    [House Hearing, 107 Congress]
    [From the U.S. Government Publishing Office]

                         H.R. 3424--COMMUNITY CHOICE IN
                                REAL ESTATE ACT
    =======================================================================

                                    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

                                 SECOND SESSION

                                   __________

                                 JULY 24, 2002

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 107-80

                               U.S. GOVERNMENT PRINTING OFFICE
    83-042                          WASHINGTON : 2002
    ____________________________________________________________________________
    For Sale by the Superintendent of Documents, U.S. Government Printing Office
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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

                                  ----------
                                                                       Page
    Hearing held on:
        July 24, 2002................................................     1

    Appendix:
        July 24, 2002................................................    65

                                   WITNESSES
                            Wednesday, July 24, 2002

    Calvert, Hon. Ken, U.S. Representative from the State of
      California.....................................................     5
    Kanjorski, Hon. Paul E., U.S. Representative from the State of
      Pennsylvania...................................................     7
    Bailey, Robert, President, California Association of Realtors....    44
    Baird, Stephen W., Baird & Warner, Chicago, Illinois, on behalf
      of Realty Alliance.............................................    16
    Burleson, Mary Frances, President, and CEO, Ebby Halliday
      REALTORS, Dallas, Texas........................................    46
    Eastment, George T. III, Executive Vice President, Long and
      Foster Real Estate, Inc., on behalf of Real Estate Services
      Providers Council, Inc.........................................    14
    Edwards, Martin Jr., President, National Association of Realtors.    42
    Face, E. Joseph Jr., Commissioner of Financial Institutions,
      Commonwealth of Virginia, on behalf of the Conference of State
      Bank Supervisor................................................    11
    Grabill, Patrick, former NAR Director for Coldwell Banker King
      Thompson, current President, King Thompson/Holzer-Wollam,
      Realtors.......................................................    18
    Holland, Elizabeth, Asset Manager and General Counsel, Abbell
      Credit Corporation, Chicago, Illinois, on behalf of the
      International Council of Shopping Centers......................    48
    Smith, James E., Chairman and CEO, Union State Banker & Trust
      Clinton, Clinton, Missouri, President of the American Bankers
      Association....................................................    12
    Taylor, John, President and CEO, National Community Reinvestment
      Coalition......................................................    49

                                    APPENDIX

    Prepared statements:
        Bachus, Hon. Spencer T.......................................    66
        Barr, Hon. Bob...............................................    69
        Calvert, Hon. Ken............................................    72
        Gillmor, Hon. Paul E.........................................    74
        Hinojosa, Hon. Ruben.........................................    76
        Kanjorski, Hon. Paul E.......................................    77
        Sandlin, Hon. Max............................................    79
        Bailey, Robert...............................................    81
        Baird, Stephen W.............................................    91
        Eastment, George T. III......................................    97
        Edwards, Martin Jr...........................................   128
        Face, E. Joseph Jr...........................................   144
        Grabill, Patrick.............................................   156
        Holland, Elizabeth...........................................   160
        Smith, James E. (with charts)................................   167
        Taylor, John (with attachments)..............................   197

                  Additional Material Submitted for the Record

    Bachus, Hon. Spencer T.:
        Association of Real Estate License Law Officials letter, July
          24, 2002...................................................   220
    Baker, Hon. Richard H.:
        Latter & Blum, Inc., letter, July 15, 2002...................   222
    Stephen H. Murray, President, Murray Consulting, Inc. and Anne
      Randolph, Partner, Murray Consulting, Inc., prepared statement.   224
    America's Community Bankers, prepared statement (with
      attachments)...................................................   227

                         H.R. 3424--COMMUNITY CHOICE IN

                                REAL ESTATE ACT

                                  ----------

                            Wednesday, July 24, 2002

                 U.S. House of Representatives,
                Subcommittee on Financial Institutions
                                   And Consumer Credit,
                               Committee on Financial Services,
                                                       Washington, D.C.
        The subcommittee met, pursuant to call, at 2:21 p.m., in
    Room 2175, Rayburn House Office Building, Hon. Spencer Bachus
    [chairman of the subcommittee] presiding.
        Present: Representatives Bachus, Baker, Lucas of Oklahoma,
    Barr, Riley, Biggert, Hart, Capito, Tiberi, Waters, Maloney of
    New York, Watt, Bentsen, Sherman, Gutierrez, Maloney of
    Connecticut, Hinojosa, and Lucas of Kentucky.
        Chairman Bachus. [Presiding.] Boy, that is the quietest I
    have ever heard the room get. We are waiting on Mr. Kanjorski,
    the first panel, but we will go ahead and get started.
        The Subcommittee on Financial Institutions is hereby called
    to order.
        The subcommittee meets today for the legislative hearing on
    H.R. 3424, the Community Choice in Real Estate Act. Ever since
    the Federal Reserve and the Treasury Department issued a
    proposed rule in January 2001 to permit banks to engage in real
    estate brokerage, a vigorous debate has raged between those who
    believe that the proposal is an appropriate application of the
    agencies' authority under the Gramm-Leach-Bliley Act and those
    who warn that it could seriously undermine the separation
    between banking and commerce that Congress reaffirmed in that
    same landmark legislation.
        One indication of the controversy engendered by the
    proposed rule is the number of submissions that the Federal
    Reserve and the Treasury received during the four-month public
    comment period--over 44,000.
        On May 2, 2001, this subcommittee held the first hearing in
    Congress on the proposed Fed-Treasury rule, taking testimony
    from the regulators as well as a broad cross-section of
    industry groups on both sides of the issue. In the 15 months
    since the subcommittee's hearing, there have been a number of
    developments that I want to take a moment to summarize a few of
    those
        In December 2001, Mr. Calvert and Mr. Kanjorski introduced
    3424, the subject of today's hearing, which amends the Bank
    Holding Company Act to prohibit financial holding companies and
    national banks from engaging, directly or indirectly, in real
    estate brokerage or management services. At last count, H.R.
    3424 had 245 cosponsors in the House. A Senate companion bill
    has attracted 18 cosponsors.
        In April, in response to Chairman Oxley's request for a
    status report on their rulemaking, the Treasury and the Federal
    Reserve announced that they would delay until next year any
    further action on the real estate issue, citing the urgent
    priorities created by September 11 as the primary obstacle to
    completing the process this year.
        Earlier this month, the Appropriations Committee, over the
    jurisdictional objections of this Committee, inserted language
    in the Treasury-Postal spending measure that would block
    implementation of the proposed rule during fiscal year 2003, or
    until October of next year at the earliest. The version of the
    Treasury-Postal appropriations bill that the full House is
    expected to approve later today--actually they have, I think,
    approved or will approve today--will include the real estate
    provision added in the Appropriations Committee.
        I was one of the first members of Congress, along with the
    gentleman from Kentucky, Mr. Kanjorski, to challenge the
    regulatory proposal to allow banks into the real estate
    brokerage business. I convened last year's subcommittee hearing
    to ensure that members of this committee had an opportunity to
    be heard on an issue that is of critical importance to so many
    of our constituents.
        Like the proponents of H.R. 3424, I have been concerned
    that the Fed-Treasury proposal threatens to erode the long-
    standing separation between banking and commerce that Congress
    sought to fortify in the Gramm-Leach-Bliley Act. Moreover,
    important questions remain regarding whether the current
    federal and state regulatory framework is sufficient to ensure
    the adequate supervision of bank real estate activities,
    assuming the proposed rule is ultimately implemented.
        I respect the views of those who feel differently about
    this issue than I do, and those views are well-represented on
    the second panel of witnesses that we have assembled for
    today's hearing.
        Before recognizing the Ranking Member for an opening
    statement, I would like to thank all of our witnesses for being
    here today, particularly our colleague from California, Mr.
    Calvert. This is a contentious issue with strongly-held views
    on both sides, and yet at our first hearing on the issue last
    year, I was very impressed, and I think other members were, by
    the civility and the reasoned tone of the debate. I hope that
    we can meet that same high standard at today's hearing, and I
    believe that we will.
        With that, any other members wishing to be heard for an
    opening statement?
        [The prepared statement of Hon. Spencer T. Bachus can be
    found on page 66 in the appendix.]
        Chairman Bachus. Mr. Hinojosa?
        Mr. Hinojosa. Thank you, Mr. Chairman. I want to thank you
    for calling this important hearing today on H.R. 3424, the
    Community Choice in Real Estate Act. This bill, introduced by
    my good friend and colleague, Congressman Ken Calvert, aims to
    clear up any confusion the banking and the real estate
    industries might have in relation to the Gramm-Leach-Bliley
    Act.
        While GLB Act helped federally chartered banks access many
    new services and industries in the financial market, I believe
    that it did not include real estate brokerage. This legislation
    and this hearing gives us the opportunity to reexamine whether
    or not these two industries should be allowed to merge or share
    in similar business enterprises.
        As a representative of a congressional district where
    minority and low-income home ownership are a top concern, I am
    especially interested in how the potential merger of these two
    industries will impact the Community Reinvestment Act,
    predatory and subprime lending as well as low income and first
    time home owner loan programs.
        Mr. Chairman, I hope the panelists will address these
    issues, and I look forward to their remarks. Mr. Chairman, once
    again, thank you, and I yield back my time.
        [The prepared statement of Hon. Ruben Hinojosa can be found
    on page 76 in the appendix.]
        Chairman Bachus. Thank you. Other members?
        Gentleman from Oklahoma?
        Gentleman from Ohio? The gentleman is recognized--Mr.
    Watts, I am--okay.
        Mr. Maloney.
        Mr. Maloney of Connecticut. Mr. Chairman, I ask unanimous
    consent that members can file opening comments for the record.
        Chairman Bachus. All members' opening statements will be
    made a part of the hearing record on the motion from the
    gentleman from Connecticut.
        Gentleman from North Carolina?
        Mr. Watts. Thank you, Mr. Chairman. I will not take the
    full time. I just want to applaud the chairman for convening
    the hearing. We have certainly had a lot of smoke on all sides
    of this issue throughout the course of this year and ever since
    the proposed regulations came out. And it is appropriate to try
    to being some more information and perspectives to this issue,
    I think, before we get hit with it.
        It is not going to be a major issue obviously this year,
    because everybody has agreed that the regulations will not go
    forward, but I suspect the issue will not go away. And at some
    point we are going to have to deal with it head on, and this
    hearing will at least start to provide some information
    perspectives and positions of the various people so that we
    will be better informed to make a decision about it when the
    time comes.
        So I thank the chairman for convening the hearing and yield
    back the balance of my time.
        Chairman Bachus. I appreciate the gentleman's comments. I
    will say that it was the chairman of the full committee who
    made the decision to have this hearing at this time and not the
    chairman of the subcommittee.
        Mr. Watts. You mean I should have been praising somebody
    else?
        Chairman Bachus. That is right.
        [Laughter.]
        I recognize the ranking member, Ms. Waters.
        Ms. Waters. I would like to thank you, Chairman Bachus, for
    holding this hearing, and I would like to take a moment to
    welcome two very distinguished witnesses who are here at my
    invitation to testify today, if I may.
        Mr. Martin Edwards, Jr. is the president of the National
    Association of Realtors, and Mr. Robert Bailey is the president
    of the California Association of Realtors. And I would like to
    thank them for being here today to testify.
        We are here today to discuss H.R. 3424, and I am very proud
    to be an original cosponsor of this bill. H.R. 3424 will ensure
    that banking and commerce are not mixed and will prohibit
    national banks and financial holding companies from engaging in
    real estate activities, such as management and brokerage.
        This is important legislation that Congress should support
    for a variety of reasons. First of all, allowing financial
    holding companies and national banks to participate in these
    activities would give them an unfair competitive advantage over
    real estate companies.
        In fact, banks enjoy the benefit of a federal charter,
    including but not limited to having access to the Federal Funds
    Market, the payment system, and Federal Deposit Insurance. On
    the contrary, real estate companies lend their own money to
    consumers or have to borrow from commercial banks to make these
    loans.
        Financial holding companies charter advantages can also
    benefit its non-financial subsidiaries, which results both in
    lower costs and tremendous tax advantages to the entity. Real
    estate companies do not have these benefits.
        Real estate business derive their income from fees received
    when they originate or service real estate loans. National
    banks have a variety of fee-generating options other than fees
    on loans. We have to give real estate operations a chance to
    make a living. Besides real estate companies are generally
    smaller businesses and will be unable to compete with big
    banks; therefore, they would be forced out of business.
        The banks benefit from government-imposed barriers to entry
    into the industry. To operate a bank, a state or federal
    charter is required. For real estate, on the other hand, they
    have lower barriers to entry and no government restrictions on
    market competition.
        Allowing national banks to enter the real estate business
    will lead to industry consolidation, higher costs and fewer
    choices to consumers. Consumers can no longer shop around for
    the best deal, and banks will have no incentive to give
    consumers the best deal. Bigger institutions providing real
    estate services will not necessarily result in better services
    to consumers.
        Mr. Chairman and members, I could go on and on and on. I
    think it is no secret where I stand on this issue. As a matter
    of fact, I think that most citizens who understand what this
    issue is all about would share the same position that I have.
    With that, again, I thank you, and I look forward to hearing
    from our witnesses today.
        Chairman Bachus. Thank you, Ms. Waters. The gentleman from
    Connecticut, Mr. Maloney, made a motion that all opening
    statements will be a part of the record. We will include your
    full remarks in the record.
        The gentlelady from New York.
        Ms. Maloney of New York. Thanks, Mr. Chairman. Thank you
    for calling this hearing. It is an important one. In the
    interest of time, we have two distinguished members of Congress
    waiting to testify, I will just place my comments in the
    record, and I look forward to the testimony, not only from my
    colleagues but from the panel you have assembled today. Thank
    you.
        Chairman Bachus. The gentleman from Kentucky, if you would
    like an opportunity--thank you.
        At this time, we will hear from our first panel of
    witnesses. Mr. Calvert, who was a realtor in California, a good
    friend of mind, a respected member of this body, and Mr.
    Kanjorski, a member of this committee. And Mr. Kanjorski was
    one of the first members of Congress and I think you and I
    signed the first letter challenging the proposal to allow banks
    into the real estate brokerage business. We have not been shy
    about making our views made on this issue, nor has Mr. Calvert.
        So at this time, we will hear the testimony from our first
    panel, and I do not know if you all have an order that you wish
    to go in. All right. We will go from left to right, from my
    left. Thank you.
        Congressman Calvert?

      STATEMENT OF HON. KEN CALVERT, A REPRESENTATIVE IN CONGRESS
                      FROM THE STATE OF CALIFORNIA

        Mr. Calvert. I thank the gentleman. Thank you, Chairman
    Bachus, Ranking Member Waters and members of the subcommittee.
    Thank you for the opportunity to come here today to testify on
    behalf of H.R. 3424, the Community Choice in Real Estate Act.
    You all have written testimony in front of you, so I will do my
    best to keep my remarks short and to the point.
        Anyone who has found an error on their monthly bank
    statement knows how hard it can be to get a bank to admit they
    made a mistake. On a very serious policy level, we are dealing
    with that very same issue today.
        Before the ink was dry on the Gramm-Leach-Bliley Act, the
    banks petitioned to become involved in real estate brokerage
    and management. That was a mistake. And it has become that
    mistake, not this bill, that we are here today.
        H.R. 3424 is merely a corrective measure for a situation
    that we never should have been put in the first place. The
    simplest solution is for the banks to withdraw their petition,
    and I will continue to call for them to do so. I introduced
    this bill with my friend, Paul Kanjorski, on December 6, 2001.
    It now has 245 cosponsors, certainly more than the majority of
    the House members.
        Since this legislation directly deals with Gramm-Leach-
    Bliley Act, I would like to get, again, directly to the point.
    I was here when we voted on GLBA, and I remember it vividly. It
    passed the House by one vote. Many of us were given assurances
    that real estate brokerage and property management were not at
    all considered to be anything but commercial activities. So we
    voted for the bill and moved on. I am certain that had this
    issue been up in the air or in any way ambiguous this bill
    would not have passed.
        I do not think this issue is the result of confusion. It is
    a direct result of the banking lobby trying to make an end run
    around congressional intent. Fifteen House members of the
    Conference Committee on GLBA are cosponsors of the Community
    Choice in Real Estate Act. These members include
    Representatives Kanjorski, Waters, Tauzin, Dingell, Hyde,
    Gekas, Greenwood, Conyers, Towns, Markey, Waxman, DeGette,
    Stenholm, Hooley and Gutierrez.
        Clearly, these conferees did not walk away from the
    conference with the idea that banks would be allowed to engage
    in real estate brokerage and management, nor did they leave the
    conference with the understanding that the Treasury could
    quietly slip this in while Congress debated other matters.
        This is a matter for Congress to decide. H.R. 3424 speaks
    directly to who should make such a monumental decision and
    whether the Treasury Department and the Federal Reserve should
    have such broad power to usurp authority over what is clearly a
    commercial enterprise.
        It is interesting to note that currently, and even if the
    proposed rule went through, real estate brokers could not open
    a bank. So what we are talking about here is one industry
    trying to dominate another while at the same time protecting
    themselves from meaningful competition.
        When you get a chance I would like to invite you to ask the
    bankers that are testifying today what happened when Wal-Mart
    requested a thrift charter so they could offer depository
    services? The banks fiercely opposed this effort as a
    prohibited mixture of banking and commerce. So ask the banks,
    why are the immune from competitors? Because this is not about
    competition or one-stop shopping. It is about market dominance
    and conglomeration.
        I have a great relationship with my local bankers, and I
    know they work hand in hand every single day to make America's
    dream come true. But the action here in Washington does not
    represent the close, symbiotic relationship between local
    bankers and their friends in the real estate industry. Bankers
    do not want to engage in real estate, their leaders simply want
    to corner another market, this time a commercial market, while
    protecting their own interests.
        I would like to leave you with a few quotes from
    Congressman Jim Leach of Iowa, the sponsor of the Gramm-Leach-
    Bliley Act. ``The movement to go beyond the integration of
    financial services and eliminate the traditional legal barriers
    between commerce and banking is simply a bridge we should not
    cross. It is a course fraught with risk and devoid of benefit
    and one for which there is no justification.
        Such a step would open the door to a vast restructuring of
    American economic and the abandonment of the traditional role
    of banks as impartial providers of credit while exposing the
    taxpayers to liabilities on a scale far exceeding the savings &
    loan bailout. At issue with financial services modernization is
    increased competition. At issue with mixing commercial and
    banking is economic conglomeration, the concentration of
    ownership of corporate America,'' end quote.
        From Congressman Bereuter during the debate on GLBA, ``This
    member has been a fervent of keeping banking and commerce
    separate. In fact, this member is quite pleased that H.R. 10
    does not contain a commercial market basket, which would allow
    the very dangerous mix of commerce and banking, equity
    positions by commercial banks. We must avoid the problems that
    the Japanese have lately experienced because of such a
    dangerously volatile mixture of commerce and banking in their
    banking institutions.''
        And from Congressman Boehner, ``We have learned from Japan
    that we need to go slow on mixing banking and commerce.'' Let
    me say that again, ``Go slow on mixing banking and commerce.
    Let's see how we do with affiliation first, then return to the
    question of commerce and banking.''
        And, finally, again, to quote Congressman Leach in his
    opening remarks during the debate on GLBA, quote, ``As we all
    know, there are complex issues involved in this legislation,
    and there will be differing opinions and judgments by members.
    One thing we can all agree upon, however, is that Congress
    needs to reassert its constitutional role in determining what
    should be the laws governing financial services instead of
    allowing the regulators and the courts to usurp this
    responsibility.''
        If the national banks do not withdraw their petition, it is
    time for Congress to act and reaffirm its overwhelming support
    for keeping banking and commerce separate. We must stop this
    blatant end run around congressional intent. It is time for the
    House to pass the Community Choice in Real Estate Act.
        I am glad that I had the opportunity to come in front of
    this committee today and make my opinions known, Mr. Chairman,
    and I appreciate your consideration of this legislation.
        [The prepared statement of Hon. Ken Calvert can be found on
    page 72 in the appendix.]
        Chairman Bachus. Thank you. Appreciate your remarks,
    Congressman Calvert.
        Congressman Kanjorski?

