affiliates of
the banking organization.
Again, we believe that going forward with this proposal
would be inconsistent with the congressional intent in passing
Gramm-Leach-Bliley.
We are grateful you have had this hearing today and
listened to our views. We hope that the subcommittee can
utilize its oversight authority to reaffirm its commitment to
maintain the separation of banking and commerce.
Thank you very much.
[The prepared statement of Robert Nielsen can be found on
page 121 in the appendix.]
Chairman Bachus. Mr. Torres.
STATEMENT OF FRANK TORRES, LEGISLATIVE COUNSEL, CONSUMERS UNION
Mr. Torres. Chairman Bachus, Members of the subcommittee,
Consumers Union appreciates the opportunity to be here today.
I've got realtors to the left and bankers to my right, and
maybe I'm stuck in the middle with some of you on some of the
issues that are related to the proposed rule.
Chairman Bachus. You also have an auctioneer there.
Mr. Torres. That's right, but that kind of skews the
perspective then perhaps a little.
I do want to raise three points about the proposed rule
today.
First, we believe that it's questionable if this type of
activity is permissible under Gramm-Leach-Bliley.
Second, the existing marketplace might not be perfect for
consumers, but allowing banks in won't necessarily change
things or automatically provide benefits for consumers.
Third, if banks are allowed to be real estate agents, then
there need to be safeguards like those Congress included in the
Gramm-Leach-Bliley Act for the retail sales of insurance by
financial institutions.
I guess the threshold question here is whether Congress
intended that banks be allowed to engage in this type of
activity when it passed the Financial Modernization Law.
Many Members, including some today on this subcommittee,
have said, no.
During the financial modernization debate, much concern was
raised about the mixing of banking and commerce. Consumers
Union, at that time, testified that ``We opposed permitting
federally-insured institutions to combine with commercial
interests because of the potential to skew the availability of
credit, conflict of interest issues, and general safety and
soundness concerns from expanding the safety net provided by
the Government.''
You let the banks get a toe in now, as Congressman Bentsen
said, or perhaps someone else, they'll keep on coming back to
the well. The next thing you know, they've plunged in and
they're swimming across the Atlantic and the taxpayer gets to
pay for the rescue mission when something goes wrong.
What can a consumer expect if banks are allowed to engage
in real estate activities? We've heard a lot about benefits.
Are we going to see cuts in commissions? Are we going to see
lowered costs, perhaps reduced fees? No selling of junk
products and the protecting of my personal information?
The banks' track records make us a little skeptical. Banks
are still charging consumers a lot of fees for their bank
accounts, unless of course you maintain a large balance, which
many consumers don't.
Banks continue to oppose life line banking accounts. Will
they also shut out lower income people if they are allowed to
participate in the real estate marketplace?
Some banks are partnering with payday lenders that charge
consumers in excess of 300 percent for loans. And they use
existing national banking laws to avoid having to comply with
State consumer protections.
ATM fees have quadrupled. Credit card practices are out of
hand and consumers continue to get hit with fees upon fees.
Fannie Mae and Freddie Mac have both estimated that many
consumers in the sub-prime market, where banks are
participating more and more, can actually qualify for better
loans.
So to the extent that banks are already participating in
the marketplace, through offering mortgage and home equity
loans, some of their practices leave a lot to be desired.
And what incentive will the banker's agent have to refer a
customer to a better product that another institution may
offer?
And we're really skeptical about the value of one-stop
shopping for consumers, especially those who don't have a lot
of money.
The financial services industry has opposed virtually every
effort to improve the financial services marketplace for
consumers, including attempts to curb predatory lending at both
the Federal and State level.
Financial institutions have opposed changes to regulations
protecting consumers who take high cost loans, and even
expanding some disclosure laws that the Federal Reserve Board
has proposed.
It's ironic that the institutions who claim they want to
get into this marketplace more oppose efforts to keep people in
their homes by avoiding foreclosure and other problems that
they have with predatory loans.
Predatory lending absolutely needs to be addressed as part
of this discussion, because it gives all of us an idea of what
to expect from some of these financial institutions.
We would say clean up your act first before we even begin
this discussion of allowing banks into the marketplace.
When confronted, some lenders say that they will restrict
credit or even leave the marketplace altogether. Lenders made
that argument in North Carolina, and North Carolina passed the
Predatory Lending Law anyway, and it hasn't affected lending in
that State.
Now Congress included some very good consumer protections
on the retail sales of insurance products by financial
institutions. Similar protections are needed if banks are
allowed to engage in real estate activities.