       STATEMENT OF HON. PAUL E. KANJORSKI, A REPRESENTATIVE IN
                CONGRESS FROM THE STATE OF PENNSYLVANIA

        Mr. Kanjorski. Thank you, Mr. Chairman, members of the
    committee. I am pleased to have the opportunity. I ask that my
    official remarks be made part of the record. A lot of what I
    wanted to say my colleague and cosponsor of this bill has
    already said.
        I have no dog in this fight between the banks and real
    estate, other than I totally agree that it was my explicit
    intention when I sat in H.R. 10, and I think many of the
    members that signed onto that bill and finally voted its
    approval through the House, that we had no intention of mixing
    banking and commerce. And now, for some reason, based on this
    petition and new regulation, the question arises, isn't real
    estate banking?
        Well, if it is, selling yachts is banking, selling
    automobiles is banking. Almost anything and certainly Wal-Mart
    is banking. And we will have opened the door to have a hybrid
    mixture of banking and commerce to the extent that there will
    be no lines of delineation.
        When we are in the particular financial difficulties that
    we find ourselves today, it would seem compelling evidence for
    us to stop and say do we really want to organize a society that
    has one or 10 corporations that can do everything and anything
    everywhere? Or are we hearing a cry that bigness and hugeness
    and greatness may have its inherent difficulties in social
    life, and maybe we should just hold back a little.
        The reason I got into this bill is very simple. It really
    was not the fight between the interest of banks doing real
    estate work or real estate people wanting to get into the
    financing business. It was really an approach entirely
    different. I represent a very small congressional district in
    northeastern Pennsylvania. We have 176 municipalities, little
    towns. When we put on a Boy Scout drive, the people that lead
    those drives are generally in the business community.
        When I first got elected to Congress in 1984 Saturn had
    announced that it was going to locate a Saturn plant somewhere
    in the country, and it came to my attention there were people
    that we wanted to make a competition in Pennsylvania. At that
    time I called a meeting, and I asked one of our chief bankers
    in the community to serve as chairman and we put on a outreach
    community, and we called a meeting of all the leadership in the
    financial services industry. And at that very first meeting, we
    had 40 bank presidents that showed up, and I knew them all.
    They ran little banks in little towns all over my district.
        If we had that same competition today, Mr. Chairman, I
    would go to the same type of leadership, the chairman or
    president of a bank, and ask them to take the chairmanship and
    call a meeting together of the financial institutions and
    rather than having the meeting in a clubhouse we would meet in
    a closet, because there are only three or four banks that are
    in my district anymore. We have had such a gigantic growth in
    the last 18 years and particularly since the act and
    consolidation of the financial services in this country, it is
    not only banks, it is insurance companies, the security
    industry--almost every one of them too large to fail.
        And now they are setting their sights, basically, on other
    businesses, but they can make some sort of an argument because
    money transfers that it is banking. But if you can make that
    argument that selling real estate and managing real estate is
    banking, you can make that argument about almost any business I
    can conceive of there is a financial transaction involved
    because that is what business is--a financial transaction. So
    using the logic of their argument, really anything is open to
    them.
        I do not think we can afford that to happen in the United
    States. And going back to that Saturn project I was telling you
    about in my district, and many since, what the realtors
    represent to my district are they are the final profession left
    in business. The lawyers all belong to large law firms, the
    doctors all belong to hospitals, associations and HMOs, the
    banks are consolidating their home offices to either New York
    or Pittsburgh but they are not local. But when you call that
    meeting now, who shows up? It used to be insurance agents, but
    they are gone. Who shows up? It is the realtors. And we are
    about to clug off their head and say, ``No, we do not need you
    as local leadership anymore.''
        So I pose the proposition that I think that failure to
    enact this or the failure of the banks to withdraw the petition
    for the regulation and the allowance tantamounts to a positive
    decision of this Congress, a very important pubic policy social
    decision, that we want to go into a society of incredible size
    of corporations that literally extract leadership from the
    local communities and have it reside in the core, huge
    metropolitan areas of our country and eventually of the world.
    And that it will be something that none of us dreamed of and
    probably would have feared if we had read it in the science
    fiction 25, 30, 40 years ago when we were in school.
        I know we can make an argument, and I have lost a lot
    friends in the financial service industry, particularly in the
    banking, I do not see them anymore and they are not my friends
    anymore, and I miss that. I hope after all this is over they
    call me, because I think we have a lot of work to do in the
    years ahead.
        But the one thing I am certain of is that the realtors have
    asked a very simple thing. This question of banking and
    commerce has to be decided. What is the proper role and who is
    the proper people to decide it? It is not the Treasury of the
    United States and it is not the Federal Reserve, it is the
    Congress of the United States. It is not only a legal question,
    it is a social question.
        And it does not only have immediate impact over the next
    few years but has long-term ramifications of the very nature of
    the American society. And I would argue compellingly on
    everything my colleague has said and the few factors that I
    have thrown in that we must move forward as a Congress and show
    the nerve and the intestinal fortitude to say we did not intend
    and did not enact the authority in H.R. 10 to mix banking and
    commerce. This would be an act of mixing banks and commerce,
    and if it needs legislation to clarify it, it is this body, not
    the regulators, that should make that decision, because we
    represent the people.
        And I want to just call the attention to the committee, we
    have 245 cosponsors. I have never seen a more diverse,
    philosophical, ideological, geographical and political
    dispersion of people. This is an overwhelming number of members
    of Congress that have expressed their intent on the record as
    to where they stand now, but I think at least another 100 that
    have not yet gone on the record.
        I think we ought to give it time, as my colleague
    suggested, that if a withdrawal of the petition is the act that
    would disengage this, fine. But if that does not happen, this
    Congress should act on this legislation as speedily as
    possible, and I really do believe it has a very strong chance
    of going on suspension. I think we will get a two-thirds vote
    of the Congress to accomplish that end.
        So I urge my colleagues to consider this legislation and
    join my colleague and myself and the other 243 members that are
    cosponsors of this and do the right thing. Thank you.
        [The prepared statement of Hon. Paul E. Kanjorski can be
    found on page 77 in the appendix.]
        Chairman Bachus. Thank you. Do any members have questions
    for our first panel?
        Mr. Sherman?
        Mr. Sherman. Thank you, Mr. Chairman. I do not know if I
    have questions, I was not here for opening statements. I am
    very impressed by the presentation here. I want to associate
    myself with our two colleagues. I personally was angry when the
    regulators, with the encouragement of some others, decided to
    take my vote and yours in favor of a huge feast of additional
    powers for commercial banks. And before that feast was
    digested, to try to add another major dish to it, particularly
    because we all sat here, we voted for financial modernization.
    We were not lazy, we were not stupid. We wanted to know what
    was in that bill.
        And what was in that bill was a separation of commerce and
    finance. And none of us had a mental picture that somehow
    anything that needed to be financed was part of financial
    services. Many people, not all, when they buy a house, need to
    get a loan. This suit I am wearing was financed too, thanks to
    my friends at Visa, and an awful lot of my friends when they
    buy clothing or an appliance or food are doing that in a
    financial transaction involving a loan.
        And as these panelists and colleagues have pointed out
    quite eloquently, if real estate and realty services are
    financial services, then what is the difference between a suit
    of clothes or a toaster. This is a battle between democracy and
    bureaucracy--ruled by the people or ruled by the bureaucrats.
    And let us, may we assert the power of the people, of Congress,
    or our committee, of our subcommittee to make these decisions.
        These hearings should have come before--there never should
    have been a proposed regulation. Instead we should have waited
    several years to see if this great feast of additional powers
    was digested without food poisoning. And then three or four
    years from now, we should have such esteemed representatives as
    are coming before us today. We should make the decision in this
    subcommittee and our committee and figure out whether this
    additional set of powers should be conferred on banks.
        We would then be worried, as we are worried today, about
    whether federal insurance was either endangered or was being
    used to subsidize a possible endangerment of traditional
    realtors. And, Paul, you pointed out how important they are in
    not just rural communities but in urban communities as well.
        But in a few years, my anger would subside to the point
    where we could balance, or I could balance, along with everyone
    else on this subcommittee.
        So with that, I just want to ask our panelists whether they
    have any additional comments. I hesitate to do that because
    their opening statements were so eloquent, what else could they
    add? But let me turn it over to them.
        Chairman Bachus. Did you all understand the question?
        [Laughter.]
        Mr. Calvert. I will be more than happy to attempt to answer
    any questions the gentleman may have or any of the other
    members.
        Mr. Sherman. Paul, do you have anything else to say?
        Mr. Kanjorski. Just let's do our duty, gentlemen and
    ladies.
        Chairman Bachus. All right. Thank you. The first panel is
    discharged, and we appreciate your attendance and testimony.
        At this time, the second panel will take their seats. The
    second panel is made up--as you all come forward, I will go
    ahead and begin to introduce you. Mr. Joseph Face, Jr.,
    Commissioner of Financial Institutions, Commonwealth of
    Virginia, on behalf of the Conference of State Bank
    Supervisors; Mr. James E. Smith, Chairman & CEO, Union State
    Banker & Trust Clinton, Clinton, Missouri, President of the
    American Bankers Association, testified before our committee on
    many occasions. We welcome you back, Mr. Smith.
        Mr. George T. Eastment, III, Executive Vice President, Long
    and Foster Real Estate, on behalf of Real Estate Services
    Providers Council; Mr. Stephen Baird, Baird & Warner, Chicago,
    IL, on behalf of Realty Alliance; Mr. Patrick Grabill, former
    NAR Director for Coldwell Banker King Thompson, current
    president, King Thompson/Holzer-Wollam Realtors.
        At this time, we will start with Commissioner Face. And
    because of the large panel, ask the panel to try to keep your
    remarks to five minutes, if possible. Thank you.

      STATEMENT OF E. JOSEPH FACE, JR., COMMISSIONER OF FINANCIAL
       INSTITUTIONS, COMMONWEALTH OF VIRGINIA, ON BEHALF OF THE
                  CONFERENCE OF STATE BANK SUPERVISORS

        Mr. Face. Good afternoon, Chairman Bachus, Congresswoman
    Waters and members of the subcommittee. I am Joe Face,
    Commissioner of Financial Institutions for the Commonwealth of
    Virginia, and chairman of the Legislative Committee of the
    Conference of State Bank Supervisors. Thank you for asking us
    to share the views of CSBS on bank real estate brokerage and
    management authority and on H.R. 3424, the Community Choice in
    Real Estate Act.
        As the organization that represents the primary regulators
    of more than 70 percent of our nation's banks, we appreciate
    this opportunity to discuss the states' experience with real
    estate brokerage. We salute H.R. 3424 sponsors for their
    appropriate emphasis on competition and choice for communities
    and consumers. The legislation in its current form, however,
    would not promote these goals.
        All of us are clearly most concerned with the welfare of
    consumers. We suggest, however, that the experience of the
    state banking system offers a valuable perspective on how to
    create an environment that offers consumers responsible,
    competitive options.
        As you may know, CSBS has strongly supported the rulemaking
    proposed by the Federal Reserve and Treasury Department, which
    would allow financial holding companies and financial
    subsidiaries to offer real estate brokerage and real estate
    management services.
        While CSBS agrees that real estate brokerage and management
    are activities that are financial in nature and that these
    activities are both incidental and complementary to banking,
    this should not be the thrust of our policy debate. As
    Representative Calvert and the sponsors of H.R. 3424 have
    appropriately said, advancing choice for consumers should be at
    the core of our discussion.
        Twenty-nine states and the District of Columbia currently
    allow their state-chartered banks to offer real estate
    brokerage services. Despite the availability of these powers,
    only a few state-chartered banks are actively engaged in real
    estate brokerage. Among the banks that do use these powers,
    state bank supervisors have not encountered any significant
    safety and soundness or consumer protection concerns related to
    these real estate activities.
        The states' experience supports the Federal Reserve's and
    Treasury's interpretation of real estate brokerage as an
    appropriate activity for bank holding companies. Based on this
    experience, we generally support the agencies' determination
    that real estate brokerage and real estate management
    activities are financial in nature or incidental to a financial
    activity.
        We qualify this support, however, with the stipulation that
    financial institutions should conduct these activities in
    compliance with applicable state laws, prudential operational
    safeguards and appropriate consumer protections. With these
    safeguards, consumers will benefit from the enhanced
    competition of new providers in real estate services.
        The ability for state banks to test new products, services,
    powers and structures on a state-by-state basis has helped
    policy makers identify best practices for the delivery of
    financial services before granting these powers on a nationwide
    basis. This model has been very effective in promoting safety
    and soundness and ensuring consumer protection, while fostering
    innovation within our banking system.
        While few banks currently engage in real estate activities,
    a growing number of securities firms, insurance companies and
    notably real estate firms are blending banking and real estate
    services. H.R. 3424 would make this evolution unfairly one-
    sided by preventing banks from offering their customers the
    same breadth of services.
        State bank supervisors seek to promote credit availability
    and economic development in all communities in our states. We
    would strenuously oppose any system that would allow a few
    institutions, be they banks or non-banks, to dominate the
    financial markets and limit choice for our local communities.
    Like banking, real estate is a service business. And as in
    banking, local providers often know their customers' needs
    best. If this is truly the case, government intervention to
    protect these local service providers should not be necessary.
    Increased competition in real estate will benefit not only
    consumers and their communities, but also the service providers
    that are eager to earn their business.
        Again, we commend this committee for its attention to this
    challenging issue. Thank you for the opportunity to testify. I
    will look forward to your questions.
        [The prepared statement of E. Joseph Face Jr., can be found
    on page 144 in the appendix.]
        Chairman Bachus. Thank you.
        Mr. Smith, or President Smith?

      STATEMENT OF JAMES E. SMITH, CHAIRMAN AND CEO, UNION STATE
      BANKER & TRUST CLINTON, CLINTON, MISSOURI, PRESIDENT OF THE
                     AMERICAN BANKERS' ASSOCIATION

        Mr. Smith. I want to thank you, Mr. Chairman, for holding
    this hearing. I do have some charts to show you, and if it is
    permissible, I would like to ask staff to distribute copies of
    these charts for your to review.
        I believe that bankers and realtors have more in common on
    this issue than the rhetoric suggests. We both believe that
    customers deserve the best possible service. We both want
    customers to have many choices so that they can seek out that
    agent or company that the trust most. And we both believe that
    any financial service should be provided in a safe and sound
    manner, including adhering to all licensing, sales practices
    and continuing education requirements.
        If banks could offer real estate services, consumers would
    have more choices of real estate firms when buying or selling a
    home. Real estate agents would have more choices of potential
    brokerage firms. And brokerage firms would have more choices of
    companies to partner with, providing new sources of capital and
    technology. By prohibiting bank involvement in H.R. 3424,
    results in fewer choices for everyone.
        As we begin our discussion, it is important to note that
    combining brokerage and banking services is not a new or
    unusual activity. Real estate firms do it, insurance companies
    do it, securities firms do it, and well over half the
    depository institutions in this country, including many of the
    largest banks, can do it. In fact, my community bank in
    Clinton, Missouri has the authority to provide real estate
    brokerage.
        Like most banks that could provide real estate today, I
    have yet to move into this line of business, but I am
    rethinking my bank strategy on this matter. I have to. Even in
    my small town with 9,600 residents, it is obvious that the
    world is changing rapidly. I am losing customers to real estate
    firms that aggressively offer mortgages and insurance. Since
    the customer often goes to the real estate first, I lose out on
    the ability to offer this product.
        And the choices for customers are getting fewer and fewer
    as aggressive firms like Cendant, which owns Century 21,
    Coldwell Banker and ERA, and Re/Max gobble up small locally
    owned real estate firms. Cendant, for example, has averaged
    about one acquisition per week since 1997. This trend is
    obvious in the pie chart on my right, showing that the real
    estate market is far more concentrated than banking.
        In my town, Re/Max is the largest of the three real estate
    firms. Its mortgage lending and insurance operations are much
    bigger than mine. The number two real estate firm seems to be
    doing well, but the smallest agency seems to be struggling to
    compete. I wonder if it has the marketing and financial
    resources to compete with Re/Max. What are its choices?
    Continue to struggle, go out of business, sell out to Cendant.
    Would it not be better for it and for my community if it could
    partner with my bank? How is the National Association of
    Realtors helping that agency or my community by working to
    preclude such an option for them?
        My experience is not unique. My fellow community bankers
    are witnessing the same trends and believe that their ability
    to offer real estate services would significantly benefit their
    customers and communities. The packages many real estate firms
    offer, including those provided by the outstanding real estate
    firms with me here on this panel, provide valuable cost,
    convenience and service options. The posters on my right show
    examples of these combinations.
        GMAC, backed by General Motors, owns GMAC Mortgage
    Corporation, GMAC Real Estate and GMAC Bank, a full service
    bank chartered two years ago. They have 1,300 real estate
    offices and 20,000 agents and ranked eighth in mortgage
    originations in the first quarter of this year. Such
    combinations of services are good for consumers. The ABA
    believes that all banks should have the same opportunity to
    meet the needs of our customers.
        The Gramm-Leach-Bliley Act is a solid, well thought out
    piece of legislation. It promotes competition and enables
    Congress to avoid becoming embroiled in every competitive
    issue. The Fed and Treasury proposal on real estate follows
    exactly the process Congress set forth. H.R. 3424 would put
    Congress back in as referee for future competitive disputes.
        In conclusion, let's look ahead, not backward. We want to
    work with realtors to make the most of the skills and
    advantages each side brings to the table. Above all, we want to
    be able to partner with realtors to provide good, honest real
    estate, real estate services to America's homeowners and home
    buyers. Thank you very much.
        [The prepared statement of James E. Smith can be found on
    page 167 in the appendix.]
        Chairman Bachus. Thank you.
        Mr. Eastment?

    STATEMENT OF GEORGE T. EASTMENT, III, EXECUTIVE VICE PRESIDENT,
      LONG AND FOSTER REAL ESTATE, INC., ON BEHALF OF REAL ESTATE
                    SERVICE PROVIDERS COUNCIL, INC.

        Mr. Eastment. Good afternoon, Mr. Chairman and members of
    the subcommittee. My name is George Eastment, I am the
    Executive Vice President of the Long and Foster Companies, a
    full service home ownership company headquartered in Fairfax,
    Virginia.
        Long and Foster has 200 residential real estate brokerage
    offices that engage in real estate sales and leasing in seven
    Mid-Atlantic states and the District. Long and Foster also
    offers a full array of mortgage services through Prosperity
    Mortgage, which is a joint venture of Long and Foster and Wells
    Fargo Home Mortgage.
        We also offer a full line of personal and commercial
    insurance through Long and Foster Insurance Agency, a wholly
    owned insurance agency. Mid-States Title, another wholly owned
    company, runs five joint ventures that conducts real estate
    settlement in the Mid-Atlantic area. Our firm has 12,600 sales
    associates and employees, of which 9,000, including myself, are
    members of the National Association of Realtors.
        I am a past Chairman of The Real Estate Services Providers
    Council, known as RESPRO, and I currently serve as a member of
    its board of directors and Executive Committee. RESPRO is a
    national association of approximately 200 residential real
    estate brokerage, mortgage, home building, title and other
    settlement service companies who promote an environment that
    enables providers to offer one-stop shopping for home buyers
    across industry lines.
        Together, RESPRO members who are in the real estate
    brokerage business closed over 1 million residential real
    estate transactions last year, utilizing over 300,000 sales
    associates and 78,000 employees. Like the majority of the
    nation's top 350 residential real estate brokerage firms, most
    RESPRO real estate broker members also offer mortgage, title,
    closing and other settlement services.
        In fact, according to a 1999 study conducted by the
    independent consulting firm of Weston Edwards and Associates,
    72 percent of the top 350 real estate brokerage firms offered
    mortgage services and closed $22 billion in mortgage loans in
    1998 and realty and builder-based lending accounted for about
    10 percent of all purchase money mortgages that same year.
    Forty-five percent of these same firms offer title or closing
    services and personal lines of insurance.
        Mr. Chairman, RESPRO favors open competition in the real
    estate marketplace, and we believe that any bank should be able
    to compete with us in providing home buyers with one-stop
    shopping programs. For this reason, we oppose H.R. 3424 which
    would prevent affiliations between nationally chartered banks
    and real estate brokerage firms.
        All available evidence shows that home buyers prefer one-
    stop shopping and that realty-based one-stop shopping programs
    offer them potential benefits. The most recent consumer survey
    in this area was performed in March by Harris Interactive, the
    parent of the Harris Poll. Harris surveyed over 2,000 recent
    and future home buyers and found that 82 percent of home buyers
    prefer using a one-stop shopping service for their home
    purchase and 64 percent of those home buyers who recently did
    use realty-based one-stop shopping service also had a much
    better overall purchase experience.
        Other studies, some of which are described in my written
    statement have found that services offered through realty-based
    one-stop shopping programs are competitive and even lower in
    cost than those offered by independent firms. RESPRO does not
    believe that the entry of financial holding companies and
    national banks would change the potential consumer benefits of
    realty-based one-stop shopping programs.
        Over the last 20 years, a number of financial conglomerates
    have entered the real estate brokerage business: Sears Roebuck,
    Metropolitan Life, Merrill Lynch, General Motors, Prudential
    Insurance Company, Cendant Corporation and Warren Buffet's
    Berkshire Hathaway.
        On the surface, these companies appear to have significant
    competitive advantages over traditional real estate brokerage
    firms. Sears even had access to federally insured deposits
    through its affiliate, Sears Savings Bank. But Sears, Merrill
    Lynch and Metropolitan Life have since left the real estate
    brokerage business. While Prudential, GM, Cendant, and
    Berkshire Hathaway remain competitors, their presence has not
    changed the basic character of the real estate brokerage
    marketplace. In fact, we believe that their entry has
    contributed to the development of a wider range of services and
    has caused traditional real estate brokerage firms to be more
    efficient and more consumer-focused than we were before.
        In summation, I would say that at Long & Foster, we would
    not fear banks being in the business. They have a very
    different management style than realtors. We believe that we
    can compete heads up with them. And, basically, a real estate
    company, whether it has five agents, 9,000 or 90,000 basically
    has to do the same thing every day to win those customers over.
        Mr. Chairman, I thank you for the opportunity to testify. I
    would be glad to answer any questions.
        [The prepared statement of George T. Eastment can be found
    on page 97 in the appendix.]
        Chairman Bachus. Thank you.
        Mr. Baird?

     STEPHEN W. BAIRD, BAIRD AND WARNER, CHICAGO, IL, ON BEHALF OF
                            REALTY ALLIANCE

        Mr. Baird. Good afternoon, Mr. Chairman and members of the
    subcommittee. My name is Stephen Baird, and I am President and
    CEO of Baird and Warner. Baird & Warner has 35 residential
    brokerage offices throughout the Chicago metropolitan area, and
    we are currently ranked 12th largest residential brokerage
    company in the United States.
        Baird & Warner Financial Services is a wholly owned
    subsidiary providing mortgage services to our clients. The
    company currently employs approximately 1,600 employees and
    independent contractor agents. As a five-generation family
    business, we are the oldest real estate company in the United
    States, dating back to 1855. Baird & Warner has been a member
    of NAR since NAR's inception.
        I am currently on the Board of Directors of the Realty
    Alliance. The Realty Alliance consists of 45 of the largest
    independently owned and operated real estate companies in
    America, and I speak on their behalf.
        With NAR's escalating opposition to banks entering the real
    estate business, our members have grown increasingly concerned
    that NAR's position and vehemence would have a negative impact
    on consumers, our companies and the industry as a whole.
    Because of that concern, the Realty Alliance began a serious
    debate on the pros and cons of this issue. At the end the
    debate, the Realty Alliance voted to support the Fed
    regulations to encourage banks to enter the real estate
    business by a vote of 41 to four. The following are some of the
    reasons for that decision.
        Number one, open competition is the American way. As the
    real estate industry has changed, real estate brokerage
    companies have looked to diversity and enter new businesses,
    such as mortgage, title and insurance. Just as we should be
    able to compete in these businesses, so should other industries
    be able to enter and compete in our business. Open competition
    is the American way. Open, free markets are superior to closed,
    controlled or regulated markets.
        There are certain areas in our business that could use a
    greater level of competition. Nationally chartered banks would
    provide competition against other large financial entities,
    such as Cendant, Prudential and GMAC. This would certainly
    benefit the industry as a whole, since today these companies
    have little competition.
        Number two, capital is good for our business. Residential
    real estate has always been a capital-short industry, and we
    should encourage any efforts to bring more capital to our
    business. We have struggled for many years to find enough
    capital to expand our businesses, to innovate and to do
    research and development. With open markets, capital would most
    certainly be available. Furthermore, capital provides liquidity
    for real estate brokerage firms of all sizes, large and small.
        Three, competition will make us better. Competition makes
    us all better. NAR's argument that banks are anti-consumer
    makes no sense at all. How could real estate brokerage be less
    competitive and anti-consumer if there are more companies
    offering new and different services? Frankly, I think NAR is
    afraid of a new form of competition. We are not.
        Four, RESPA reform. Our industry is facing RESPA reform in
    the near future. RESPA reform will have significant impact on
    how we practice our business and our ability to grow our
    companies. We feel it would be hypocritical to work towards
    RESPA reform by building a model for one-stop shopping while
    prohibiting certain financial entities from participating in
    that solution. One-stop shopping should be offered by and
    available to everyone.
        Five, We should welcome new players. Our industry has
    succeeded for many years by on open, competitive marketplaces,
    while all players can compete on an even footing and welcome
    new entrants into the marketplace. Over the years, many
    companies have entered our business: Sears, Merrill Lynch and
    Metropolitan Life. They have brought new ideas and new ways of
    doing business. We have changed and grown and prospered. The
    challenges have only make us better.
        Six, and last, banks are already in our business.
    Currently, over 25 states permit state chartered banks to
    engage in real estate brokerage, either directly or through a
    subsidiary. Also, federal savings banks are authorized through
    service corporations to engage in real estate activities. We
    already compete with large financial players, such as Cendant,
    Prudential and GMAC. We see no difference between them and a
    large bank or a federal savings bank.
        Mr.Chairman, the National Association of Realtors does not
    speak for the vast majority of Realty Alliance members on this
    issue. We hope that you and members of the subcommittee will
    consider our views on the issue as you consider this
    legislation. Thank you for the opportunity to testify, and I
    would be glad to answer any questions.
        [The prepared statement of Stephen W. Baird can be found on
    page 91 in the appendix.]
        Chairman Bachus. Thank you.
        At this time, I am going to recognize a member of the
    committee, Mr. Tiberi from Ohio.
        Mr. Tiberi. Thank you, Mr. Chairman. It is an honor for me
    to introduce to the committee today a constituent and friend
    who was recently appointed as chairman and CEO of a company
    called Homestead Communities. Before that, Patrick Grabill was
    the CEO of a central Ohio company called Coldwell Banker King
    Thompson. And he was the founder of his own company, but during
    his tenure he expanded a 60-sale associate firm, Mr. Chairman,
    to its current size of 800. And I think, actually, officially
    this week, he became the former CEO, resulting in over a
    billion dollars in sales for the combined King Thompson
    Coldwell Banker firm.
        For over two decades, Patrick Grabill has been heavily
    involved in the real estate associations at the national, the
    state and the local level. He is the former president of the
    Columbus Area Board of Realtors, which I was a member. And on a
    personal note, Pat is known in central Ohio as an innovator. He
    is someone who is respected by both his peers, his competitors
    as well as the community as a whole. And I am sure glad that I
    am not competing with he or his company today as a realtor.
        With that, here is Patrick Grabill.

    STATEMENT OF PATRICK GRABILL, FORMER NAR DIRECTOR FOR COLDWELL
     BANKER KING THOMPSON, CURRENT PRESIDENT, KING THOMPSON/HOLZER-
                            WOLLAM, REALTORS