In addition, Congresswoman Roukema brought up the fact that
we might be discussing, at some point this year, reforming the
Real Estate Settlement Procedures Act and the Truth In Lending
Act.
We think it is very vital that consumers have the
information that they need so they can shop for loans.
Perhaps what we need to be talking about is some sort of
real estate consumer bill of rights that would affect anybody
participating in this marketplace. Perhaps have suitability
standards when it comes to lending.
And if Congress really wants to examine how to benefit
consumers, we should be talking about some of those issues
during this discussion.
Simply allowing banks into the marketplace won't be the
solution to a lot of the problems that consumers have today.
Thank you.
[The prepared statement of Frank Torres can be found on
page 126 in the appendix.]
Chairman Bachus. Mr. Roebuck.
STATEMENT OF JOHN ROEBUCK, CAI, AARE, CHAIRMAN OF THE BOARD,
NATIONAL AUCTIONEERS ASSOCIATION
Mr. Roebuck. Yes. Chairman Bachus, Members of the
subcommittee, I am John Roebuck, Chairman of the Board of the
National Auctioneers Association, and President of John Roebuck
& Association of Memphis, Tennessee.
I'm accompanied today by NAA's legislative consultant,
Curtis Prins, who is a former director of this subcommittee,
and who is well known by many of you.
The National Auctioneers Association is strongly opposed to
the regulation issued by the Federal Reserve System and the
Treasury Department, that would allow banks to engage into the
real estate brokerage business.
To illustrate NAA's strong, deep concern about the
proposal, I should point out that, to my knowledge, this is the
first time ever that my trade association has ever testified
before Congress.
We have not been here before because we believe that we
should not testify unless it's something of a life-threatening
nature to our industry.
The proposed regulation will most assuredly cripple, if not
kill, the real estate auction business as far as companies such
as mine.
Today, many of the NAA's auctioneers, 6,000 members plus or
minus, conduct not only real estate auctions, but also operate
traditional real estate brokerage business. All of our members
are small businesses in the true meaning of the word.
In our business, we face competition from other auction
firms and real estate companies. The competition that we face,
however, comes from companies that do not have an unfair
competitive edge. However, if the regulation goes into effect,
our industry will be faced with a whole new area of competition
from banks who will clearly hold an unfair competitive
advantage.
Banks have access to customers' deposits and cheap loans
from the Federal Government and from other banks. Real Estate
auction companies, such as mine, do not. Banks have access to
financial information and customer lists that they used for
marketing purposes. Real estate auction companies don't. Banks
have the ability to attract customers with a variety of
financial incentives; real estate auction companies don't.
While I could list numerous reasons why banks will have an
unfair advantage in competing with the real estate brokerage
business, including auctions, I want to spend my remaining time
trying to understand how the Federal Reserve and Treasury were
able to put forth such a regulation.
I'm just a small businessman from Memphis, Tennessee, and
like the rest of the 6,000-plus members of the NAA, I'm
confused by the process that led to the real estate regulation.
I have great faith in the Members of Congress. They are
elected by the people of their districts and States. They are
accessible, concerned about their constituents' views and
willing to listen.
On the other hand, Government agencies are not made up of a
single elected person, have narrow, if any, constituencies, and
are hardly accessible. Certainly, the Fed and Treasury have
asked for written comments about the proposed regulation, but
that does not allow groups, such as NAA, to truly express their
concerns.
Perhaps the most significant question surrounding this
whole issue is this. If Congress wanted banks to engage in real
estate activities, why didn't it grant those powers clearly and
unmistakably? Surely, if Congress intended banks to have such
powers, there would be no need for this hearing today. There
would be a clear record of Congress granting real estate powers
to banks and probably even a recorded vote.
I ask this question of the two agencies: How many Members
of Congress have sent comment letters saying that Congress, in
passing the Gramm-Leach-Bliley, clearly intended banks to have
real estate brokerage power. On the other hand, Congress has
voted several times against allowing banks into the real estate
brokerage business.
Congress passed the Glass-Steagall Act in 1933, some 68
years ago. If it took that long for Congress to decide what
businesses banks should be in, is it logical that Congress
would take just over a year to hand over the authority to make
legislative banking powers decisions to two unelected agencies?
Mr. Chairman, I applaud you and other Members of this
subcommittee who have written to the two agencies to question
their actions. In your letter, you state ``far-reaching and
controversial financial policies should be determined through
legislation, not through regulation.'' Those 14 words are the
clearest testimony that will be heard at this hearing.
One of the tenets of President Bush's Administration is to
return Government to the people. I truly hope that happens. But
when the people see Government agencies legislate against a
large segment of the people, then we must question if such a
return is possible.