        Mr. Grabill. Thank you, Congressman Tiberi. Can I just
    leave now? That was awfully nice of him.
        [Laughter.]
        Good afternoon, Mr. Chairman and the members of the
    subcommittee. My name is Patrick Grabill. I am enjoying my 30th
    year as a realtor in the central Ohio area. By way of
    background, which Mr. Tiberi gave, so I will condense that, I
    speak to you as a citizen, an independent realtor and a small
    business owner.
        Over the course of building my prior business, I served my
    industry in various capacities in the realtor associations,
    including local board president, state trustee, national
    director, member of numerous committees and task forces,
    including the state and national association finance
    committees. I take no pleasure in the statements I make here
    today, which are in direct opposition to the position of the
    National Association of Realtors.
        The leaders of that association, both volunteer and staff,
    are bright, decent, well-meaning people trying to do what is
    right. I believe that the structure of this trade association
    and its self-perpetuating, self-protecting tendencies have
    dictated their conformance and desire to close ranks on this
    issue.
        With respect to H.R. 3424 and Senate bill 1839, the NAR has
    embarked on a vigorous campaign to position itself as the
    representative of the entire real estate industry. My purpose
    in coming before you is to underscore that there are numerous
    other opinions within NAR that are not being heard precisely
    due to the structure of that association.
        Rather than putting forward a balanced information program
    on this issue, and it is a complicated issue, a campaign was
    launched by NAR entitled ``Stop the Big Grab.''
        This well-funded and highly focused effort comes complete
    with a cartoon character of an octopus meant to be the banks
    reaching out to engulf the industry. Enormous political
    pressure is being brought to bear on association leaders at all
    levels and congressional members to support their position on
    this issue.
        I could cite other incidents of this but there were in many
    other incidents opposition to NAR's positions. These opponents
    are ridiculed, labeled disloyal or out of touch and generally
    just drowned out. The leadership charges right ahead. And that
    is a result of what is known in the industry as a three-way
    agreement. This requires as real estate salesperson to join all
    levels of this association: local board, state and National
    Association of Realtors. Otherwise, they cannot gain access to
    the Multiple Listing System or use the term ``realtor,'' which
    is a trademark owned by the National Association.
        The three-way agreement generates an income stream to the
    National Association of Realtors that is substantial. I believe
    the dues income generated plus the non-dues revenue and income
    from reserves exceeds $100 million annually. The level of
    income obtained in small amounts from a vast number of people
    provides little accountability other than a 500-member board of
    directors which meets semi-annually.
        The leadership team is thus given great latitude to craft
    issues and a response to those issues. The general members have
    little voice and no ability to vote with their wallets. They
    cannot leave the association because they will be cut off from
    the only source of local data exchange--the local Multiple
    Listing Systems. Thus, NAR's claim to represent 800,000
    members, to me, rings hollow.
        I believe that NAR's position on this issue is as much
    about protecting the income and interests of the trade
    association as about protecting the ability of its members to
    represent buyers and sellers in real estate transactions.
        If banks enter the real estate business, they could ask
    questions currently being asked by many of the larger regional
    brokerages today. Today, the NAR can largely ignore these
    concerns because there are only a few, maybe 100, large
    companies, and NAR perceives its interests to lie with the
    masses, the 800,000 plus individual members. With larger,
    better capitalized firms, such as banks, asking questions of
    accountability and values for money spent, these voices could
    grow louder, threatening NAR's role as the sole voice for
    organized real estate.
        I do have concerns about banks broadening their scope of
    activities into the real estate brokerage and property
    management businesses. Protections against undisclosed tying
    and firewalls should be required to protect against abuses,
    ensuring a level playing field. But to assume that bankers are
    less ethical, virtuous or less consumer friendly than realtors
    are is at the very least a stretch. It would seem to me that
    given the less scorched-earth approach by the National
    Association of Realtors a middle ground of compromise could and
    should be reached on this issue.
        Open competition in the marketplace would, in my opinion,
    provide a method for consumers to employ who they believe will
    act in their best interest. I believe the competent, caring,
    community-minded professionals I have worked with over the
    years will be the consumers' choice if they are given a chance
    to make a choice. Realtors need not be concerned about
    competition, they have lived with it all their lives, providing
    they stay responsive to the consumers' needs, just like any
    other small businessperson.
        To follow NAR's logic, realtors should not be allowed to
    participate in mortgage, title or insurance businesses. This is
    ludicrous because consumers have demonstrated that they would
    like the home buying process simplified, streamlined and made
    more affordable.
        Chairman Bachus. Mr. Grabill, if you could wrap up.
        Mr. Grabill. Yes, sir. In summary, at the end of the day,
    the fundamental question is with every other industry faced
    with new methods of competition and alternate delivery systems,
    why should traditional real estate be granted special
    protections? I thank you, Mr. Chairman.
        [The prepared statement of Patrick Gabrill can be found on
    page 156 in the appendix.]
        Chairman Bachus. Thank you. At this time, it is the
    intention of the chair to recognize Mr. Tiberi and then break
    for a vote. So if other members other than Mr. Tiberi want to
    go back, when we come back Mr. Watts will be recognized.
        Mr. Watts. Mr. Chairman, I am not sure I am going to be
    able to come back.
        Chairman Bachus. Are you going to return to the hearing?
    Well, if Mr. Watts would like to ask questions at this time and
    then we will recess. And if any members want to be excused at
    this time.
        Mr. Watts. That is fine. Thank you, Mr. Chairman. You
    caught me a little off guard. I just wanted to ask--I am glad
    to see Mr. Eastment here since word must have gotten back to
    him that I was using his company as one of the models. I
    thought they were on the other side of this issue at the
    outset.
        Mr. Eastment. I think, sir, that is one of the problems,
    that everyone assumes that the other side speaks for realtors,
    and I do not think that is necessarily the case.
        Mr. Watts. That is fine. I did not mean that as a put-down.
    I think it is very--I intended it as a compliment. Let me just
    ask you about something Mr. Grabill raised, Mr. Eastment, and
    that is the tying issue. How are you companies dealing with
    that and how would you suggest we deal with that if banks are
    in this business, to prevent kind of the appearance of
    imposition on the client that once you get in the door you
    cannot get out?
        Mr. Eastment. The question on the tying, the way that works
    is that the real estate agents have to pay dues, as he said, to
    the national, state and local--
        Mr. Watts. I do not mean tying in that sense. I mean tying
    of services where once you--one of the concerns that has been
    expressed with banks getting into real estate is if they are
    real estate brokers, then that gives them a means of requiring
    or at least applying more pressure to consumers to use their
    lending products.
        And I was just wondering how your companies are dealing
    with that? Are there rules that currently govern your companies
    that keep a particular person who is buying a home through your
    real estate company from being required to use your mortgage
    company, in other words?
        Mr. Eastment. Well, I think RESPA is a very important issue
    here in that we have to follow all of those guidelines and
    absolutely nothing can be required. We deal with it through
    disclosures. For example, after 20 years in the mortgage
    business, we have achieved a 16 percent capture rate, and the
    individual agent is free to recommend where or when their
    buyers go to a particular service provider.
        Mr. Watts. Sixteen percent capture rate means that 16
    percent of--
        Mr. Eastment. Sixteen percent of our buyers are using our
    mortgage company.
        Mr. Watts. Oh, I see.
        Mr. Eastment. And so that 84 percent of them are going
    somewhere else. We do not pay our agents or our managers. We
    are not allowed to pay them. There is no financial incentive.
    And I would assume anyone else in the business would also be
    subject to those RESPA rules. And the nature of the business is
    those agents are independent and they do not want anything to
    damage their relationship with their client, and they will use
    our services or anyone else is only if they think those people
    can perform.
        Mr. Watts. I did not realize there was anything in RESPA
    that required no tie-in. I mean I know that--I thought RESPA
    was a disclosure thing that says we cannot--I mean maybe I am
    just wrong, but is this an industry standard? Are all companies
    that have the whole range of services in their company fully
    disclosing that there is no tie required?
        Mr. Eastment. We have to provide--I have with me, this is a
    copy of our disclosure that we give to our buyers upon contact
    that does outline our interest in these various companies.
        Mr. Watts. And that is required by RESPA?
        Mr. Eastment. Yes. We must give that disclosure, and, as I
    said, the agents choose or they make their recommendations
    based upon who they feel can provide the best service.
    Sometimes that is us, sometimes it is not.
        Chairman Bachus. Mr. Eastment, I have been advised we have
    got about two and a half minutes left on a vote on the floor.
    So we are going to recess the hearing until approximately 4 or
    4:15. As soon as we are through we will return and start the
    hearing. Thank you.
        [Recess.]
        Chairman Bachus. At this time, I am going to recognize--the
    gentleman from Oklahoma does not have any questions for the
    panel, so I am going to recognize the gentleman from Ohio for
    questions.
        Mr. Tiberi. Thank you. Thank you, Mr. Chairman.
        First question, Mr. Eastment.
        Mr. Eastment. Yes, sir.
        Mr. Tiberi. Are you a licensed realtor?
        Mr. Eastment. Yes, I am.
        Mr. Tiberi. So you are a member of the National Association
    of Realtors.
        Mr. Eastment. For the last 30 years.
        Mr. Tiberi. In your opinion, as a licensed realtor, and you
    said you are opposed to this bill, why do you believe the
    National Association, in your mind, just speaking on your own
    personal behalf, not the company's behalf, why is the National
    Association for this bill?
        Mr. Eastment. Quite honestly, I am not sure about really
    why they are against it. I do not understand it. I think it is
    irrational, but I cannot begin to understand their arguments or
    see any credibility in them. So what is exactly in their minds
    I do not know.
        Mr. Tiberi. You have obviously peers, friends in the
    business and employees or independent contractors that work for
    you. What is the general nature of thinking from people in the
    profession that you come into close contact with regarding this
    issue?
        Mr. Eastment. I have received numerous questions about this
    from our agents and our managers, and the vast majority are,
    number one, even not aware of the issue, and another
    substantial number really could care less. I think the typical
    real estate agent is interested in day-to-day issues, how is
    the market, what does money cost today, where is my next deal
    coming from, what is my commission split? And I think there is
    only a very small percentage of realtors who really support NAR
    on this subject.
        Mr. Tiberi. Mr. Baird, you mentioned in your testimony that
    41 of your members, I assume brokers?
        Mr. Baird. They are large, independent real estate
    companies like ours. Long & Foster is a member.
        Mr. Tiberi. And all 41--41 to 40 voted to support the Fed-
    Treasury proposed rule, according to your testimony. All 45 of
    those voters, I assume they are all licensed real estate
    brokers and members of the National Association?
        Mr. Baird. Oh, yes. All of them are, and they have numerous
    agents that are members, in the--I do not know how many there
    are, I think 60,000 or 80,000 throughout the whole
    organization.
        Mr. Tiberi. Just to follow-up with the same question I
    asked Mr. Eastment, what are your thoughts in terms of why you
    believe the National Association is opposed to the rule?
        Mr. Baird. My personal opinion, and I have also been a
    realtor, not as long as George, but 22 years, my person opinion
    I am also perplexed why they would take this position. I think
    it has to do with some of the remarks that Pat made earlier
    that they somehow got onto this issue, put their, for whatever
    reason, marketing, PR muscle behind it. And now it is kind of
    become bigger than life.
        Mr. Tiberi. You are primarily in the Chicago market?
        Mr. Baird. Yes.
        Mr. Tiberi. What percentage of the market in Chicago do the
    three largest real estate brokerage firms handle?
        Mr. Baird. The three largest companies?
        Mr. Tiberi. Ballpark. Yes.
        Mr. Baird. Oh, 30 percent, 35 percent.
        Mr. Tiberi. Mr. Eastment, in your market, what are the
    three largest brokerages?
        Mr. Eastment. In the Washington area--we are in many
    markets. If we took the Washington area here, I would say the
    three largest companies are probably 35 to 38 percent. And if I
    may add to my previous comment, the real estate brokers in
    RESPRO represent about 40 percent of the membership of NAR in
    the companies that are our members.
        Mr. Tiberi. Mr. Grabill, same question to you. In the
    central Ohio market where you are company has been located for
    your entire career, what are the three largest?
        Mr. Grabill. I was just trying to add it up. It is close to
    50 percent.
        Mr. Tiberi. The three largest?
        Mr. Grabill. Yes.
        Mr. Tiberi. In your testimony, you talk about 800,000
    members of the National Association, and those members, I
    assume you are including part-time realtors, brokers, full-time
    realtors. And you made the statement in your written testimony
    that the NAR really does not represent them. Can you kind of
    further elaborate?
        Mr. Grabill. Well, if you are a broker and you are a member
    of the local board of realtors to get access to the Multiple
    Listing System, all of your agents are required to become
    members or you cannot employ them. So I do not know if that
    exactly answers your question, but that is how it is composed.
        Mr. Tiberi. But just if I could follow-up, Mr. Chairman. If
    you are a member of the National Association of Realtors,
    whether you are part-time or full-time, why--I am trying to
    figure out why the statement that the National is not really
    representing 800,000 members.
        Mr. Grabill. There are an awful lot of members that are not
    terribly active in the industry. They may be part-time, they
    may work for banks, but to gain access to the Multiple Listing
    they have got to be members of the association. Or they may be
    appraisers or other fields of related real estate. They are not
    necessarily all real estate practitioners, but they are
    required to join all three levels of the association to get
    access to that data. So there is no distinction made between
    part-time, full-time, ancillary careers or anything else.
        Mr. Tiberi. Thank you.
        Thank you, Mr. Chairman.
        Chairman Bachus. Mr. Bentsen?
        Mr. Barr?
        Mr. Barr. Thank you, Mr. Chairman. One thing that I am a
    little bit unclear on, several of you all used the term, ``one-
    stop shopping.'' You also used the term, ``foster
    competition.'' I am a little bit confused. How does one-stop
    shopping, where you would have a number of different services,
    including now real estate services available through the same
    entity that provides money and insurance and so forth, exactly
    how does that type of one-stop shopping, which may or may not
    be good, I do not think there is anything magical about one-
    stop shopping, that can be a monopoly also as one-stop
    shopping, how does that sort of one-stop shopping foster
    competition? It may be something that you all want to do and
    there may be some benefits to it, but I am not sure that
    fostering competition is one of them.
        Mr. Eastment. I will take that. One-stop shopping came
    about because consumers wanted it. In this area, for example,
    when you go into Giant, you used to go in to buy food. Now they
    have a dry cleaners, they have a drugstore.
        Mr. Barr. Excuse me just a second. In terms of this piece
    of--these proposed regulations, which consumers are you talking
    about? It is my impression that these proposed regulations were
    not based on consumer input, they were based on folks here
    within the government making what seems to be a fairly quick
    decision after the passage of Gramm-Leach-Bliley before we have
    really had much of a chance to really see how it was developing
    in the real world.
        I am not quite sure what consumer or customer input there
    was, at least for this set of proposed regulations. I
    understand generally what you are saying, but in this case,
    there has not been that public input. As a matter of fact, the
    public input seems to be in the other direction with regard to
    the regulations.
        Mr. Grabill. Could I respond to that, Congressman?
        Mr. Barr. Well, I really want maybe if you could just
    finish following up on that, please?
        Mr. Eastment. Yes. I was addressing the question of why we
    got into one-stop shopping. I am not aware of what consumer
    input there was or was not in terms of the regulation.
        Mr. Barr. Okay. Are any of you all, because, again, this
    was a decision made by the federal agencies pretty much on
    their own to move forward with these proposed regulations. So
    it is my impression that it was not based on consumer input. Do
    you all know otherwise?
        Mr. Grabill. Sir, I do not have any information about the
    government agencies, but I would believe it is the result of
    the fact that we are watching the marketplace change underneath
    our feet as this is happening. As an example, a company I just
    separated a relationship with, on an amiable basis, has grown
    their mortgage operation to the second largest mortgage
    operation in the country in the last four years from being
    pretty much nowhere on the charts.
        That is consumer-driven, that is not corporately driven.
    The consumer has found a value in that relationship. And if I
    was sitting in a banker's seat, I would see that happening. I
    know it is happening in my marketplace because bankers that I
    know of wondered why we are growing so rapidly in providing
    that service. I believe it is consumer-driven, and I think it
    is a result of that sea change in the marketplace.
        Mr. Barr. We have in my district, in Georgia, a lot of
    bankers, a lot of large banks, community banks whom we work
    very closely with. There are a lot of realtors, a lot of real
    estate companies. And to be honest with you, in the eight years
    that I have served in the Congress, we have not gotten
    complaints from consumers that banks dealing with financial
    services and the delivery thereof and real estate agents and
    brokerages dealing with real estate has created a problem for
    consumers.
        Have you all seen studies that indicate that people's
    needs, their ability to find homes and get them into homes is
    being hampered under the current legislative system that we
    have and have had for many, many years?
        Mr. Grabill. I have not perceived a problem from that
    sense. I have perceived a competitive situation, and, again, I
    am seeing the landscape as a real estate practitioner change
    rather dramatically when people like Warren Buffet come into
    the real estate business, corporations like Cendant and
    Prudential and other major corporate entities do that. There is
    a shifting in the landscape regardless of what happens in terms
    of this legislation. And I think the real estate industry is
    reacting to that, and I assume that the banks are reacting
    similarly.
        Mr. Barr. But the changing landscape, for example, with
    regard to financial services generally, clearly was a
    legitimate basis on which to take up the Gramm-Leach-Bliley
    bill. The Glass-Steagall Act was woefully outdated. They did
    not even have computers back when that went into effect. So I
    think there was a very legitimate basis that the entire
    financial system out there, regulatory system, had not kept up
    with realities and customers were not being properly served.
        I do not see the same thing, though, with regard to the
    delivery of real estate services. The housing market is doing
    well, the real estate business is doing well. It is keeping up
    with the changes in technology. I am just not quite sure what
    need that is out there that you all seem to talk about as
    providing the basis for supporting the regulations that the
    federal government is proposing here.
        And at a minimum, would not it make sense, without
    prejudicing whatever the government might do in the future,
    let's just see how the process that we change fairly
    dramatically in Gramm-Leach-Bliley works itself out to see if
    there are in fact areas out there, real estate or others, that
    are not being properly met by this new framework? I guess the
    question is what is the rush to judgment?
        Mr. Smith. If I may give you a personal example that is
    happening in Clinton, Missouri, which is a community of 9,600
    people. We have three real estate agencies in town. One is a
    Re/Max, one is a Coldwell Banker, and one is an independent
    agency. There are five banks in town.
        The RE/MAX office started about three years ago making
    mortgage loans, and so now somebody comes to Clinton, Missouri
    looking for a home, they go in and they sign a contract to buy
    a home. They walk into the next office, do the mortgage, walk
    into the next office, get the title insurance. I do not get the
    opportunity to see that customer or present my product to that
    customer unless they happen to walk into the bank.
        And one to four family residential loans are well over half
    of my loans at my bank. So when I stated in my oral statement
    it was making me rethink my strategy, I am going to have to
    rethink how I can have the opportunity to present my bank
    products to that customer so they have a choice.
        Mr. Barr. And wouldn't that be fair to say, well,
    competition ought to guide that rather than the federal
    government coming in and artificially perhaps dictating
    something?
        Mr. Smith. Well, I have real estate powers, but if it is
    taken away from me, I will not have the opportunity to be
    competitive in that nature.
        Mr. Barr. What is being taken away?
        Mr. Smith. If the real estate brokerage powers, which my
    bank today has, if I want to get into the market, my bank has
    the authority to do that. But if H.R. 3424 passes, that could
    be taken away and--
        Mr. Barr. No, it would not. H.R. 3424 simply maintains the
    status quo before the proposed rules would go into effect. It
    does not take anything away.
        Mr. Smith. Well, it would eliminate national banks from
    being involved.
        Mr. Barr. It does not take anything away from the powers
    that banks currently have.
        Mr. Smith. As I understand it, it would eliminate national
    banks from getting involved in real estate brokerage powers.
        Mr. Barr. But they are not involved now.
        Mr. Smith. They are not involved now.
        Mr. Barr. So it does not take anything away.
        Mr. Smith. But in my community, the smallest bank is a
    national bank, so I am not sure that they should be eliminated
    from having the opportunity to do real estate powers. If credit
    unions can do it, savings banks can do it, if I can do it, if
    RE/MAX can do it, I am not sure why we would want to eliminate
    the national banks, which 90 percent of the national banks are
    community banks. And I am not sure why we would want to
    eliminate them from being competitive in this marketplace.
        Mr. Baird. Congressman, if I may add to that?
        Chairman Bachus. Go ahead.
        Mr. Baird. I do not think it is an issue of creating less
    of an environment. By adding another player into the mix, you
    are going to increase the amount of competition. Today, what is
    happening in our market is there is a move towards one-stop
    shopping. Different companies are approaching it from different
    ways. They are creating different combinations. You are
    eliminating one element from playing in that game. It is going
    to happen no matter what happens here. It is already happening
    in the marketplace.
        By prohibiting these certain financial institutions, there
    are already a bunch of financial institutions that are doing
    it, you are just holding the level of competition at one level.
    By opening it up and making it an open playing field for
    everyone, you are just going to increase the competition
    because there are going to be different combinations of
    services that are brought to bear.
        Chairman Bachus. All right. Thank you.
        Let me just before I go on, Mr. Smith, you have a thrift,
    do you not?
        Mr. Smith. No. I have a trust charter. I am a trust
    company.
        Chairman Bachus. Okay. All right.
        Ms. Waters?
        Ms. Waters. Mr. Chairman--
        Chairman Bachus. Or Mr. Bentsen, whichever of you all want
    to--
        Ms. Waters. It is okay if Mr. Bentsen wants to go. I
    thought he was about ready to go. I have no problems with that.
    Go right ahead.
        Mr. Bentsen. I apologize for missing the earlier part of
    the hearing.
        Mr. Smith, you talked about title insurance, but under
    Gramm-Leach-Bliley, national banks can offer title insurance
    through their operating subsidiary, I believe. So you have
    gotten that authority, and I think while there was a struggle
    over that particular issue, as I recall, it was determined that
    it was financial in nature.
        But the two questions I have, for you and for the entire
    panel, are, one, I do not think that--you reference Cendant
    Corporation, for instance. I do not think that Cendant could
    own a bank. They can own a mortgage company, which is not a
    federally insured depository institution. And I am not sure
    that--I am concerned that if we want to go all the way and say
    that real estate is financial in nature under Gramm-Leach-
    Bliley, we might need to look at it from the other direction.
        And I think that is something that you all need to think
    about, that real estate companies can now get into the banking
    business themselves, not just the mortgage business, not just
    the mortgage brokering business or the mortgage banking
    business, but in the banking business. I want to hear your
    thoughts on that.
        The second question, and this is just sort of a broader
    question, because you referenced Cendant Corporation, which has
    had its ups and downs, I think, recently, is what is the
    rationale, beyond the legal issues which will be hashed out,
    but what is the rationale for getting into this business if you
    were in fact allowed to do so? I mean, yes, the one-stop
    shopping and all that, but I mean is there really profit margin
    in that for the banking industry?
        Mr. Smith. Well, first, as to whether Cendant can own a
    bank, a broker, the people that own the real estate companies,
    can own banks. They can charter a bank and we are seeing many
    new charters today. So individuals that own the agencies can
    charter banks.
        Mr. Bentsen. But the corporation cannot.
        Mr. Smith. That is correct. That is correct.
        Mr. Bentsen. And they cannot use the capital from the
    corporation to capitalize the bank, because that would be
    mixing banking and commerce.
        Mr. Smith. Right.
        Mr. Bentsen. But on the other hand, to see it from your
    viewpoint, that it is not mixing banking and commerce for the
    bank to own a real estate company.
        Mr. Smith. Well, the bank would own the agency, and that is
    what I could today under my powers. I could own an agency,
    which under Gramm-Leach-Bliley or under the previous things we
    are allowed to own agencies. And so we have that precedent--
        Mr. Bentsen. Only pursuant to the regulation if in fact it
    becomes--I think that was what Mr. Barr, who is not here, but I
    think that was where he was going, that it is only pursuant to
    whether or not the regulation is final. It is not explicit in
    the act.
        Mr. Smith. As a trust company charter, I have agency
    powers, and I can own an insurance agency, I can own a real
    estate agency. So I have that ability to own that agency. And,
    again, that is not capital-intensive, that is not a safety and
    soundness issue. We will own the agency, and we have agents
    that will be selling insurance or agents that will be selling
    real estate. So we do not view that as a safety and soundness
    issue, because we are not pouring capital into that product.
        Under Gramm-Leach-Bliley, it expressly prohibits us from
    getting into real estate development because that is capital-
    intensive and could possibly pose a safety and soundness issue.
    But that is our view is that an agency relationship would not
    pose a safety and soundness issue.
        Mr. Bentsen. And would you oppose a real estate agency,
    itself, with its own capital, seeking a rule to be able to own
    a trust charter or a national bank?
        Mr. Smith. Well, I think that is a determination by whether
    Treasury and Fed, which I think is what Gramm-Leach-Bliley was
    intended to do is to ask the Treasury and Fed to determine what
    things are financial in nature and those powers that can be
    afforded under that. So I think that is up to the Treasury and
    the Fed to determine how that is. We have explicit laws on the
    books on mixing commerce and banking, and I am sure that would
    have to be followed.
        Mr. Bentsen. But you would consider that mixing commerce
    and banking.
        Mr. Smith. Yes. A company cannot own a bank.
        Mr. Bentsen. Sure.
        Mr. Baird. I think your example of the Cendant Corporation
    is an interesting example. First, let me just say that I am
    not--
        Mr. Bentsen. And if I might, the only reason I raise that
    is I did not think of it. To be honest, it was in Mr. Smith's
    testimony.
        Mr. Baird. Right.
        Mr. Bentsen. I just picked it up.
        Mr. Baird. And I am not an expert in the banking
    regulations, so I will start off with that part of it. But the
    Cendant Corporation essentially, from a market point of view,
    from my point of view as a competitor, owns a bank, because
    they have one of the largest mortgage companies in the country,
    and they own a real estate company, actually. They own my
    number one competitor. So they can offer the same services as
    if they were a bank and owning a real estate company. So by
    prohibiting banks getting into the business, you are
    essentially giving them a mini-monopoly on that connection, and
    I cannot go out, for example, and make a connection with a bank
    and--
        Mr. Bentsen. If I might, with the chairman's indulgence,
    there is a slight difference in that a mortgage company in and
    of itself is not a bank, and it does not have access to the Fed
    window, it does not have access to--it does not have what, say,
    Alan Greenspan likes to talk about, this implicit subsidy that
    we had long debates over, that I will not bring back.
        And I do not think a mortgage company has access to the
    home loan bank system. I may be wrong about it, but I do not
    think it has access to own shares in the home loan bank system
    so that it can warehouse funding for mortgage purposes. It can
    sell to the secondary market like theoretically anybody can,
    but obviously you have to have capital. So I think that is an
    important distinction that has to be made. And my time is up.
    The chairman has been very generous, and I yield back.
        Chairman Bachus. The chair now turns to the ranking member,
    Ms. Waters, for her questions.
        Ms. Waters. Thank you very much, Mr. Chairman. Even though
    this hearing is being held, I think the issues are quite clear.
    I, for one, never supported Gramm-Leach-Bliley. I was concerned
    about these kinds of issues, concerned about the growing powers
    of the bank and the fact that ordinary citizens would be
    subjected to one-stop shopping where the banks would be in an
    unusually influential positions of offering all of the services
    and basically eliminate all competition because of the ability
    to do so.
        But let me just ask Mr., is it Grabill?
        Mr. Grabill. Grabill.
        Ms. Waters. Grabill. Do you believe that if real estate is
    deemed incidental--do you understand that if real estate is
    deemed incidental or a financial activity, that it may become
    subject to regulation under the federal Treasury? How would you
    feel about that?
        Mr. Grabill. Well, I am a real estate practitioner and I am
    not a lawyer, so I really do not have an opinion on that
    particular point of law.
        Ms. Waters. Does anyone have an opinion on it? How would
    you like to have your activities become federally regulated?
    What happened if you sold real estate in the bank, in the
    federal bank, would that real estate agent be separate and
    apart from everything else that goes on federally or would that
    agent then come under some kind of federal regulation? How
    would it work?
        Mr. Grabill. Congressman Waters?
        Ms. Waters. Yes.
        Mr. Grabill. What I said earlier is what I believe that
    these two industries need to get together and find a common
    ground to respond to changes in the marketplace. I do not think
    I am qualified to advise you on how the federal regulations of
    the statute should read, but I do think I am qualified to
    represent my observations in the marketplace. Whether you
    change this legislation or not, there is a sea change in how
    real estate has being marketed, and there are consumers who are
    taking advantage of the ability to vertically integrate the
    industry just like they go get their gas and get a quart of
    milk.
        They want to have their life simplified. The consumer is
    finding ways to do this. If you do not change this, it is not
    going to make a tremendous amount of difference in the average
    life of a consumer because they are going to find a way to do
    it anyway. Companies like Berkshire Hathaway, companies like
    Cendant, companies like Prudential, franchise organizations
    that can respond to the needs of a small businessperson who is
    a realtor in the marketplace will find ways to partner in the
    mortgage opportunities and the other ancillary services to help
    them be more profitable, to grow their real estate companies
    and to get the needs competitive to the consumer.
        Just the big issue I have had with the realtor industry is
    that because we are so busy in our lives, we end up only
    talking to other real estate people. We do not realize these
    kind of pressures are on every other industry. The consumers
    get it. The consumers want the services, provide the need, and
    I can tell you from growing my business we did better as a
    company when we provided more services.
        We are more competitive because the consumers want it. And
    a consumer may move from California to Ohio and have
    experienced it in California, and they want it in Ohio, or they
    move from Ohio to New Jersey and they want those abilities to
    do it because that is the society we live in.
        I believe, and the reason I am here as a private citizen,
    is that the marketplace is making these changes, my trade
    association is not responding effectively to communicate the
    real changes that are going on. They are trying to build
    barriers and partitions to the marketplace. And I hope you find
    a way to get these two industries together.
        Ms. Waters. Well, let me just say this: I have not heard
    all of the testimony, but I have heard some testimony that
    suggests, for example, that Cendant is now this conglomerate
    that owns RE/MAX and Century 21 and Coldwell.
        Does someone suggest that these real estate entities are
    now out selling properties and offering to get the mortgage and
    all of the other services related to that sale? Is someone
    suggesting that this is going on in some big way in America?
        Mr. Grabill. Congressman Waters, I sold my business to
    Cendant last year, a year ago today, and I can tell you they
    have been very successful and providing very good service, and
    I am a big fan of their format to do exactly that.
        Ms. Waters. Well, you know, I do not know if this is being
    maybe exaggerated a little bit, and I tell you why. I am a
    great observer of real estate and the real estate market, and I
    interact an awful lot with those entities that have been
    identified, the Coldwells and the RE/MAXs, et cetera. I am a
    lookie-Lou. I just go look at houses, and I just call real
    estate agents, and I know they hate me.
        Mr. Grabill. I knew you looked familiar.
        Ms. Waters. As a matter of fact, in one area of Los
    Angeles, one real estate person said, ``Now, Ms. Waters, I
    think you know every house in this community. What else can we
    show you?'' And I say that because--and the reason I am telling
    you about this just little personal experience is I have not
    met one real estate agent that has even suggested that they