This regulation is not just to decide banking powers. It is
far more than that. If this regulation is finalized, it will
mean that Congress has given up two basic powers to legislate
in the area of banking.
I ask you, is this what you want?
Thank you very much.
[The prepared statement of John Roebuck can be found on
page 134 in the appendix.]
Chairman Bachus. Thank you, Mr. Roebuck.
Mr. Parsons.
STATEMENT OF RICHARD J. PARSONS, EXECUTIVE VICE PRESIDENT, BANK
OF AMERICA CORP., ON BEHALF OF
FINANCIAL SERVICES ROUNDTABLE
Mr. Parsons. Good afternoon, Chairman Bachus, Members of
the subcommittee.
I'm Rick Parsons, an Executive Vice President at Bank of
America. I am testifying on behalf of the Financial Services
Roundtable.
The Roundtable is a national association representing 100
of the largest financial companies in the U.S. We are made up
of 64 different banks and thrifts and a number of different
insurance companies, as well as security firms and other
diversified financial services companies.
The Roundtable appreciates the opportunity to discuss the
proposal to permit financial holding companies and national
banks to engage in real estate brokerage.
The Roundtable strongly supports adoption of the regulation
for three reasons.
First, permitting holding companies to engage in real
estate brokerage is good for consumers.
Second, it is good for the financial industry.
Third, brokerage is a financial activity consistent with
the Gramm-Leach-Bliley Act.
We believe that the consumers will be the real winners if
this regulation is adopted. The rule will increase competition
in the brokerage industry. More competition means more consumer
choice, can mean lower prices and better service.
The adoption of the rule is necessary to meet demand for
one-stop shopping for homebuying services.
A study conducted on behalf of the National Association of
Realtors indicates that three out of four homebuyers say that
getting all or some of their homebuying services through one
company is appealing.
The NAR study concludes that 77 percent would consider
using a bank for those one-stop shopping services in future
transactions.
The regulation enhances consumer privacy for brokerage
customers. Customers of holding companies are entitled today to
the Act's far reaching privacy protections and customers of
real estate brokers currently have no Federal privacy
protections.
If adopted, the regulation will afford brokerage customers
the same Federal privacy protections now afforded to bank
customers.
Now with regard to the threat of tying, existing banking
laws, such as the Federal Reserve Act, and the Anti-Tying
Statutes, are more than adequate to preclude these types of
practices.
Because of these laws, a brokerage customer of a holding
company will enjoy greater protection than a brokerage customer
of a less regulated competitor.
Second, adoption of the regulation is prudent for the
financial industry. Traditional real estate brokers are now
competing with financial companies by offering financial
services, such as loans and insurance.
According to the 1999 NAR profile of its real estate
members, 56 percent of its members with more than 50 agents are
involved in mortgage lending. Federal thrifts and credit unions
as well as State chartered banks in 26 States are now permitted
to act as real estate brokers.
Yet, the only financial institutions that are uniformly not
allowed to engage in brokerage are holding companies and
national banks.
A broker is an intermediary in a financial transaction.
Banks and holding companies are permitted to conduct similar
agency activities, including travel, securities, and insurance
brokerage.
Real estate brokerage poses little risk to the banking
system.
Finally, the Act permits the Fed to define certain
activities as financial in nature, including the,
``transferring for others, financial assets other than money or
securities.''
The Roundtable believes that real estate brokerage is
exactly that type of activity. Real estate is the largest asset
owned by most Americans. For many, real estate is the most
significant source of wealth. Real estate is conferred special
status under tax laws reflecting our Nation's recognition of
real estate as a storehouse of consumer net worth.
For these reasons, we believe that real estate is a
financial asset, and that brokerage is financial in nature. In
determining whether an activity is financial in nature,
Congress mandated that the Fed considered changes in the
marketplace as well as the ability of financial holding
companies to compete effectively with any company seeking to
provide financial services in the U.S. This will provide
parity.
We support the regulation, and believe that its adoption
would be a winning proposition for consumers. The regulation
will benefit consumers by enabling increased competition, more
choice, and lower prices.
Thank you. I will gladly respond to any questions.
[The prepared statement of Richard J. Parsons can be found
on page 136 in the appendix.]
Chairman Bachus. Thank you, Mr. Parsons.
My first question, and I'll ask this to Mr. Burns and Mr.
Parsons.
Mr. Parsons, you mention brokerage is a financial activity.
Would you gentlemen give me the distinction between a financial
brokerage and a commercial brokerage?
What is the distinction?
Mr. Burns.
Mr. Burns. Mr. Chairman, there's been a lot of discussion
about----
Chairman Bachus. If you will pull the mikes up----
Mr. Burns:----Financial activities and commercial
activities. And I think sometimes there is a definite line and
the issue is black and white.
Unfortunately, as in many cases in life, I think there is a
grey area here. There are some types of transactions that have
some of the characteristics of financial transactions and
probably some characteristics of a commercial transaction.
Chairman Bachus. Yes. I guess what I'm saying is we talk
about financial brokerages and commercial brokerages. Now, are
you familiar with those terms?
Mr. Burns. No, I don't think that I am. I'm sorry.
Chairman Bachus. Mr. Parsons.
Mr. Parsons. Let me take a shot at that.
It's the issue, I think, of our contention that this
transaction is financial in nature, and I think that's the
heart of the question that the Fed and Treasury are dealing
with.
The contention I think that we have is that this
transaction involving a home is putting us, as an industry, the
Roundtable members, as agents, as opposed to principals. Agents
in that we are an intermediary in a financial transaction. We
don't own the real estate.
Chairman Bachus. Oh, I understand that. That's true of all
brokerages. I mean a brokerage brokers and, you know, a
financial brokerage, my understanding is it brokers paper, it
brokers intangible as opposed to a tangible----
Mr. Parsons. And commodities.
Chairman Bachus: ----And a commercial broker brokers
property, you know, whether it be an airplane or an automobile
or a home.
I mean, if you say that selling, brokering a home is a
financial transaction, you would say that about an automobile
too, wouldn't you?
Now I'm not talking about owning a dealership; I'm talking
about you could--that's a different matter--there's a
distinction between owning an automobile, as an automobile
dealer does, but what about a bank brokering automobiles
between say the manufacturer and the public?
Or brokering fine art, or brokering anything? I mean, if we
allow commercial brokerage, it would have to be on everything,
wouldn't it?
Mr. Parsons. Let me go back to something I said in my
testimony, Mr. Chairman.
I noted that the financial asset of a home is conferred
special tax status. I think at least, you know, in our Tax
Code, there's an indication that there is something different
between this asset, which is such an important source of net
worth for most of us, than the other examples that you just
alluded to.
And I don't know if that distinction helps, but I think
that's the one that draws out, in particular, the nature of a
financial.
Chairman Bachus. Let's say that you were being allowed to
broker a home or broker another item. What if you had--what if,
Mr. Burns, you were a real estate broker for a piece of
property that you held the mortgage for, and the mortgage was
in default?
You'd list the property for sale, but you're also the
banker, and you have the mortgage, you're holding the mortgage
on that home, and the mortgage is in default.
Would your interests be in getting the best value, or would
it be in paying off the mortgage or seeing that the mortgage
wasn't in default.
I mean, do you see a conflict there?
Or what if that mortgage went into default on a piece of
property, would you list property that you held a mortgage on?
Mr. Burns. No, I wouldn't necessarily assume that there is
a conflict there. Depending on the size of the mortgage and the
value of the property, it could well be that we need to get
every penny out of that property that we can.
Chairman Bachus. Right.
Mr. Burns. I do know that there are real estate laws that
regulate when a broker typically is hired by the seller of the
property to market the property. And there's an agency
relationship created there, and it's covered by State laws that
apply to real estate agents.
And I think actually that it's covered in the real estate
brokerage laws. And banks, if they are allowed to be brokers,
will in fact be subject to all of those State laws and
regulations that brokers are now. I think that's an important
point.
Chairman Bachus. I agree.
Let me ask the realtors a question. We talked about
competition, and Mr. Mendenhall, I'll ask you this, competition
in the marketplace.
In my home town there are four gas stations on the corner;
Texaco, Exxon, Amoco, and Philips. Is there competition?
Mr. Mendenhall. In my marketplace, I can tell you that
there is.
Chairman Bachus. What if they are all $1.39 a gallon?
Mr. Mendenhall. There is not going to be competition at
that kind of level, but I do want to speak to the issue of
competition.
I think the purpose, which we all talk about----
Chairman Bachus. Let me address that. I mean, if you have
four gas stations on a corner, they're all selling gas for the
same price, is that competition?
Mr. Mendenhall. Yes, it's competition in my mind.
Chairman Bachus. Even if they're all selling it for the
same price, they all go up the same? You know, we've all seen
that.
Is the 6 percent commission, which is standard in the
industry, at least in Alabama, I mean is that competition?