    wanted to do anything more than sell me that house. Not one
    suggested that they wanted to finance it or even direct me to
    financing. They want you to come with your financing. Bring
    your banker with you to buy the house. That is what I have
    found.
        Mr. Grabill. I think that is very true, and that will vary
    geographically around the country. And agents, by and large,
    are independent contractors, and they will do what is in their
    interest and their client's interest. No matter what real
    estate broker owners or corporations want them to do, the agent
    will control that transaction. And I do not think your
    experience is unusual.
        When we can get to 20 to 30 percent of our transactions
    through some of our ancillary companies, that is a very high
    number. I think the marketplace, that is the genius of the
    marketplace. I see this proposed legislation as adding
    additional restrictions, not solving the problem, and that is
    why I came.
        Ms. Waters. Well, I do not think it is intended to add
    additional restrictions. This is about the separation. This is
    about the wall. This is about saying, ``We do this business and
    you do this business, and we want to keep it that way.'' And
    because even though you have described the marketplace a bit
    differently and people wanting the one-stop shop and it being
    inevitable and all of that, I do not really think so.
        I think what people want are personalized services by real
    estate companies that are prepared to do what it takes to sell
    that property. I think they want people who are willing to meet
    them at a given location at 7 o'clock in the morning or 9
    o'clock at night, because that is what I make them do--``Come
    meet me someplace, I want to see this house.'' And not only do
    they do it, but they educate you along the way.
        The more I look at real estate the more I learn. I think I
    have learned everything, I keep learning more because that
    agent is there knowing his or her business. And what I like
    about this business it has opened up opportunities for a whole
    lot of people to be in business, for small folks to be in
    business, and I want to keep it that way. So I yield back the
    balance of my time.
        Chairman Bachus. Thank you.
        Mr. Eastment, I will ask you--well, Mr. Baker, do you have
    a question?
        Mr. Baker. Mr. Chairman, if I might, I really had intended
    to be able to stay for the next panel, but we have a conference
    meeting at 5 that I must attend. If I may, I would just like to
    make my statement now within the five minutes here.
        Chairman Bachus. Absolutely.
        Mr. Baker. Thank you, Mr. Chairman. And I want to express
    my appreciation to you for calling this hearing and bringing
    attention to this most difficult matter. Certainly, all of us
    who were engaged in the debate over Gramm-Leach-Bliley intended
    for the offering of financial services to be in a more
    efficient and convenient methodology for the public. And the
    question of whether real estate services and brokerages
    constitute financial services was at the heart of the debate.
        As a former realtor and home builder, I certainly
    understand the concern about consolidation within the financial
    services world and the potential for enhanced competitive
    environment. No one will ever believe that the letter which I
    am about to read was sent to me unsolicited on July 15 but it
    was in fact. And I would like to read it into the record within
    the time I have available.
        ``Dear Congressman, as president of Latter & Blum
    Companies, I feel it is very important to personally
    communicate our feelings on the issue of banks entering the
    real estate business. We do not oppose their entry. We own and
    operate Latter & Blum and CJ Brown Realtors. Our organization
    is composed of 1,000 real estate agents and staff with 23
    offices covering Louisiana and Mississippi. We are a Louisiana-
    based organization and proud to be recognized as the largest
    real estate company in the Gulf South by the National
    Association of Realtors, as well as independent media reporting
    services.
        Latter & Blum is headquartered in New Orleans, and our CJ
    Brown operation is headquartered in Baton Rouge.'' That got my
    attention. I represent Baton Rouge. ``We vehemently disagree
    with the National Association of Realtors' position on this
    matter. Is it highly unusual for our firm to oppose NAR's
    position on issues because as a general rule, we do support
    wholeheartedly their efforts. Our firm collectively is the
    largest contributor to LARPAC in the state. We cannot support
    or defend their position this time, however; it is dead wrong.
        Competition is good and healthy. Our firm does not need
    anti-competitive protective measures from the government or the
    National Association of Realtors to keep us in business. Our
    organization was founded in 1916, and we have done quite well
    in the face of new and innovative competitors. Each new entrant
    over the years has brought us challenges, to be sure, but we
    have always prevailed and we will do so against banks. They
    provide no unfair advantage against our firm, in our opinion.
    We believe they may bring a different level of products and/or
    innovation that will force real estate companies to even
    further improve their delivery of services and products.
        This is the natural evolution of business. Poorly managed
    real estate companies with poorly trained agents may not
    survive the new challenge, but that is in the best interest of
    the consumer. That is the American way. Quality real estate
    firms have nothing to fear. Bring on the banks. We may learn
    new things and do a better job for our existing and future
    customer client base. It is hypocritical, self-serving to
    prevent banks from entering the real estate brokerage industry
    while allowing real estate companies to provide mortgage,
    brokerage and other ancillary services.
        The issue of federally insured deposits creating unlevel
    playing fields in favor of the banks is a red herring and a
    diversion to the real issue. Let's speak the obvious. The
    public can certainly see it. We would most appreciate your
    consideration of allowing the market to work. Your energies and
    talents should be directed to the truly serious and potentially
    catastrophic insurance industry problems of our region--
    flooding--rather than becoming embroiled in this industry
    protectionist issue. Thanks for your help and many years of
    support, blah, blah, blah. Arthur Sterbco, President and CEO
    and Latter and Blum in Baton Rouge, Louisiana.''
        And I wish to speak just briefly to the issue of FDIC
    insurance. Whether or not it helps to resolve anything or not,
    I am not sure, but a bank pays a premium for insurance. If the
    premium is paid, it is a cost of business for the bank to
    operate--a premium which a realtor does not pay. Now, the
    beneficiary of the premium is not the bank or its officers, it
    is shareholders who are left holding the bag and depositors
    left holding the bag in the event the bank fails. So the bank
    sees no benefit from a mandated cost in order to do business.
        I have really struggled with understanding how that is an
    advantage to a banker in competing with a realtor. And I
    certainly want to have further explanation made as to how that
    is a bottom line cost advantage to a banking enterprise in
    relation to the delivery of real estate product.
        I do not have any offer to make, Mr. Chairman, as to how
    this issue is resolved. I simply say that a decade ago we were
    embroiled in a similar debate between insurance companies and
    banking and that is banks entered into the insurance business,
    insurance as we know it would evaporate and banks would own the
    world. History may have spoken a different story. I simply
    appear here today to put into the record the letter of one
    constituent who I think is brave enough to give us the facts.
    Thank you, Mr. Chairman.
        Chairman Bachus. Thank you.
        Mr. Sherman, have you had questions yet?
        Mr. Sherman. Believe it or not, I do have a few comments.
        Chairman Bachus. Okay.
        Mr. Sherman. I have not had a chance to work with this
    panel. I want to invite our ranking member if she wants to tour
    more houses to come to the San Fernando Valley where our local
    realtors will show you interesting places. I know you are
    constrained and probably will not actually join me in living in
    the San Fernando Valley, but it will be a wonderful--
        Ms. Waters. If the gentleman will yield, I will just
    explain to you, despite what my friends may say, the real
    estate has become so expensive in California, now is not the
    time to buy. I am waiting. And I think that in about a year I
    may take up some of the persons I have been putting through all
    these hoops on one of those houses I have been looking at.
        Mr. Sherman. The one thing everybody in the room will agree
    on is they are all hoping the real estate continues to go up.
    You may be able to unite the bankers and the realtors.
        Mr. Chairman, these hearings are in a way premature and in
    a way absolutely necessary. We need to pass H.R. 3424 and lock
    in the fact that there is a very interesting policy issue, an
    issue well addressed by this panel and the next panel as well,
    but it is a policy issue that needs to be decided in this room
    by the people's elected representatives.
        Once we pass this bill, once we tell the bureaucrats this
    is our decision, then we can explore some interesting
    questions, like whether deposit insurance gives banks an unfair
    ability to compete with realtors or not, whether there is a
    risk to the insurance fund knowing that bank lending decisions
    may have the appearance of being influenced by whether the
    bank's holding company is getting an extra 6 percent by acting
    as a realtor, whether bank regulatory authorities are capable
    of regulating realtors or whether realtors working for banks,
    real estate agents working for banks would be exempt from local
    state regulation.
        In a few years, we will know whether Gramm-Leach-Bliley
    worked well, and after you digest one feast, and only then,
    should you be looking for another one.
        And, finally, we would be able to explore in hearings, once
    we decide the decision is to be made by the elected
    representatives and the hearings should be here and not over at
    the Fed, this interesting chart, which is on everyone's desk
    and seems to indicate that 36 percent of the real estate firms
    of the whole real estate realty industry is dominated by three
    firms, which I believe confuses the fact that these are
    franchisees that are independent, locally owned companies
    making their own decisions, for the most part.
        Whereas these 15 percent of banks--you know, last I checked
    with the bank manager of Bank of America down the street, he
    did not say, ``This is my company. I do what I want. I just
    hang out a sign that has red, white and blue on it.'' The 15
    percent bank figure is indeed owned by the banks. I have a
    feeling the 36 percent figure for concentration in real estate
    just indicates a bunch of local realtors preferred all have the
    same sign.
        So we have to pass H.R. 3424 now and then revisit the
    policy issue, then we can bring this panel forward, then we can
    discuss all those interesting questions. If we do not do it
    that way, if we fail to pass this bill, then an important issue
    of public policy is going to turn on 12 bureaucrats can get
    into a room and stretch the word ``financial'' to encompass the
    commercial.
        Well, that is not how we make policy decisions, whether
    bureaucrats can stretch a word. We should make them based on
    whether it is good for consumers and good for the country to
    have these find folks in the real estate business. And once we
    demonstrate that that decision is going to be made here, then
    we should have you folks back to convince us that we should
    make a decision different from the one I am leaning towards.
        But worse than that, and that is if we sit back and let the
    bureaucrats stretch financial to encompass real estate, then
    maybe appliance sales, maybe automobile sales. I venture to say
    there is not a single person on this panel that can tell us
    whether banks should be involved in automobile sales. And if
    they can, I am sorry, that is outside the scope of the issue.
        If we acquiesce in this, then we have, by default, told the
    bureaucrats at Treasury, at the Fed that it is their decision,
    not only for real estate, which you folks may be able to make a
    good case for, but for toasters as well.
        Mr. Face, does your Virginia commission have the capacity
    to regulate realtors?
        Chairman Bachus. Mr. Sherman, your time is up.
        Mr. Sherman. Oh, my time is up.
        Chairman Bachus. No, I am kidding. You can go ahead with
    your time.
        [Laughter.]
        Mr. Face. No. My particular agency is a regulator of
    financial institutions. We do not regulate realtors. That is
    done by another agency in the Commonwealth of Virginia.
        Mr. Sherman. Thank you.
        Chairman Bachus. You can go ahead if you all want to
    elaborate on the question. You can go ahead.
        Mr. Sherman. You want me to ask--okay, I will ask Mr.
    Grabill--Patrick, how do I pronounce your last name?
        Mr. Grabill. Grabill.
        Mr. Sherman. Grabill. You are a former director.
        Mr. Grabill. Yes.
        Mr. Sherman. But as I understand it, they have 655
    directors which means that they must have what, 5,000 former
    directors still on the planet?
        Mr. Grabill. Oh, there are many.
        Mr. Sherman. Okay. So you are not here asserting that your
    role as a former NAR director makes you a--
        Mr. Grabill. Not at all.
        Mr. Sherman. --representative of a huge percentage of the
    realtors in the country.
        Mr. Grabill. Absolutely not.
        Mr. Sherman. Got you. Believe it or not, I have run out of
    questions.
        Chairman Bachus. Thank you. Yes, we will have a second
    round. Let me ask this question. I have reserved asking
    questions.
        Mr. Eastment, you mentioned that you thought RESPA prevents
    you from tying the real estate transaction operating as one's
    broker from the financing from offering them a loan or
    something you basically said?
        Mr. Eastment. Well, RESPA does a number of things. Number
    one, it prevents us from requiring the use of any other
    services.
        Chairman Bachus. Yes, tying of services.
        Mr. Eastment. It also prevents us from offering
    compensation or any other thing of value to the real estate
    agents to encourage them to use the services.
        Chairman Bachus. And that policy is that there should not
    be any tie or any expectation that when you are someone's
    broker that you would then finance that purchase. Is that the
    policy behind that?
        Mr. Eastment. I think the background of RESPA was to
    prevent, back in the 1970s, kickbacks for the referral of
    business. It is basically to prevent referrals.
        Chairman Bachus. Or even anti-competitiveness.
        Mr. Eastment. Yes.
        Chairman Bachus. Let me ask you this: When you talk about
    one-stop shopping, doesn't that imply a tie, though?
        Mr. Eastment. No, I do not believe that it does. I believe
    one-stop shopping makes the opportunity available. Ms. Waters'
    experience, for example, was her realtor did not choose to
    offer any other services, and as I said in my earlier
    testimony, after 20 years, we have a 16 percent capture rate.
        Chairman Bachus. Yes. That, I guess, is my point. Now, Mr.
    Baird and you both said that customers are the reason for banks
    to offer their services, as people are seeking one-stop
    service. But then on the other hand, you turn around and say
    only 15 percent of the people actually do this. And in certain
    locations, there are probably not but five brokerage firms. You
    are maybe one of five, so that does not sound like people are--
    at least the 15 percent does not imply that people really care
    about--
        Mr. Eastment. Well, if you took the largest real estate
    companies in the country, probably more an average capture rate
    would be in the high 20's. Ours is on the low side. I believe
    that the consumer does want it. They do not want to have to
    come and buy the house from us, then go down the street and go
    to someone else for their title insurance.
        Chairman Bachus. Wait a minute. Yes. Okay. That is my
    second point. Now, they have to do that anyway, don't they? I
    mean I have been trying to sit here and figure out how you
    could buy a house and on that same occasion close on a
    mortgage. I just cannot conceive of that being possible.
        Mr. Eastment. Well, the way it would work would be--
        Chairman Bachus. How is that one stop? I mean, you know, I
    cannot go buy a house and--I cannot go to Long & Foster, sit
    down and buy a house--
        Mr. Eastment. You could come to Long & Foster, buy a house
    and under the same roof there would be a loan officer who would
    offer you a loan that you--
        Chairman Bachus. The same day that I close?
        Mr. Eastment. The same day. In fact, we actually prefer to
    pre-qualify the person before they would go out and look at a
    house so that when they offer a contract to a buyer they would
    know that you were qualified. And then we can actually close
    the loan in the same office.
        Chairman Bachus. Now, isn't that tying it when you actually
    pre-qualify someone, you say, ``We will give you a loan,'' you
    pre-qualify them, and then you go out and you sell them a
    house. I mean how could that not be tying it together? I cannot
    think of anything be more tied together.
        Mr. Eastment. When you are buying a home, especially in an
    environment such as we have the last few years where the seller
    is interested in the qualifications of a buyer. And if they
    have two buyers coming to them, one who says, ``Yes, I am
    interested in your house and I am writing a contract,'' and the
    other one says, ``I am interested in your house and I am
    writing a contract, and here I am, I am already pre-approved
    for a loan of X dollars,'' that is a sure thing, and that
    would--
        Chairman Bachus. So, actually, what you are saying is that
    if you had at a bank that was a real estate broker and you were
    competing against someone that did not have a bank, did not
    have an affiliation, there would be a real competitive
    advantage because your client would come saying, ``I am pre-
    qualified.'' Boy, now that is not what we call a level playing
    field, is it?
        Mr. Eastment. I would think that it was. I think what we
    are offering is a service, and we are representing the seller
    of the home and we want to bring them qualified buyers. The--
        Chairman Bachus. But, you know, in a way it would--let's
    say you have a bank in a certain town and you also have a real
    estate firm and you start pre-qualifying people. It would
    almost get to the point that if I wanted to buy a house, I
    would almost have to go out and go to a bank and get pre-
    qualified to be able to go out and buy at a reasonable price,
    because I would be competing with all these people who walked
    in, because you said it was a tremendous advantage.
        Mr. Eastment. It is a tremendous advantage when you have a
    seller who has to decide among, for example, multiple
    contracts. It is an advantage to them knowing someone is
    qualified rather than someone who writes a contract, they
    accept the contract and then the buyer has to go out and spend
    a few days getting approved. In the meantime, the seller has
    his home off the market. I think the other point--
        Chairman Bachus. If we said that we were not going to allow
    brokers to finance this transaction, then everyone would have
    the same advantage--
        Mr. Eastment. I do not think we would be providing the
    service that the people would want then. They do not want to go
    around from place to place to get these different--
        Chairman Bachus. My time is expired. If we have a second
    round, I think--are any members wishing to ask a follow-up
    question on this side? How about on this side?
        If they do not, let me close with one question. You are
    talking about one-stop shopping and I know, Mr. Baird and Mr.
    Eastment, you really focused on that. Convenience of dealing
    with the same person, pre-qualified. What about General Motors,
    do you think they ought to be able to own a bank and then they
    could basically own a bank and finance it all, when you could
    go to the bank and buy a car? What do you think about that?
        Mr. Eastment. I believe General Motors already does that
    with GMAC and--
        Chairman Bachus. So is it you all's position that General
    Motors ought to be able to own a bank? What would your
    membership say?
        Mr. Eastment. I do not think that would bother us.
        Chairman Bachus. Okay. How about your members?
        Mr. Baird. One of my big competitors is owned by GMAC.
        Chairman Bachus. Yes. I am talking about a bank as opposed
    to opening finance company. You just think they ought to go
    ahead and do it.
        Mr. Baird. I do not view that if General Motors owned a
    bank versus their current financial situation that it would
    make them any more or less competitive than they are right now.
        Chairman Bachus. Well, what do you think about them owning
    a bank? Does that bother you?
        Mr. Baird. Whether General Motors owns a bank or not is not
    going to affect the real estate business or my competitiveness
    in the market.
        Chairman Bachus. And this is not a trick question, but that
    would certainly it would open another avenue to them, right?
        Mr. Baird. Well, General Motors' ability to borrow money
    today is probably one of the lowest in the country, because of
    their financial resources. That is a huge competitive advantage
    that they have--over me or over a lot of other institutions.
        Chairman Bachus. Well, wouldn't that be a case of a large
    bank in a big town? Wouldn't they have a tremendous competitive
    advantage over a realtor with two agents?
        Mr. Baird. I guess what I am trying to say--
        Chairman Bachus. You are and awfully big company, and yet
    General Motors, you are saying they have a tremendous advantage
    over you today.
        Mr. Baird. No. They have a tremendous advantage in
    borrowing money. But as it comes down to the competitive nature
    in the real estate business, that does not have a significant
    difference for me.
        Chairman Bachus. Well, wouldn't a big bank--wouldn't the
    same thing be true of a big bank? Wouldn't they have a
    tremendous advantage on being able to loan money?
        Mr. Baird. Well, they already are in my marketplace loaning
    money. The fact that they might offer real estate brokerage is
    not going to mean that their financial capabilities are any
    more competitive?
        Chairman Bachus. What about Wal-Mart? Do you all see
    anything wrong with allowing Wal-Mart to operate a bank? Your
    group does not?
        Mr. Baird. You know, my own personal opinion is if Wal-Mart
    thinks they can compete with us, I will be glad to compete with
    them.
        Chairman Bachus. Because this would be consistent with your
    policy, right?
        Mr. Baird. Absolutely.
        And how about you, Mr. Eastment?
        Mr. Eastment. I would say the same thing. Wal-Mart would
    not bother me. I think there is this--
        Chairman Bachus. And I am not questioning that. I believe
    you all sincerely think let Wal-Mart have banks, let them
    operate banks, because that is consistent with the
    competitiveness and the free market and the one stop, correct?
        Mr. Eastment. Yes. I think there is a misunderstanding that
    large institutions, be they banks or General Motors or Cendant
    or whomever--
        Chairman Bachus. Or Wal-Mart.
        Mr. Eastment. --or Wal-Mart, does something differently
    when they take someone out to show them a home. And as I said
    earlier, no matter what size company you are, unless you have a
    good agent who is looking after their customers' interest, they
    have to do the same thing to sell that customer something. And
    I think that is the key, customer service.
        Ms. Waters. Will the gentleman yield?
        Chairman Bachus. Yes. I will simply just close by saying I
    mean if you argue there is one stop and the competitor, then
    your philosophy has to say let the Wal-Mart in the banking
    business. It would be inconsistent not to, wouldn't it? I am
    just asking you two.
        Mr. Baird. Could I add one thing to that? There have been
    many large financial institutions who have come into our
    business, and you can argue about how strong they are: Sears,
    Merrill Lynch, Prudential, Metropolitan Life. And quite a few
    of them have exited the business, because they had trouble
    providing the level of service that realtors provide.
        Chairman Bachus. And Wal-Mart could have that same problem.
        Mr. Baird. A lot of people. I would love to be able to
    compete with large financial institutions, because I will beat
    them every day of the week, because they cannot provide the
    level of service that my realtors can, that I can attend to on
    a local basis. That is why the entrepreneur realtor is always
    going to win out.
        Chairman Bachus. So if we let the banks in the real estate
    business, we have got to let Wal-Mart in the banking business.
    So you all would agree with that?
        Mr. Eastment?
        Mr. Eastment. That would be fine with me.
        Chairman Bachus. Thank you.
        Ms. Waters?
        Ms. Waters. You know, Mr. Eastment, when you talked about
    pre-qualification, it kind of struck a chord with me. I do not
    know if you know or believe that many of us feel that the banks
    have not done a good job in making mortgages available or loans
    available to people in certain communities. The reputation of
    banking in general is such that, you know, from the old
    description of red lining to the newer descriptions of
    predatory lending and all of that, I mean still kind of saddled
    with that reputation. When you talk about pre-qualification, if
    you use the same kind of thinking that banks have used in the
    past to determine whether someone is creditworthy, it causes me
    a little bit of concern.
        What is different about the bank and the real estate agent
    is this: The real estate agent really wants to be financed.
    They want to make that sale, and they will help talk about
    possibly what you need to do in order to qualify, where perhaps
    there are several places you can go to seek that mortgage.
    Would you, as a banker, tell your customer that there is a bank
    across town that has lower interest rates than I have, maybe
    you ought to check them out first?
        Mr. Eastment. Our agents do that all the time, and as I
    said earlier, the agents they want to keep you--
        Ms. Waters. They do what all the time?
        Mr. Eastment. They have their buyers check multiple lenders
    before they commit. And, for example, if they were showing you
    a house, they might recommend two or three lenders, including
    ours, maybe not ours.
        Ms. Waters. Wait just a minute. I want to make sure that I
    understand you correctly. You would have someone representing
    your bank selling real estate suggest that there is another
    lender who will have better interest rates than you?
        Mr. Eastment. If you understand how real estate agents
    work, if our company was owned by a bank and the bank said,
    ``You only recommend us,'' the agent would leave and go across
    the street to our competitor. And I think that is why we are
    not afraid that banks could bring anything that would be much
    of a competition. If they did that, they would not be in the
    business very long.
        Because the agents are independent, they are looking out
    for your interest, and they are going to do what they feel is
    right, because they want to keep you as a future customer. They
    do not want you to be mad at them because they recommended a
    loan that was inappropriate for them. And they want to stay in
    your good graces. And if they think an in-house mortgage
    company has an appropriate product, they will recommend us. If
    they do not, they will not.
        Ms. Waters. What is the advantage then of having that agent
    inside the bank? Aren't they there to bring business to the
    bank?
        Mr. Eastment. Well, I think if we are talking about we have
    a loan officer in our real estate office. The advantage is the
    loan officer is right there and all we are asking for is the
    opportunity to present a loan package to you, and if you choose
    to go elsewhere, you are free to do so. As opposed to an
    outside loan officer from a bank across the street who you may
    have to page, he has to come by. We offer a mortgage office in
    our real estate office.
        Ms. Waters. Oh, that is interesting, and it is kind of hard
    to digest here, that an agent would be welcomed inside the bank
    for very long if they were sending the business all over town.
    I do not know. That just does not sound right to me. You know,
    I know a little about competition and business, and I just do
    not think that that agent would be welcome inside the bank if
    they were directing the sales at other places with better
    interest rates, et cetera. Now, I hear what you are saying and
    that sounds lofty and that sounds pretty good, but I do not
    know if they would have a chair there very long if they
    operated that way.
        Mr. Eastment. If the agent was not welcome, if we take your
    premise they were not welcome, there are hundreds of other--for
    example, in this area, there are hundreds of other real estate
    firms that they could go to there and conduct the business the
    way they see fit. And what I do not agree with would be the
    premise that if a bank bought our company, all of a sudden they
    could direct the business to their bank. Our agents would leave
    in a heartbeat.
        Ms. Waters. Yield back.
        Chairman Bachus. Thank you.
        Mr. Sherman, you indicated you had some--
        Mr. Sherman. I would like to pick up on my colleague from
    California's comments. I am not so much concerned about a
    requirement but rather an incentive. As I understand real
    estate law now, and anyone on the panel can indicate this is
    wrong, if I am a real estate agent, I cannot accept from my
    favorite mortgage broker cash so that I direct all my folks to
    that one mortgage broker; is that correct?
        Mr. Eastment. That is correct. Not only can they not accept
    cash, they cannot accept anything, quote, of value.
        Mr. Sherman. Got you.
        Mr. Eastment. And I think RESPA already covers that.
        Mr. Sherman. We have dealt with the stock analyst problem.
    We have not solved it yet, but we have tried to do it with a
    little bit of a wall, and we have pressured, if not legislated,
    so that the big Wall Street houses will say, ``We are not going
    to directly compensate you for recommending stocks of the
    companies we are doing underwritings for.'' And so I assume
    that RESPA would prohibit an employee of a bank from
    participating in a bonus program in which the more loans you
    get your customers to originate the greater your pay. Would
    RESPA prohibit that?
        Mr. Eastment. RESPA would prohibit that. You know, the
    issue that you have--
        Mr. Sherman. Now, my concern is this: I do not believe in
    Chinese walls to separate in the sense of expecting employees
    not to do what is in the best interest of their company,
    because if you are a real estate agent, you could not get
    compensated directly by your bank employer based on loan
    originations, but loan originations could be determined,
    calculated, kept track of. And then at the end of the year, you
    could get a bonus and it would not be tied to an exact
    calculation, but rather it would be an all facts and
    circumstances test.
        And maybe because you are willing to work Sundays when
    other people will not or maybe because you have a good attitude
    or maybe because you have helped train some of the junior
    agents or maybe because your origination figure is good you
    could get the biggest bonus in the office. Are you proposing
    polygraph tests for supervisors of agents so that we know that
    the bonus at the end of the year, the discretionary bonus, the
    all facts and circumstances bonus is not influenced at all by
    loan originations?
        Mr. Eastment. The situation on Wall Street involves
    employees on both sides. The real estate agents are literally
    and figuratively independent contractors and are prohibited by
    RESPA from receiving anything of value. It prohibits us from
    doing anything, and it would prohibit us regardless of who
    owned the company. So I would assume that if a bank owned our
    real estate company, they would still be subject to the RESPA
    provisions and would not be permitted to do that.
        Mr. Sherman. Well, I know that the tax law has been
    designed to identify them as independent contractors and that
    benefits the industry. But are you saying that real estate
    salespeople do not get discretionary bonuses at the end of the
    year ever?
        Mr. Eastment. I am not aware of--
        Mr. Sherman. I know usually they get a piece of the 6
    percent, but are there some firms where they also get bonuses?
        Mr. Eastment. We certainly do not, and I am not aware of
    other firms that do that either.
        Mr. Sherman. Because the question is not are you an
    employee or an independent contractor, the question is, is
    there an all facts and circumstances discretionary bonus
    payable at your firm at the end of the year that could be
    influenced by steering your customers to a particular mortgage
    source. And that could somehow interfere with the fiduciary
    duty to steer them to the best source.
        I think, though, most customers, if they are dealing with
    Bank of America Real Estate are going to figure that they are
    going to be urged to get a Bank of America loan. As a matter of
    fact, panelists have talked about one-stop shopping, and that
    is exactly what one-stop shopping is.
        I would have to learn more and, as I say, I look forward to
    learning more after we pass the bill, take this decision back
    from the bureaucrats and decide this issue in a way that does
    not license the bureaucrats to deal with toasters, cars or
    anything else but just decide the real estate issue in this
    body. And I yield back.
        Chairman Bachus. Thank you. I very much appreciate your
    testimony and I know some of the questions we asked you were
    banking questions and you are real estate, in some cases, Mr.
    Eastment, Mr. Baird. We do appreciate your testimony, and you
    are discharged at this time.
        At this time, we will call the third panel. Our third panel
    is made up of Mr. Martin Edwards, Jr., President of the
    National Association of Realtors; Mr. Robert Bailey, President
    of the California Association of Realtors; Ms. Mary Frances
    Burleson, President and CEO of Ebby Halliday Realtors in
    Dallas, Texas; and Ms. Elizabeth Holland, Asset Manager and
    General Counsel, Abbell Credit Corporation in Chicago, on
    behalf of the International Council of Shopping Centers; Mr.
    John Taylor, President and CEO, National Community Reinvestment
    Coalition.
        At this time, I am going to recognize the gentleman from
    Texas, Mr. Bentsen.
        Mr. Bentsen. I thank the chair for yielding. I just wanted
    to make note that Mary Frances Burleson, who is the chair of
    the Texas Association of Realtors, is testifying before us
    today. I would also mention that Martin Edwards used to be a
    Texan, but somewhere down the line he went bad and ended up in
    Tennessee, I think it is, but still has strong ties there, and
    we are glad to have you both on the panel today.
        Chairman Bachus. I thank the gentleman.
        Mr. Sherman?
        Mr. Sherman. If I can recognize Robert Bailey who has the
    good sense not to live in Texas and instead to be president of
    the California Association of Realtors.
        Chairman Bachus. Thank you. And at this time, I am going to
    recognize Mr. Barr. He has a conference or committee to go to,
    and I am going to recognize him, with the indulgence of the
    other members, first.
        Mr. Barr. Thank you, Mr. Chairman. I appreciate you letting
    me speak briefly out of order. I apologize to the panel. I have
    to leave and go to the floor on a bill, but I want to thank
    you, Mr. Chairman, for both panels, both the previous panel as
    well as this panel.
        And I would like to pay a special word of welcome to Mr.
    Edwards. Mr. Edwards was a very, very eloquent spokesperson for
    the realtors just a few months ago, a couple of months ago,
    when he appeared before my Subcommittee on Commercial and
    Administrative Law to speak on the same issue. And I
    appreciated very much his input then, and I know that he will
    bring the same eloquence to bear with regard to the substance
    of the testimony today. But I would like to thank him and the
    rest of the panelists and apologize.
        I do have to leave. I will try and get back after the floor
    debate that I have to participate in, but if I do not, rest
    assured that as with the previous panel, I appreciate very much
    you all being here and will pay very close attention not only
    to the transcript of the proceedings today but your written
    statements as well. Thank you, and thank you again, Mr.
    Chairman.
        Chairman Bachus. Thank you. And also wish to ask questions,
    we will recognize you.
        Mr. Barr. I will submit them in writing if there are any. I
    know that you will probably cover pretty much most of them, as
    you always do, hit the high points. But if there are any
    specific ones, Mr. Chairman, I will submit them in writing, but
    I do have to get over to the floor very quickly here.
        Chairman Bachus. Thank you.
        Mr. Barr. And thank you for letting me speak out of order.
        Chairman Bachus. Mr. Bentsen, you have a question? Oh, I am
    sorry, they have not testified yet.
        [Laughter.]
        Yes, I have read their testimony, so I am ready just to ask
    questions.
        Mr. Edwards, I apologize. I have been up till 1 o'clock and
    up at 7 this morning and it is beginning to show. It will turn
    on, actually. There is a button--