Mr. Mendenhall. Well, first of all, I would say that I
don't know what--I can't speak for Alabama, but I can speak for
my own State, and tell you that real estate commissions are
highly competitive.
That in fact, in my own firm in the last 3 years, our real
estate commission has dropped by 20 percent.
And then I go to the testimony that was given by the person
for the consumer. Credit card fees for banks have gone up in 1
year by 7.7 percent, penalty fees by 23.1 percent, and cash
advance fees by 36.7 percent.
So when somebody argues that they're going to get more
market share, and that's going to make it more competitive, I
just don't see that.
Right now, the financial holding companies have 44 percent
of all the loan originations in the country.
I have a mortgage company in my real estate firm. I'm not
trying to say that one-stop-shop is not fair. What we were
trying to say, on behalf of the National Association of
Realtors, is that if you're going to have it, make sure it's
fair.
And that the people who are going to get into our business
don't enjoy, don't have advantages that we can't also have. It
is significant that they can borrow money cheaper that we can
borrow it to run a real estate firm.
So in effect, even if you had, in your example, the four
gas stations of everybody selling at the same price, if they
can run their business at less cost than I can because of their
borrowing power, they have a significant advantage of that. And
I think that's very important.
Chairman Bachus. With the number of Members we've got, what
we may do is just expand the questioning to about 8 or 10
minutes.
Mr. Watt.
Mr. Watt. Thank you, Mr. Chairman.
I want to express my thanks to this panel of witnesses who
I think all have enlightened us in various ways, and extend a
special greeting to Mr. Parsons who comes from my hometown and,
works for one of the institutions that is based in my
congressional district.
I come away from this hearing troubled at some level, I
guess. And I think I want to address my first line of questions
to Mr. Mendenhall.
Mr. Hammond, earlier today, testified that there were two
rationales under which the regulators found that there was a
threshold high enough to promulgate this proposed regulation.
One of those I think you can't do anything about is that
some States allow banks to be real estate brokers. I guess you
don't have any control over that.
But the second one is pretty well illustrated by a comment
that you just made and by this Long & Foster ad over here,
which is that realtors are in direct competition with financial
services businesses.
And I guess I know this. To some extent, I knew it at some
level, because when I came to Washington, Long & Foster was my
real estate company, and they arranged the loan, and they
arranged the title insurance.
But it's kind of striking to see that in an ad which says
``Long & Foster, more than a great real estate company, we're
also a great mortgage, title, and insurance company too.''
That's in the headline.
I guess I wasn't completely aware that that was going on.
Is that, in fact--I mean, if there is a rational basis for the
regulators doing this, it seems to me that that might be a
compelling rationale, and that does seem to be sanctioned
because there's something in the statute that talks about
competition.
Are realtors regularly getting into the business now of
mortgage, providing mortgages. This says ``Prosperity Mortgage
Company'' is Long & Foster's company.
Are you regularly getting into the business of providing
title insurance. This says ``Midstate Title Insurance Agency,
Inc.'' is a Long & Foster company.
Are you regularly getting into the business of providing
insurance. This says ``Long & Foster Insurance Agency, Inc.''
is the insurance provider.
Is this something that's happening?
Mr. Mendenhall. The answer to that is yes, real estate
firms are doing one-stop-shopping. But I want to emphasize that
that is commerce versus commerce, not banking versus commerce.
Mr. Watt. So this Prosperity Mortgage Company is not really
a mortgage company of Long & Foster then? They're not making
loans?
Mr. Mendenhall. They are making loans.
Mr. Watt. Well how is that not financial?
Mr. Mendenhall. I'm not saying that that's not financial.
What I'm trying to say is that when that mortgage company makes
loans, they're not a bank; they don't accept deposits, they
don't have the ability to do a financial transaction other
than--in fact, in my company, which I can speak to the
closely--half the loans we make we sell to the local bank.
Mr. Watt. All right, let me go to the other end.
Mr. Parsons, I won't exempt him just because he's my
neighbor.
This ad points up an interesting and troubling aspect from
the other end. Let's assume that banks are allowed to get into
the real estate business.
Would it be appropriate for Bank of America, for example,
to have an ad like this, which says, ``I can be your lender, I
can be your mortgage company, I can be your realtor, I can be
your insurance company, I can be your title insurance
company.'' I don't think we allow you to do that in North
Carolina--but, you know, would that be appropriate?
And the second step in that is, how close does that come
really, what's the distinction really between providing a
convenience and providing a tie?
I know there's a legal distinction, but in the consumer's
mind--and maybe we can get Mr. Torres to comment on this too--
in the consumer's mind, can a consumer really distinguish, when
he's in a hurry, trying to get a real estate transaction
closed, moving, on the move, got nine million other things, how
do we distinguish between what is a convenience and what is
really a tie when an ad like this is what we're responding to.
Mr. Parsons. Two questions. Let me take the first one.
And I think as you would expect, Mr. Watt, I would say,
yes, Bank of America and all the members of the Roundtable
should be entitled to have the same opportunity as the company
mentioned, you know, in your comment, to be able to talk about
convenience, one-stop shopping.
To your second question, specifically that that fine line
perhaps between the tying and the real element of choice for
the consumer, I really think there are several distinctions
there, not the least of which are clearcut laws that are in
place today around anti-tying.
And I think second, is----
Mr. Watt. Are realtors subject to those same laws?
Mr. Parsons. No, they are not.
Mr. Watt. So if Long & Foster's mortgage insurance company
mortgage company wanted to direct me there, Long & Foster could
direct me there?
Mr. Parsons. I'm not sure I understand your question.
Mr. Watt. If Long & Foster's agency wanted to direct me to
Prosperity Mortgage Company, Long & Foster Mortgage Company,
would they have the legal authority to do that?
Mr. Parsons. Well, I'm not a lawyer so I'm not sure that I
could answer that specific question. I'd be happy to get some
advice on that one.
Mr. Watt. Mr. Torres will tell us quickly here.
Mr. Torres. It's hard for consumers to comparison shop. And
one thing in today's marketplace, and it's not going to get any
easier if this idea of one-stop-shopping, you know, perhaps
evolves in a way that consumers really aren't benefiting.
How do you shop for a mortgage today if you want to shop
for the interest rate, because it always changes. You can't fix
it unless you plunk down a lot of money to make it stable so
that you can go to Bank of America and say, ``Hey, I'm getting
a 6 percent loan from Long & Foster, can you beat that?''
The marketplace isn't set up that way today, so it's very
difficult for consumers.
Mr. Watt. But people are at least attuned to shopping for
interest rates. I don't know that there's anybody that's really
attuned to shopping for a title insurance company.
The premiums are essentially the same, going back to the
Chairman's question, is competition, competition, competition.
If the price is the same for a title insurance policy,
regardless of whether you get it in the bank or get it at the
real estate company, aren't you always going to get it from the
place that's most convenient, and isn't that always the first
person to grab a hold on you and that might be the realtor, it
might be the lender.
In some cases, because I've gone and tried to--my
experience is that it was seldom the lawyer, the lawyer got
kind of, you know, cut out of the equation, although every once
in a while, my clients would insist that a lender use the
lawyer that he wanted to use, rather than the lawyer that the
bank wanted to send him to.
I mean, there's a lot of implicit tying going on in here
that I'm troubled about, I would have to say from the realtor
perspective and from the lender perspective. And I'm even more
troubled--I guess that's why I'm troubled at the end of this
hearing--because I'm not sure I realized that realtors were
doing all this, or at least had the legal capacity to do it
all, and were permitted to do it all.
But I'm not sure that I would consider that necessarily a
compelling rationale, just because somebody else is doing
something that I don't like, to say OK, somebody else in the
industry ought to be able to do something I'm not going to like
either. As my mom used to say, ``Two wrongs have never made a
right'' in my opinion.
But this is a difficult area. And I'm going to wrap up, Mr.
Chairman. I know I'm over my time.
I just, I'm troubled by this ad, and I'd be even more
troubled, I'd have to say, if a bank were able to do the same
ad, because I really do not think that consumers really are in
a position to go through in this process, in a real estate
process. I know how complicated they are. That's why I've
always thought all this RESPA stuff was heavy-handed, because
even after you get it, nobody understands it.
The lawyers don't even understand it, you know.
But I don't think people are going to go through and shop
for any of this stuff. The first person that gets ahold of
them, is going to have a captive audience.
That's basically what we are creating here I think.
Mr. Burns is anxious to respond to me.
Mr. Burns. Well, personally in response to your initial
question, Congressman, and it's an excellent one. Actually,
under the Real Estate Settlement Procedures Act, it requires
any mortgage lender, whether they are affiliated with a realtor
or with a bank, that if we have an affiliation with somebody
where we're providing the property insurance on the property or
title insurance, that has to be disclosed.
It has to be disclosed on a separate piece of paper and
acknowledged by the customers, so customers are made aware of
that.
Mr. Watt. But you know, Mr. Burns, let me be clear. That's
going to take place in a lawyer's office after the whole
transaction has been approved and you had a closing, and the
lawyer's going to stick a piece of paper under your nose and
say, ``Sign it.''