         STATEMENT OF MARTIN EDWARDS, JR., PRESIDENT, NATIONAL
                        ASSOCIATION OF REALTORS

        Mr. Edwards. Push that button. That works, even for Texans,
    right?
        Chairman Bachus, Representative Waters, members of the
    subcommittee, I am pleased today to testify on behalf of the
    National Association of Realtors, the National Association of
    Home Builders and the National Auctioneers Association, with a
    combined membership of approximately 1.25 million people,
    practitioners in our business supporting H.R. 3424.
        Mr. Chairman, in these precarious times, housing and the
    real estate industry are a shining light in contrast to some of
    our country's largest corporate institutions who are now facing
    failure, bankruptcy and due to accounting problems and cozy
    relationships, in some cases, outright fraud.
        Ordinary Americans have seen their retirement accounts
    wither and portfolios vanish with corporate management while
    corporate management has profited. Federal Chairman Greenspan
    testified last week that the continued strength of the housing
    and the real estate sector are necessary elements to keep the
    economy on the right track. We are proud as three organizations
    of this accomplishment and point to it as a strong evidence
    that the current system is not only working but is working very
    well.
        It is important to note in our organization that 67 percent
    of all residential real estate firms consist of a sale force of
    five or less agents and only 3 percent of our firms represent a
    sales force of 50 agents or greater.
        Many of the troubles being experienced in the current crop
    of corporate failures can be traced to rapid expansion and
    consolidation of business. Congress has determined that when
    the lines of separation are breached, as in accounting and in
    consulting, too many conflicts of interest may arise. We
    believe that that is why commerce and banking should remain
    separate. Real estate brokerage, leasing and property
    management are purely commercial activities.
        Bankers will argue that the central tenet of Gramm-Leach-
    Bliley was the section to grant powers to banks. We disagree.
    The purpose was for Congress to grant securities and insurance
    industry powers to financial holding companies and national
    bank subsidiaries. Gramm-Leach-Bliley authorized the regulators
    to grant banks expanded financial powers, not whole industries.
        Although bankers have argued that this is the first test of
    Gramm-Leach-Bliley, in fact there has been a rule finalized to
    allow financial holding companies to act as finders, bringing
    parties to a transaction together. It specifically excludes
    finder activities that require a real estate license.
        Another proposed rule would allow financial holding
    companies greater entry into electronic data processing and new
    technologies to assist in delivering of existing bank products.
    These are what we believe Congress intended were incidental to
    our complementary powers.
        The diagram here on my, if we have got it, on my right
    shows the current reality of competition in the financial
    services arena. Currently, we have a balanced marketplace of
    commerce, banking and financial services. Both the real estate
    brokerage and the financial holding companies, banks, have
    diversified their business lines into financial service areas
    that have served and serve as a buffer between commerce and
    banking, as we heard from the previous speakers. This was the
    intent of Congress throughout the deliberations of the
    Financial Modernization Act.
        Let me make this perfectly clear, Mr. Chairman. Real estate
    companies do not offer banking services. We do not take
    deposits, we do not offer savings accounts, we do not offer
    checking accounts or certificates of deposits. We do not offer
    ATM machines. Nor do we have deposit insurance or access to the
    federal discount window. We do offer real estate brokerage,
    leasing and property management.
        In addition, as you heard from some of your previous
    speakers, some real estate firms also offer mortgage lending
    operations. It is in this area where real estate brokers and
    banks compete. This is no different than General Motors
    financing the purchase of an automobile. In fact, close to 45
    percent of mortgage originations today are from commercial
    banks. The next highest groups originates half that amount. And
    the realtor affiliated mortgage originations offer an
    origination of about 5 percent of the total market.
        These are very special relationships governed by the
    affiliated business arrangement provisions of RESPA, Real
    Estate Settlement Procedures Act. That act requires very
    specific consumer disclosures and maintains an arm's length
    relationship between the affiliated providers.
        So why do bankers seek this rule? Although they argue that
    the local licensing would of course be followed by the banks,
    actions sometimes speak louder than words. Maybe we can look to
    the experience of the insurance industry since the enactment of
    Gramm-Leach-Bliley. There have been several instances of
    national banks joined by their regulator, the controller of
    currency, seeking preemption of state consumer protection and
    insurance laws.
        The state of Massachusetts recently filed suit against the
    OCC for preempting state laws on the sale of insurance by a
    bank. Even Chairman Oxley of this committee has questioned the
    OCC about the propriety of their actions. These are good
    reasons for Congress to take a long, hard look at how banks
    operating real estate brokerage firms would be governed.
        Real estate today is one of the most locally regulated
    industries in America. There are far too many questions and
    hurdles that arise on the proposed rule to let them be decided
    by banking regulators rather than by local and state
    authorities. This rule would profoundly change the real estate
    industry. What bankers are seeking under the proposed rule is
    nothing short of nationalizing the real estate industry.
        Does Congress want the Federal Reserve, the Treasury
    Department, the Federal Trade Commission or other regulators to
    be the regulators of the housing industry in land and local
    matters? If so, Congress should enact legislation to accomplish
    that goal. By declaring real estate brokerage, leasing and
    property manage financial or incidental thereto, the regulatory
    would do just that.
        Yes, the bankers will argue that they only seek to enter
    the market to be competitive while abiding by all of the local
    real estate regulations. But their actions and insurance show a
    different approach that is sanctioned by the regulators at the
    federal level.
        In closing, on behalf of these three large organizations, I
    would ask that you pass H.R. 3424 with its overwhelming
    cosponsor support. And I thank you, and I will stand for
    questions.
        [The prepared statement of Martin Edwards Jr. can be found
    on page 128 in the appendix.]
        Chairman Bachus. Mr. Bailey?

     STATEMENT OF ROBERT BAILEY, PRESIDENT, CALIFORNIA ASSOCIATION
                              OF REALTORS

        Mr. Bailey. Chairman Bachus, Representative Waters and the
    members of the subcommittee, my name is Robert Bailey. I am
    president of the California Association of Realtors and the
    broker/owner of Bailey Properties Real Estate, a family owned
    and operated independent real estate company established in
    1974. We are located in Santa Cruz, California.
        Bailey Properties currently has three real estate offices
    and a property management and vacation rental office. The firm
    now includes over 102 associates, 17 support staff who serve
    clients throughout the entire Monterey Bay region. Our firm is
    the largest real estate firm in our market in both size and
    market share.
        Thank you for inviting me today to present testimony on
    H.R. 3424, the Community Choice in Real Estate Act, on behalf
    of the California Association of Realtors. The California
    Association of Realtors consists of over 100,000 members. We
    are the largest trade association of any type in the state of
    California. We are the second largest real estate trade
    association in the country, second only to the National
    Association of Realtors.
        Our members make up one-seventh of the entire membership of
    the National Association. To put that in scope, within
    California, CAR members handled over 90 percent of all
    residential real estate transactions last year, totaling in
    excess of 534,000 sales.
        The California Association of Realtors is unique even for a
    trade association. We are an association where each and every
    member has an equal voice, where each and every member, if they
    can articulate their position well enough, has the ability, the
    power and the right to stand at the microphone and literally
    change the direction that we go within California and the way
    we go as an industry, whether you are a member from a rural
    part of the state or a large city, whether you are an
    individual practitioner or an associate with a major firm.
        This is an important point when you gauge the response we
    have received from our members on the issue of banks entering
    the real estate industry.
        The leaders of the California Association of Realtors first
    brought this issue to the attention of the members in January
    2001. We received an immediate an overwhelming response, a
    response that far exceeded any that we had received before.
    There has never been an issue, whether legislative, risk
    management or bottom line driven, on which our members have
    never been so vocal. The closest we have come is the realtors
    current involvement in the housing affordability crisis that we
    are suffering throughout our state.
        Over 40,000 members of the California Association of
    Realtors sent letters, e-mails and faxes to the members of the
    California delegation expressing their concern regarding the
    potential for banks entering the real estate industry through
    the ownership of firms that would broker, lease or manage
    property.
        The size and passion of our members' response surprised us
    until we realized that they were not speaking solely as
    realtors but also as consumers. The shelf life of this issue
    within our state association has also surprised us. The passion
    at which our members continue to respond a year and a half
    later is exceedingly strong and has not diminished.
        The input I have received, though, goes well beyond our
    industry. In my role as president of the California Association
    of Realtors, I spend time traveling the state meeting not just
    with our members but also with members of local chambers of
    commerce, rotary clubs, lion clubs, and next on my agenda next
    week is a group called SIR, which is the Seniors in Retirement.
    I will be speaking to 120 members of that organization, which
    they have explained to me will average in age of 80, and they
    have asked me specifically to put this as one of my talking
    point.
        In each of these presentations, I have included a reference
    to the bank's request. The response I have received mirrors
    that of realtors. I think that goes to reinforcing my point
    that our members are not looking at this just as practitioners.
    They are not looking at it just as realtors. They are looking
    at it as consumers.
        The public at large is only now beginning to become aware
    of the potential effects of banks owning and operating real
    estate companies. California is not unique among state trade
    associations. There is a broad-based support from agents and
    realtors across the country. Though I can only speak on behalf
    of California, I believe that this is an issue that affects not
    only realtors but consumers across our nation, and I hope that
    this is an indicator of not only our state but the sentiment of
    consumers and realtors across the nation.
        And I would encourage the subcommittee to move forward on
    the bill. This concludes my remarks, and I would welcome any
    comments or questions. Thank you.
        [The prepared statement of Robert Bailey can be found on
    page 81 in the appendix.]
        Chairman Bachus. Ms. Burleson?

      STATEMENT OF MARY FRANCES BURLESON, PRESIDENT AND CEO, EBBY
                    HALLIDAY REALTORS, DALLAS, TEXAS

        Ms. Burleson. Chairman Bachus, Representative Waters,
    members of the subcommittee, I am Mary Frances Burleson. I am
    president and CEO of Ebby Halliday REALTORS. We are based in
    Dallas, Texas. We cover nine counties, from the Red River to
    south of Dallas and Rockwall and Tarrant Counties. And we have
    more than 1,200 outstanding associates and 130 staff. We are
    the number one independent company in the state of Texas and
    number 10 independent company in the National Association, in
    the NAR, in the country.
        I am also president of the Texas Association of Realtors,
    and we have 59,000 members. I am also a member of NAR. And I
    have been a director or NAR for 10 years. I am also a member of
    the Realty Alliance.
        Now, in terms of our marketplace, we are very active. We
    provide a lot of benefits for our clients. We also have a
    mortgage company called Home Team Mortgage. We opened it five
    and a half years ago. Now, at that time, we joint ventured with
    GMAC to do our operations center, which does the underwriting
    and loan processing. We have our own loan officers.
        Eighteen months ago, we decided to sever our relationship
    with GMAC, so we no longer have a joint venture; we own our own
    operations center. So we do our own loan underwriting and
    processing. First Tennessee is our warehouse loan, and after 30
    days our loans are sold primarily to Wells Fargo.
        So we are in business, in the mortgage business, and have
    been for five and a half years. So we want to be the masters of
    our own fate. We think we add better service to our clients and
    to our associates. We have loan officers in 20 of our 25
    offices, and so we think we provide great service to our
    clients.
        In talking about the membership in the NAR, I get a great
    deal of benefit. I attend meetings twice a year. I have been on
    all the committees and task forces. I go get information about
    the marketplace for risk reduction, risk management and about
    the marketplace and take it back home to our company to provide
    a better service for our company.
        The Realty Alliance. As you have heard, there are 45
    companies which are members of the Realty Alliance. The
    principals meet twice a year, our CFOs meet once a year, our
    marketing directors meet once a year. We meet together to share
    information, to learn to do things better and take the
    information back home to do better business. So we are there by
    choice, and we think it is a very good place to be. But we are
    members of both of these associations, and we get a lot of
    benefit from them.
        Ebby Halliday Realtors. This is our 57th year of business--
    57 years. Ebby Halliday's still very active, the broker, and I
    have been with the company for 44 years. I have seen every kind
    of market you can name--18 percent interest down to what it is
    today. We are very concerned about our marketplace. We do not
    mind competition, but we want the playing field to be level. We
    do not want it to be uneven. We think the banks getting our
    business would make the playing field very uneven.
        Our company very much supports H.R. 3424, the Community
    Choice in Real Estate Act. We do not want the banks in our
    brokerage business. You have heard today that a lot of us think
    we can give great service and we do. Every one in the brokerage
    service has to give great service.
        Chairman Bachus. They are telling me that maybe move the
    mike back a little bit.
        Ms. Burleson. Back? Sorry.
        Chairman Bachus. They are recording it back there, and it
    is kind of--
        Ms. Burleson. Thank you. I have never been told I talk too
    loud. Thank you. But we believe that we can go toe to toe, but
    we do not think it is a level playing field where they get in
    the business.
        So if they were get in the business, if they are allowed to
    get in the business, what will we do? We will do what we do
    now: Give great service, continue training our agents, work
    hard at everything we do.
        I have a very favorite motto in my business life: Early to
    bed, early to rise. Work like H-E-L-L. Advertise, economize and
    Internet-ize.
        Today's marketplace is very, very demanding, our agents are
    very demanding, and the public is very demanding. You have
    already heard the response from a lot of people sitting at this
    table today. So we have to continue what we are doing but to do
    it even better than we have ever done it before, advertising
    and marketing. That is why we go to national meetings. We keep
    learning, we keep asking questions.
        Among our peers, what are their questions and concerns
    about the H.R. 3424? Am I doing it still? Sorry.
        Chairman Bachus. Actually, I think it is the mike. Let's
    switch mikes. I believe that is just the mike.
        Ms. Burleson. Switch mikes? Okay.
        Chairman Bachus. Turn that one off.
        Ms. Burleson. As the president of the TAR, Texas
    Association of Realtors, this year, I have to travel 16
    regions. When I travel these 16 regions, realtors are very
    verbose, and they are very opinionated, as you have already
    heard Mr. Bailey. They are very emphatic. They say, ``Go and do
    what you can to get H.R. 3424 passed.'' They want this to be
    passed. They do not want the banks in our business. So I am
    speaking on behalf of the Texas Association of Realtors and
    Ebby Halliday Realtors.
        Thank you for your meeting today, Mr. Chairman, and thank
    you for being here, and I will wait for your questions.
        Chairman Bachus. Thank you.
        Ms. Holland?

       STATEMENT OF ELIZABETH HOLLAND, ASSET MANAGER AND GENERAL
     COUNSEL, ABBELL CREDIT CORPORATION, CHICAGO, IL, ON BEHALF OF
             THE INTERNATIONAL COUNCIL OF SHOPPING CENTERS

        Ms. Holland. Good afternoon, Mr. Chairman and members of
    the subcommittee. My name is Elizabeth Holland, and I am the
    chief executive of Abbell Credit Corporation, a 50-year-old
    family business focused on real estate investment, development
    and management based in Chicago, Illinois. Abbell Credit
    manages a 1.6 million square foot portfolio comprised of a
    shopping center, an enclosed mall and office properties,
    including Merle Hay Mall in Des Moines, Iowa and Westgate
    Village Shopping Center in Toledo, Ohio.
        I am here on behalf of the International Council of
    Shopping Centers and am the chair of the organization's
    Economic Issues Subcommittee. The ICSC is the global trade
    association of the shopping center industry and has 40,000
    members in the United States, Canada and more than 77 other
    countries around the world.
        Thank you for inviting me here today to express ICSC's
    views on the Community Choice in Real Estate Act and for
    holding another hearing on this very important issue.
        The ICSC strongly supports H.R. 3424. In addition to the
    technical arguments that real estate brokerage and management
    activities do not constitute financial activities under the
    Gramm-Leach-Bliley Act discussed in detail in our written
    statement, we are very concerned about the potential negative
    effects that the proposed rules could have on many shopping
    center developers and managers.
        For example, if a developer goes to a bank with a proposed
    project for construction or bridge financing, two scenarios
    could occur, both of which are highly problematic. In the first
    scenario, the developer agrees to contract with the bank to
    provide real estate brokerage and management services. The bank
    would receive a 5 percent management fee on the gross income of
    the project once it is operating, as well as a 3 percent
    brokerage commission on all leases. In this case, the bank's
    objectivity in reviewing the financial soundness of the project
    is now suspect, if not completely lost, because the bank will
    profit from the operations of the finished project.
        In the second scenario, the developer does not plan on
    having the bank participate in the leasing and management of
    the finished project, which is currently what happens in the
    marketplace. In order to secure financing to build the project,
    the developer provides the loan officers with extremely
    detailed information, including demographic support, proposed
    tenants, design and configuration on the site, current
    competition, as well the weaknesses and potential pitfalls of
    the project.
        The developer provides this information to give the bank
    comfort that the proposed project will be successful. This full
    and frank disclosure properly facilitates an objective credit
    analysis by the bank prior to issuing a loan. However, if a
    bank can compete for brokerage and management contracts, it
    could discuss a proposed project with a preferred developer,
    one that would allow the bank to provide it with such services
    should it get the opportunity to develop the project.
        This potential scenario would most likely keep the original
    developer, and others like it, from fully disclosing the
    project's potentials and pitfalls and limit the bank's ability
    to accurately assess the risk of the project, to the detriment
    of its depositors.
        Gramm-Leach-Bliley continues to prohibit banks and their
    subsidiaries from making real estate investments or being
    involved in real estate development. The Proposed Rule, on the
    other hand, would permit such institutions to engage in real
    estate management and brokerage activities. While these two
    rules may at first appear to be compatible, there are many
    overlapping or identical activities that are performed by
    property managers and real estate developers and investors.
        Successful property management in the retail context
    involves many of the same functions as a real estate developer.
    A good management company must continually reevaluate the
    projects for further development and redevelopment in order to
    stay competitive within the market through renovations, tenant
    additions, expansions and property acquisition, as well as
    engage in municipal and governmental entity relations and
    negotiations.
        The role of a property manager, like that of a developer,
    is to keep the project competitive by continuing to develop and
    redevelop the project over time. If a financial institution is
    allowed to engage in property management, it would have to
    fulfill these responsibilities and would, in essence, be
    engaged in real estate development, an activity that is
    prohibited under Gramm-Leach-Bliley.
        Furthermore, a management firm's compensation is usually
    based on a percentage, typically 4 to 5 percent, of the gross
    receipts of a property. By taking a percentage of the gross
    revenue as the management company, a bank's fees will rise and
    fall based on the performance of the property. It will be
    invested in the performance of the real estate the same way as
    if it had an equity interest in the property. This interest
    would appear to constitute an investment in real estate, an
    activity that is clearly prohibited under Gramm-Leach-Bliley.
        For these reasons, as well as those included in our written
    comments, the International Council of Shopping Centers
    strongly supports the H.R. 3424 and opposes the proposed rules.
    Thank you for opportunity to address you today. I would be
    happy to answer any questions.
        [The prepared statement of Elizabeth Holland can be found
    on page 160 in the appendix.]
        Chairman Bachus. Thank you.
        Mr. Taylor?