You know, I like to tell this story, and I'm going to quit,
Mr. Chairman. It was only one real estate closing that I ever
had where anybody ever got up and walked out of it. And they
came back the next week. That's when we actually disclosed the
annual percentage rate and the wife looked at the husband and
said, ``I'm not signing this.''
And he begged her for an hour in the middle of the closing,
``Please sign the documents, honey.'' And then next week, I
guess, I don't know what he did for her over the weekend, maybe
he gave her some flowers or something, but nobody's going to
walk away from a closing at that point. It's just not going to
happen.
So I mean, I hear what you're saying, but I've been there
and I've done this. And I know it just is not going to happen.
Nobody's walking away from a closing because all of a sudden
they realize--I wouldn't have walked away from the closing, if
I realized that Prosperity Mortgage, I don't know whether that
was the company they were using, was affiliated with Long &
Foster. I thought I had a reasonable rate, you know.
But the first person who got a hold on me in Washington
happened to be a Long & Foster agent. They were in control of
that transaction, and I'm a Member of Congress. Now, imagine,
and I've done this for 22 years, leading up to this.
Now imagine somebody who has never been involved in the
real estate business, a regular consumer, so to speak, and
you've multiplied my confusion times one hundred, I guess.
But maybe we can't solve all of these problems.
Chairman Bachus. You owe me about 10 minutes.
[Laughter.]
Chairman Bachus. Thank you, Mr. Watt.
Mr. Bentsen.
Mr. Bentsen. Thank you. Actually I think he owes me about
10 minutes.
First of all, I think the answer to the second question,
Mr. Parsons, would be price. And I think Mr. Torres that at
least for some sectors of the public, there is greater
transparency.
But I would agree that for other sectors, particularly
lower income sectors, the transparency has not existed where
there is sufficient competition.
But I want to go back to the Long & Foster example that is
given, and I think we need to clarify some points.
There's nothing under the law, prior to or since the
passage I think, of Gramm-Leach-Bliley, that would preclude a
separate company, a non-banking company from engaging in
mortgage banking, or establishing a mortgage finance company,
or any other type of finance company.
And it is a little unrealistic I think to compare Long &
Foster or some other company to a financial institution,
primarily because Long & Foster, to my knowledge, does not have
access to the discount window, it doesn't have access to the
Federal Home Loan Bank system.
Their mortgage company does have access to the other GSEs,
Fannie and Freddie, but so to the banks and thrifts through
their mortgage banking operation.
So there is I think that distinct difference.
The other thing, and I don't know the answer to this, but I
think it is unlikely that these mortgage finance companies are
taking down the loans for their own account. And quite frankly,
I don't think the banks are taking too many loans down for
their own account either, maybe more so now than they have in
the past, but most of these are going into the secondary market
and into some form of mortgage-backed securities.
So I think we need to be certain that there are those
differences.
The question I want to get to, and why I stuck around,
because I kind of figured out what everybody was going to say
beforehand, is what Mr. Parsons brought up, and I would like
you to expand on this.
You did actually as I was writing down the question, you
started to talk about it in your testimony. And I think the two
issues at play here, and I'm only going to ask you about one of
them, what was our intent, and I'm sure you can find varying
opinions with respect to that.
The second issue, I think, is whether or not the regulators
would have authority to expand the powers as such under the
Gramm-Leach-Bliley for financial holding companies, that was
otherwise expanded by legislation for thrifts under the Thrift
Charter. And I'm sure there are varying opinions on that, and
we won't resolve that issue; somebody else will across the
street.
But the third issue, which I think we may or may not
address, but if not us, the nine people across the street may
address ultimately is whether or not real estate is a financial
asset under the law.
I'm not sure, based upon what you said, that you really
fleshed it out enough for my interpretation, and I would add to
that, and this sort of goes back to what my colleague, Mr.
Watt, was saying about when he came to Washington, and goes to
the realtor and they say, ``Oh, you can finance, you can get
your mortgage us through us here and this through this here.''
I mean, I went to buy a car the other day, and like every
time I've bought a car, when you sit down to sign, to close the
deal, they say ``How are you paying for this, and are you going
to finance this, or are you paying cash?''
Did you know we have some really good financing options
that are available through, I won't say which company, because
I don't want it to appear that I have some preference for one
car versus the other or some car company because of our
esteemed position here. But the fact is that I'm not sure that
automobiles are, in and of themselves, a financial product.
Automobile finance is a financial product, but automobiles
are not. And I'm not sure that that same line of thought does
not follow through to a piece of real estate.
And while real estate, like other assets, can be used as a
pledge, I'm not sure that it's necessarily considered legal
tender, I'm not sure that it's necessarily considered the type
of liquid asset that is easily tradeable, and so I'm curious in
more detail where you believe it actually would be defined as a
financial asset.
Mr. Parsons. Thank you. A couple of thoughts on that one.
You made a good point about real estate being used as a
pledge, and I think that is an element of at least part of that
discussion.
And to expand on this notion of financial in nature, there
are some related comments that are part of this existing Act,
and that is such words as ``complementary'' or ``incidental''
to activities that are financial in nature.
And to expand on that a little bit, if you look at the kind
of activities that Gramm-Leach-Bliley allow banks and financial
holding companies to currently do today, you have a role of
finding that we can play; appraisal, title insurance, property
and casualty insurance, loan brokerage, lending, closing, and
escrow.
And I think, you know, as you said earlier, that maybe this
is one that will be, you know, debated in other forums as well.
But in our review of this, what I think we conclude is that
these activities collectively plus the fact that it is an asset
that is so important and is probably the most important one to
most Americans, collectively convert that into being a
financial asset, at least part of this discussion.
Mr. Bentsen. The only thing I would say is, I'm not sure, I
mean, escrow, closing, any of those, those are complimentary to
any financial transaction and involve the movement of cash or
other fungible assets like that.
But that is true whether it's involving real estate,
residential or commercial real estate, whether it is involving
some other asset, whether it is involving a merger or an
acquisition.
So I am not sure that they are on equal footing.
Insurance, and believe me, I've got the scars from going
through the insurance battles here, and I do think that
insurance, in general, is a financial asset. I think that was
well-proven.
But again, I'm not sure, I mean, is jewelry a financial
asset? Because jewelry can be used as a pledge.
Somebody brought up fine art, and I know one of the
institutions some years back tried to create a fine art index.
It didn't work very well; it got caught in the bubble of the
1980s.
But is fine art a financial asset or not? It certainly has
value and has been used, in some cases, for a pledge.
So I think, and I won't push you on this, but I do think
that's a burden that you all have to overcome and I'm not sure
the case has been made there.
Mr. Parsons. At the risk of repeating what I said to
Chairman Bachus, there is one other distinction, and that is
the treatment under the tax laws. And I think that does raise,
you know, another element of question as to what that means in
this discussion.
Mr. Bentsen. Well, some of the economists tell us that the
treatment of the tax laws is built as an incentive to enhance
homeownership, and again, I guess you can look both ways. We
also have tax incentives for people to save. We're debating a
bill to enhance those tax incentives for people to save right
now.
But again, I'm not sure that the nexus is there.
Thank you, Mr. Chairman.
Chairman Bachus. Thank you. There are no other questions?
I appreciate your attendance.
Let me say this. The one thing that I would say to the
realtors that I do consider that you may be walking uphill, and
the reason for that is competition, you know, to understand
America is to understand competition.
I think we have a free market philosophy. Competition is
what normally, most effectively at the cheapest cost, delivers
goods and services to the American people.
I think we've found, through all our experiences, that
competition normally is a good deal for the consumer, for the
American public.
I think the question here is, is it unfair competition.
Mr. Mendenhall. Exactly.
Chairman Bachus. I will tell you that the other problem is
you do have--you've got Long & Foster, you've got Century 21,
you've got Federal Thrift, you've got Federal Savings & Loan,
and you have State chartered banks in I don't know, maybe it's
four States, getting into the market.
It is unfair to allow everyone but the banks into this
market and allow other financial institutions into the market.
And we are moving in that direction.
If there's anything that the Fed can say, they can say that
the marketplace is moving in that direction.
I think, from your standpoint, you're going to have to find
where it is unfair, it is bad for the consumers, and I think
that ought to be where your focus is.
Because it is a brokerage, as opposed to an ownership, I am
not sure that you even believe it is going to threaten the
banking institutions, because if they get in the business and
they do not make a profit, they will be out of the business.
So, you know, I think we almost assume that they will be
profitable. If they are not, they will either take themselves
out of the business or the regulators will take them out.
Now we have all heard all of this about Japan, but in
Japan, it was unwise banking practices, just as well as getting
involved in commerce. It is an over-simplification to say they
got involved in commerce and that is what pulled them down.
They did a lot of things that they would not be permitted to do
here under our banking laws.
This concludes our hearing. Thank you.
[Whereupon, at 1:03 p.m., the hearing was adjourned.]
A P P E N D I X
May 2, 2001
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