    STATEMENT OF JOHN TAYLOR, PRESIDENT AND CEO, NATIONAL COMMUNITY
                         REINVESTMENT COALITION

        Mr. Taylor. Good afternoon, Chairman Bachus and
    Representative Waters and distinguished members of the
    Subcommittee on Financial Institutions and Consumer Credit. My
    name is John Taylor, and I am the President and CEO of the
    National Community Reinvestment Coalition, NCRC. NCRC is a
    national trade association representing some 700 community
    organizations and local public agencies who promote fair and
    equal access to credit, capital and banking services. NCRC
    member organizations represent over 18 million consumers
    nationwide.
        I thank you for the opportunity, Mr. Chairman and other
    members of the panel, to be here to testify on the critical
    issue of whether we should allow banks to own real estate
    firms.
        NCRC opposes allowing banks to enter the real estate
    industry. Under no circumstances should any further co-mingling
    of industries occur in the absence of updating CRA, the
    Community Reinvestment Act.
        NCRC maintains that the addition of real estate to the
    array of products now offered by financial holding companies
    will lead to greater consolidation of bank market power and
    result in fewer choices for consumers. Our worst nightmare in a
    consolidated financial market that includes real estate
    brokerage is a bank offers favorable loan terms to its real
    estate affiliate, giving it significant advantage over a
    competing real estate business that does not have an affiliate.
    And the number of product choices offered to customers of non-
    affiliated real estate business decreases, resulting in higher-
    cost loans.
        If we allow for the consolidation, Mr. Chairman, via cross-
    industry ownership of banks and real estate terms, we will end
    up with fewer and bigger firms, less competition, less choice
    and higher prices for consumers.
        I must raise an issue that I think has been on the front
    page of every paper in the last month and that has to do with
    corporate greed. In May, when I testified before Senator
    Johnson's subcommittee, I cautioned against allowing banks into
    yet another market when we had just seen most of our country's
    largest lenders at the front of the, quote, Enron Ponzi scheme,
    end quote.
        Now we have just learned that one of our largest financial
    holding companies may have conspired with Enron to make the
    company look financially healthier than it actually was at the
    same time that the holding company's securities and insurance
    arms were used to prop up Enron.
        I hope in the end this is not true, but the point is
    Congress should keep the few remaining firewalls to protect the
    American consumer from financial institutions that are trying
    to serve too many masters.
        When Congress repealed Glass-Steagall without instituting
    safeguards, it legitimized stealthy operations of financial
    conglomerates that are driven purely by greed and profits at
    the expense of the everyday consumer, investor and depositor.
    To borrow a phrase from my friend, Alan Greenspan--well, I call
    him my friend, I do not know if he calls me that--quote, ``an
    infectious greed seemed to grip much of the business
    community.''
        I would add that that infectious greed in corporate
    financial conglomerates is what is driving this debate. And
    until we rebuild the firewalls demolished by Gramm-Leach-
    Bliley, it would be a tragedy to open the floodgates to get
    another market.
        Unlike any other business, banks hold a special status:
    They are the stewards of the American public wealth. We
    taxpayers guarantee that consumers cannot lose their deposits
    in banks; however, we depositors know that their personal
    savings are being put at risk when the infectious greed spreads
    to their financial institution.
        When Congress enacted FDIC insurance, it held banks to a
    solemn promise that they would be manage safely and meet credit
    needs and deposits of all the communities in which they did
    business. There was a reason why Congress kept banks out of the
    other financial businesses for over 60 years. Congress thought
    that a head-long rush into other lines of business would risk
    people's life savings in imprudent schemes.
        The terrible news of the last few weeks reaffirms that
    congressional wisdom of 60 years ago cautions us against
    allowing banks into yet another industry, namely real estate.
    Didn't the savings and loan industry devastate itself with bad
    real estate deals?
        All this being said, I am somewhat confused as to the
    financial industry's argument that they need real estate
    brokerage included as a financial activity in order to stay in
    business. Banks today already enjoy a business relationship
    with real estate companies. You have heard some of the testify
    earlier. Long & Foster, for example, has a joint venture with
    Wells Fargo Mortgage Company. This venture offers loans through
    what is called Prosperity Mortgage.
        Prosperity loan offices sit in the offices of Long &
    Foster. I am trying to imagine them recommending other lenders
    as you walk in. But you did hear Mr. Eastment testify that only
    16 percent of his business came from that. He did not testify
    that it was the biggest growth area, a 33 percent growth
    factor, that that lender, that Prosperity Mortgage was in fact
    the single largest mortgage lender in Long & Foster. So the
    other 84 percent, was it, 84 percent was a series of other
    lenders, but the single largest one was in fact that very
    special relationship they have with Wells Fargo through
    Prosperity Mortgage.
        In our opinion, there is more to this. We believe Wells
    Fargo wants to do what is now prohibited by law; namely to get
    their hands on Long & Foster client lists, to cross-sell their
    checking and savings products, credit cards, insurance, auto
    loans, refinance loans, annuities, estate planning, et cetera.
        Greed has also driven Wells into the area. I mean a bank
    like Wells Fargo is now in the payday lending business. I am
    trying to imagine the relationships they have with Golatta
    National Bank and Ace Cash Express, things that really are done
    at the expense of consumers.
        Can you imagine a business such as an FDIC-insured, a CRA-
    regulated, a federally overseen bank offering the antithesis of
    basic banking services, the most expensive kind of basic
    banking services you could possibly find, and that is payday
    lending. And now we want to open up the floodgate to allow them
    to get into the real estate industry. I think we need to learn
    from these experiences.
        I would now briefly like to elaborate on how CRA must be
    updated to cover all the activities that financial institutions
    are now permitted to undertake. As you know, CRA only applies
    to depository subsidiaries of financial holding companies.
    Other parts of the holding companies have no obligation to
    serve the entire community in which they serve. It is a
    travesty to each underserved rural area and inner city
    neighborhood that CRA basically ends with checking products and
    lending activities.
        When Congress passed Gramm-Leach-Bliley, it took the
    opportunity to give banks what they wanted, an end to Glass-
    Steagall, but it missed a tremendous opportunity to extend
    community reinvestment requirements to all bank affiliates,
    insurance companies and securities firms.
        Chairman Bachus. Mr. Taylor--
        Mr. Taylor. Yes, sir.
        Chairman Bachus. --if you could wrap up. Maybe take another
    30 seconds.
        Mr. Taylor. I was just about to do that, Mr. Chairman.
        Chairman Bachus. Thank you.
        Mr. Taylor. Thank you for helping me segue. I did, in
    closing, wanted to just point out what we have just learned
    from that segment of the real estate industry that has
    developed these special relationships where they do have
    mortgage companies. And I would just like to quickly have you
    and the rest of the committee take a peak at this chart that we
    have over there, which says, ``Home Purchase Lending to Blacks
    and Hispanics.''
        And the dark color blue--I think it is blue--that is CRA-
    regulated banks, regular financial institutions. The red is
    those hybrid lending institutions that have developed these
    real estate relationships or have been dominated by real estate
    relationships. You can see the experience thus far in looking
    at how those institutions operate. From a consumer perspective,
    it does not hold great promise for blacks and Hispanics.
        And the next chart, if it is up there, if blacks and
    Hispanics is not the issue for you but perhaps income is, you
    will see here too those hybrid financial institutions with
    those special relationships with real estate firms lagging well
    behind the rest of the industry. And this portends a shift on
    emphasis on what is important, we think.
        So just as a calculation, we found that if the rest of the
    banking industry operated along the same lines that you have
    heard some of these firms mention here that have these hybrid
    relationships, there would have been 227,012 fewer loans to
    borrowers in the year 2000.
        I will end by saying, Mr. Chairman, again I thank you for
    the opportunity to weigh in. Being a consumer representative,
    if I were not the last one speaking at the end of day, I would
    not think I was at a congressional panel. But let me say that
    we really urge you to get this bill out of this committee and
    get it on the floor. You have got 245 members behind this. Mr.
    Kanjorski tells us that there is probably another 100 waiting
    to sign on.
        This is the firewall that did not get created when you
    passed Gramm-Leach-Bliley. I do not want to sit here and say,
    ``I told you so,'' whether we are talking about Enron or all
    the promises of like, ``Let's follow the industry, this is
    where the insurance and banks want to go. We need to do this
    because this is where the industry is going.'' And you heard
    that in the earlier testimony, this is where the industry is
    going. Well, pass Gramm-Leach-Bliley with the industry and all
    the insurance companies and the banking business. It did not
    happen.
        So I am not going to say, ``I told you so,'' Mr. Chairman,
    but I am going to plead with you to create this firewall, the
    first firewall, that really needs to say, ``This is not what
    was intended when you passed GLB and enough, members of
    Congress,'' and we were all there for those conversations, and
    specifically this was the thing that was constantly recognized
    as this was not the intention in passing GLB. Thank you, Mr.
    Chairman.
        [The prepared statement of John Taylor can be found on page
    197 in the appendix.]
        Chairman Bachus. Thank you. Mr. Taylor, I noticed that you
    had run for Congress.
        Mr. Taylor. I did. I do not know how you guys can do it.
        Chairman Bachus. I think you are well qualified.
        [Laughter.]
        Mr. Taylor. I am not a good enough fund-raiser is what I
    basically learned from that experience.
        Chairman Bachus. You can go back to Massachusetts and tell
    them that when Greenspan testified before the committee, the
    stock market dropped 200 points. While you were testifying, it
    went up 440 points.
        Mr. Taylor. As a matter of fact, I have a meeting--is that
    true, it just went up that?
        Chairman Bachus. Yes, just while you were talking. No, I
    mean--
        [Laughter.]
        It did go up.
        Mr. Taylor. Well, I want that in the record, sir. But I
    also want in the record it is Massachusetts, and all you
    Texans, Massachusetts, go home and practice that word. It is an
    important state. But I like the accent otherwise. Sorry, sir.
        Chairman Bachus. Thank you. No, you are fine.
        At this time, Mr. Bentsen?
        Mr. Bentsen. Thank you, Mr. Chairman.
        Two questions for Ms. Burleson and Mr. Edwards and Mr.
    Bailey. And I told my colleague from California after he made
    that remark about Texas that that was all right because we
    would get him back on the gas prices down the road. But the Fed
    came out with this rule in December of 2000, if I recall
    correctly. Treasury has subsequently come out with a--postponed
    until I think early next year a final rule. So the way it is
    structured under Gramm-Leach-Bliley you have to have both
    parties come up with a joint rule.
        Have your organizations or you all individually had any
    discussions with the administration on their views on this
    subject? Do you have any indication of where Secretary O'Neill
    or the Bush administration is going on this, other than just
    their delay?
        Mr. Edwards. I guess I will try to answer that, Mr.
    Bentsen, by saying at the beginning of last--at the end of
    2001, we had an indication, a strong indication from the
    secretary that he would promulgate the rule when Congress
    recessed. And that is why the legislation was introduced.
        It was coincidental, I think, that when we reached 218
    cosponsors on the bill that morning Mr. O'Neill postponed the
    ruling until the end of the year. And so I do not have any
    other reading other than I have been told keep going and get
    the legislation passed, as Mr. O'Neill told me personally, ``I
    would like to see congressional intent.''
        And so I thought, and as someone who has been around a
    little bit of legislation, that when we reached the
    congressional intent of at least 218 members of this body that
    that was a pretty good message. And so the message was that we
    would postpone any further activity on it until the end of the
    year. I take that as he is waiting for this body and the Senate
    to pass the legislation. That is the only way I can answer it.
        Ms. Burleson. No. I have not had any conversation at all
    with the administration about it.
        Mr. Bentsen. Mr. Taylor, I am going to stray off the path
    here a little bit, but since you raised the subject of CRA and
    since we are talking about Gramm-Leach-Bliley, I recall that
    you and I sat on a panel together shortly after it was adopted
    back in, I guess that was, 1999. And I know you raised
    significant concerns about the CRA provisions within the bill.
        Over the two or three years that the law has been enacted
    and the rules have been promulgated with respect to CRA, has
    your analysis indicated a decline in CRA activity by covered
    institutions? Has it been flat? Have your worse fears been
    confirmed? What have you found?
        Mr. Taylor. Yes. Unquestionably, we have found what we
    feared the most. There is a real malaise, I think, in the
    attitude of lenders as it relates to CRA in a way that we have
    not seen in a long time, in a long time. And it predates the
    change in the White House. It really, I think, is very much
    connected to the sense that there is not--you need not be
    concerned and that banks, for the most part, have sort of
    figured out how to get by.
        And so what you are seeing is a lot of satisfactory ratings
    from the examiners. You are seeing not as many outstanding, and
    you are seeing a great inflation which starting in 1992 when 11
    percent of all financial institutions received a failed rating,
    dropped down now to 2 percent or less, depending on the agency
    that is regulated.
        But more importantly, just from all of our members and the
    experiences they are having in discussions with banks in making
    investments in underserved neighborhoods and working class
    people, they are all reporting back to us that there is a new
    attitude. And, you know, there are exceptions to that, sir, but
    for the most part I would say that that is the sad picture that
    is developing.
        Mr. Bentsen. Thank you, Mr. Chairman.
        Chairman Bachus. In approaching this hearing, we had
    several rumors that we were not going to allow certain people
    to testify, certain interest groups, and that we were going to
    knock people off the panel and they have been invited and
    uninvited. And so as we were just doing this hearing a few
    minutes ago I wanted to make sure that did not happen and I
    wrote a note to the staff which said that, ``Did we knock
    anybody off the panel?'' And the note I got back was, ``No, but
    we still can.''
        [Laughter.]
        I am not sure which one we want to knock off.
        Mr. Sherman. Mr. Chairman, when you say the panel, do you
    mean the panel down there or the panel up here?
        Chairman Bachus. I do not know if it was the first panel or
    the second panel. But both panels, no one was knocked off. We
    do not do it at this late time.
        I have a letter that I want to introduce for the record,
    and I will do so at this point. It is from the Association of
    Real Estate Licensed Law Officials. And it simply says about
    the proposed rule, I will just quote two or three sentences:
    ``Failure to require bank real estate sales to be subject to
    state and real estate license laws opens the possibility for a
    rollback of strong consumer protection laws currently in place.
    And then they ask the question and they say that there are
    presently no federal legislation or regulatory bodies designed
    to protect the consumer from an unlicensed, federally sanctions
    real estate sales.
        And in fact the current situation with the insurance
    industry claiming federal preemption over state consumer
    protection laws causes us a great concern over the future of
    real estate commissions to protect the public interest. It is
    therefore this association's position that any regulation must
    require all entities selling real estate in the state to be
    subject to the jurisdiction of state laws and regulations
    pertaining to real estate. Federal preemption could clearly
    lead to a rollback of protections afforded to consumers in
    this, the biggest transaction of most people's lives.''
        And I would like to associate myself with those remarks. We
    have found that preemption could in fact have some dangerous
    consequences.
        [The following information can be found on page 220 in the
    appendix.]
        Mr. Sherman?
        Mr. Sherman. Well, it is a shame that this hearing has been
    so brief. I look forward to tomorrow's session. You all will be
    back here.
        Ms. Holland, you bring up some interesting points. A lot of
    people have a lot of takes on the thrift crisis of the 1980s.
    My take on it was that you had a chance to get federal
    insurance, on the one hand, and experience the risks, the joys,
    the expectations of enormous profits--did I mention risks--of
    real estate development.
        And as you point out, in the shopping center business,
    which you clearly understand very well, many of the risks and
    joys of ownership and development seem to be experienced by the
    realtor/manager. A 5 percent share of all the revenue, that is
    better than being a 5 percent owner, which after all is just a
    5 percent interest in the remaining 95 percent.
        And what concerns me is that banks we count on them to do
    something that is very awful and that is turn people down. That
    is a role they play. They play it all too well, some of my
    friends. They play it with individual home buyers. They play it
    with--I mean I am sure most of the members you represent have
    all been turned down. And, thank God, or there would be a
    shopping center everywhere.
        [Laughter.]
        It is easier to turn people down. They come in, they want a
    loan, and maybe they are willing to pay--I mean you measure
    what they are willing to pay over what somebody else is willing
    to pay for that money in basis points. I mean most people out
    there in the real world did not know you could measure
    percentages in percentages.
        And so to be talking about not--because the profit margin
    is not, say you make an 8 percent loan, 8 percent. Well, it is
    a 8 percent loan or cost of funds is 7 percent. That is a 1
    percent payoff for the bank. You are talking about real estate
    commissions that are 5 and continue on after that, and I wonder
    whether--now, if you were doing this deal with a private
    mortgage banker and that mortgage banker let you build a lot of
    bad unsuccessful shopping centers and your member went broke
    and the mortgage banker went broke, I would be very sad, but
    the Treasury would not lose a penny.
        On the other hand, regardless of the legal niceties we
    discovered in the 1980s that when the insurance fund is hit it
    is a hit to all taxpayers and all consumers, I just wonder
    whether making loans under those circumstances could be
    regarded as a low risk, low upside risk, low downside risk
    business?
        Ms. Holland. Making loans in the context--
        Mr. Sherman. Making loans knowing that you are going to get
    the realty contract, you are going to be--I mean you described
    two situations where you were involved in renting the
    individual stores, and I think you ascribed it at a 5 percent
    revenue share. And then a second activity that you also
    described involved in management. Perhaps you could clarify
    that as well.
        Ms. Holland. Sure.
        Mr. Sherman. But you described two pieces which seemed not
    to be measured in basis points but rather mentioned in full
    percentages.
        Ms. Holland. Exactly. There is no question that if a bank
    is presented with a proposal from a developer to do a
    construction loan, so all we have is dirt, we have nothing to
    mortgage yet, and they are looking at a project and they know
    that from this developer not only are they going to get to lend
    money to him at a higher than mortgage rate because it is a
    riskier proposition, there is nothing to mortgage yet, but they
    are also going to receive at the end of the day, once the
    project is refinanced with a mortgage, once it is completed and
    it is leased, then the mortgage lender comes in and assumes the
    mortgage and buys out the construction financier that that same
    bank that issued that construction finance, that took that
    initial risk is going to receive 5 percent of the gross revenue
    as a management fee and 3 percent of the leasing income as a
    leasing fee, as a broker that--
        Mr. Sherman. Okay. So banks today they make the
    construction loan, that is at a higher than average interest
    rate.
        Ms. Holland. No question.
        Mr. Sherman. Then they aspire to make the permanent loan,
    in effect, to take themselves out of the first loan or--
        Ms. Holland. Some do, generally, though, in a bigger
    project representative it would be either a life insurance
    company or the collateralized, mortgage-backed security market
    that would create the mortgage.
        Mr. Sherman. So there is a first loan, there is going to be
    a second loan the bank may or may not be interested, and then
    you mention a 3 percent and a 5 percent fee. Can you describe
    which of those two--
        Ms. Holland. Sure. How we see the proposed rules affecting
    our business is that once a bank can participate in both the
    brokerage, meaning leasing to the stores, as well as the
    management of the property, they are going to receive fees for
    that work. And, generally, in the industry, they will receive a
    5 percent management fee on the gross revenue of the shopping
    center, as a well as a 3 percent brokerage fee on the leases
    that they sign with stores.
        Mr. Sherman. So there is a 5 percent fee in your business
    for the person that hires the janitor and makes sure that the
    place is clean, another 3 percent fee that shows the space to
    Judy's Dresses and tries to say, ``Hey, you ought to lease this
    spot here and do not worry about that Macy's competition.
        Okay. That would be, in banker's terms, 800 basis points.
    Okay. Go ahead.
        Ms. Holland. And so, obviously, the credit analysis that a
    bank would engage in, if they were not going to participate in
    the process of the final projects, it is much more circumspect.
    It is a much more jaundiced eye. It is questioning, well, you
    know, there is a shopping center across the street that has a
    lot of the same tenets that you are talking about putting in
    here. Why is yours going to succeed and not theirs?
        But when the bank knows that we are going to get 800 basis
    points at the end of the day on the final project, and we are
    going to get it as long as this project continues to do
    business with us, because Leases have come up for renewal,
    tenants move, they go out of business. Obviously, that analysis
    probably goes to nil, I would imagine.
        Mr. Sherman. My greatest fear before today was that a
    federally insured deposit institution would make a home loan to
    my former brother-in-law. My greatest fear now is that they are
    going to make a shopping center development loan, which poses a
    much greater risk to the insurance fund.
        I have run out of questions, but clearly we want--where we
    take as taxpayers the risk, we want banks to be saying yes or
    no without another side to the same company, always pushing for
    a yes, a side that could be far more lucrative just as we saw
    the stock brokerage firms. The stock brokerage does not make
    any money, what makes money is the underwriting and the
    consulting. We might be in a circumstance where lending money
    to shopping centers is just the loss leader with the emphasis
    on lost and the expected profits and in the management fees and
    the leasing fees. And thank you.
        Chairman Bachus. Mr. Gutierrez?
        Mr. Gutierrez. Thank you much, Mr. Chairman. Appreciate it.
    I want to first say that I am happy you called a hearing. Thank
    you very much. Look forward to having a full committee hearing
    on this legislation, which I have cosponsored.
        Chairman Bachus. You were not here but this hearing
    actually was not my idea. It was Chairman Oxley's.
        Mr. Gutierrez. Well, I want to thank Chairman Oxley, for
    the record then.
        I guess, you know, one of the things that we can bring to
    Congress, which I hear many members bring to Congress, is their
    own personal experiences. And it seems to me that if there is a
    somebody that understands the community, and it needs to
    understand that community in order to thrive in that community
    as a real estate broker, a real estate agent.
        And they bring with them a plethora of insurance and other
    products in order to make that fail, much like when you buy a
    car they might have insurance there, they might have a repair,
    they might have a warranty, they might do a number of things.
        And so it has been my experience that they understand
    communities. Are there bad real estate agents? Sure. There are
    bad bankers, there are a lot of bad people in a lot of
    different areas of our great society. But for the most part, I
    think they are an integral part of a community, and they
    understand what goes on in that community. And I am very, very
    concerned about just what happens when we continue to dilute
    the Community Reinvestment Act.
        And so I just have one follow-up question that I came down
    here to ask Mr. Taylor. I was listening to your testimony.
    Fortunately, this hearing is being televised so I could stay in
    my office and watch everybody's testimony and I read your
    testimony. But you said something when I got here that--you
    said that financial institutions, to paraphrase, feel less and
    less warm and anxious and having to be responsive to CRA.
        And you also spoke when you were talking in your testimony
    about Wells Fargo and their relationship with Long & Foster, I
    believe it was. Given what you know about financial
    institutions and their current relationship and financial
    institutions and their prospective relationship with real
    estate, what do you think the impact would be on CRA and
    investment in low-and moderate-income communities?
        Mr. Taylor. Right. Let me start by, again, reiterating this
    chart in which we were able to look at the sort of snapshot of
    those real estate firms that are in, essentially, through these
    hybrid relationships, these special ventures they have created
    through working with mortgage companies, what the record has
    been thus far compared to mainstream financial institutions.
    And it is not good as it relates to working class people, and
    it is not good as it relates to minorities or people of color.
        You know, the chairman mentioned that I ran for Congress.
    That is how I spent the beginning of my summer vacation. I ran
    for Congress in Moakley's seat, who is a great man, and I
    learned a lot through that, and I have a newfound respect for
    all of you. Sad that you have to spend so much of your time in
    fund-raising and that you have to run every couple of years. It
    just seems like you have to--it is just one continuous campaign
    with apparently some legislation in between.
        But I am saying this because I think the regulators in the
    White House, in the executive offices really take their cues as
    it relates to CRA from your folks, how important or how
    unimportant it is to you. I felt we took it on the chin with
    Gramm-Leach-Bliley. We allowed the insurance industry without
    having any safeguards or even having them report to see to it
    that they fairly allowed policies to go to communities of color
    and to working class Americans, just a report so that we can
    get an idea of how those policies are going out.
        We have had a stiffening, in my opinion, in the regulatory
    agencies that cries out for this Congress to be vocal again
    about the importance for fair credit and for access to credit
    and capital and for treating all Americans fairly and allowing
    them to participate in the capitalist system. It is not coming
    from anyplace else but from here and from community leaders.
        And as I sit here in the audience and I listened, I mean I
    listened to the panels and we finally get a, one community
    representative. I do not know if I was on that list to be
    scratched but thank you for not scratching me. But, you know,
    when I ran for Congress, I talked to a lot of people, and they
    have a lot of faith in you folks and a lot of faith that you
    are here representing their interests and what you really care
    about is what is important to American consumers. And I sit
    here and what I hear is an industry, two major industries like
    dueling packs.
        You know, I am sitting there beside the head of the ABA and
    the head of the NAR and these massive packs that have massive
    influence, and I am listening to their representatives on
    either side fight this battle, and all of them talk about
    consumers, when all it is about is about getting wealthier and
    finding ways.
        I mean interestingly enough, it seemed like the real estate
    people who really wanted to do this were the well-healed real
    estate people who were perhaps ready for an acquisition by a
    financial institution. I do not know, but it was all about
    money and making more money and not about what was in the
    interest of the consumers, and they really rely upon you as the
    people who are going to look for that.
        Because it was not at this table, with all due respect to
    the people in the industry, and I think you have done well
    representing the industry, we need more people speaking for
    consumers here so that you are in fact hearing how this relates
    to what is most important, and that is ultimately what is the
    impact on the consumer?
        I am sorry I am the sole rep, I am sorry I do not have the
    skills and talent to absolutely convince everybody here that we
    should go out and pass this bill tomorrow. But you asked me a
    question and I am really answering it because what I am saying
    is that I think CRA, there is a bill in Congress now, and
    several members of this committee have signed on to it--35
    members of Congress--to expand CRA to the affiliates and
    subsidiaries of financial institutions.
        If the real estate community got into this business, by the
    way, as an affiliate, they would not be reported under CRA.
    They would not have any obligation. As a subsidiary, the bank
    would get to choose whether to count the actions and
    performance of the real estate firm for CRA purposes. So if it
    works in their favor, ``Yes, well, we will count--this is what
    our real estate firm did, for CRA purposes. I mean it is like
    allowing someone to sort of effect their grade.
        And so, Mr. Gutierrez, I apologize for the long answer, but
    there is a bill in Congress that would make a great, great
    difference and create the kind of level playing that really
    consumers desperately need, that would bring private mortgage
    companies into this arena of making sure that they are not
    discriminating and ignoring LMI, low-moderate-income areas.
        It would allow us for the first time to get a really good
    view on small business lending and what is happening with
    financial institutions as it relates to what small businesses
    are, who they are making their loans available to by income, by
    census check, by gender, by race, for the first time.
        And the only thing prohibiting this at this point and the
    only one standing between that being a reality is my friend,
    Alan Greenspan, Regulation B. And he has told me personally if
    you guys would do it, he would go along with it. But he
    believes that is the job of Congress. So I do not know if he
    has passed that message along to you but allow me to be the
    messenger for my good friend, Alan Greenspan.
        Mr. Gutierrez. Let me just, because the time is up and I
    know that the chairman has been very gracious in extending the
    time and I am happy he has, let me just say that the bill was
    introduced by Mr. Barrett of Wisconsin and it has 35 cosponsors
    of the bill, so now people know at least we are not in
    collusion with one another and asking each other's questions,
    because it is clear you did not know who was introducing the
    bill. But we are working on the bill because CRA is important
    to us.
        And while I support the real estate industry in this
    matter, I wanted to come down not to ask the real estate
    industry because I know they are very well represented because
    they get to come by my office and I greet them warmly and
    attentively every time they come and meet with me, including my
    own real estate broker back in the city of Chicago who does a
    great job. But I wanted you to have an opportunity that I know
    is not always afforded the proponents of CRA. I want to thank
    you for your work and say that we are going to continue to do
    the work.
        And just one last question. Is there something that the
    public that might be watching or that members of Congress that
    might be interested, is there a bible on CRA that I could go
    and say,``Oh, I want to look at Chicago and I want to look at
    Boston, Massachusetts or I want to look at L.A.''--just I had
    an argument with my wonderful staff person, and I told her you
    were from Massachusetts, but now she believes me--that we could
    look at and kind of look at what their performance on CRA is?
        Mr. Taylor. Yes. First off, I do want to point out that I
    am extremely aware and appreciative of your having sponsored
    that bill and at least from what my staff tells me they
    actually provided input. They really did not do that, but in
    any event, yes, there is. We regularly analyze the top lenders
    in America and we try to look at it over a good period,
    anywhere from three to four years. And in fact we have done
    that every three to four years, and we can tell you which
    lenders are doing what by race, by income in all the major
    cities, major markets in America, and we would be glad to
    supply that information to you.
        Mr. Gutierrez. Thank you.
        Mr. Taylor. You are welcome.
        (AFTER 6PM)
        Mr. Gutierrez. Thank you, Mr. Chairman, even though you did
    not want the hearing. Thank you very much even more.
        Chairman Bachus. Thank you. And, actually, I will say that
    the majority invited three witnesses and the minority invited
    two witnesses. Mr. Taylor, you are one of our witnesses.
        Mr. Taylor. Cool. Thank you.
        Chairman Bachus. And when I was talking about knocking
    someone off the panel, we were trying to just keep five or six
    on a panel. We were not talking about any one certain person. I
    really actually said that for the benefit of one person in the
    audience who was afraid I was going to knock one of their
    witnesses off, but I did not. It was not on this panel either.
        Mr. Taylor. Mr. Chairman, I was looking for the opportunity
    to actually agree with Mr. Barr, because I have not had that
    experience in that past.
        Chairman Bachus. No, and you will not again.
        [Laughter.]
        Mr. Taylor. I am afraid that might be true.
        Chairman Bachus. Let me ask a few quick questions, then we
    will adjourn. I know some of you probably have travel
    arrangements. One of the strong arguments for allowing banks
    into real estate, and I mean one that I think has some logic to
    it, is that you have these, I guess you call them, integrated
    financial services companies, like Long & Foster--is that the
    name--Coldwell Banker, Long & Foster, and they are doing all
    these services.
        I mean they are doing pretty much what they describe, one-
    stop shopping where they do the title insurance, they do the
    mortgage financing, real estate brokerage services all in one
    shop. And if they can do that, why not let the banks in it? I
    mean aren't they basically doing the same thing a bank would
    do?
        Mr. Edwards?
        Mr. Edwards. Mr. Chairman, I in my past years owned a
    mortgage company, and I will admit to you that I started off as
    a commercial banker and have been involved in two bank boards.
    I think I understand the difference between the two and just to
    say to you, yes, some of these integrated firms like Prosperity
    Mortgage are offering mortgage services. However, they are
    under, as Mr. Eastment talked about, they are under RESPA rules
    which requires full disclosure.
        And I will add to that when I had a mortgage company and I
    borrowed money from a bank, loaned that money, whether it be
    Wells Fargo or First Tennessee Bank of Memphis, when I made a
    loan, as Mr. Chairman was talking about, I was responsible and
    they are responsible for those funds. I did not make those
    loans with insured deposits.
        And so they are at risk when they do that, and I was at
    risk, and if it did not work out, I made a 30-year loan with a
    30-day warehouse loan, and there is a certain amount of risk
    involved in that that the federal government or the taxpayers
    were not at. So that form of business is an approved business
    model today that, as we pointed out, is working.
        But I am not in my business today--if they were in the
    banking business as a commercial broker, our business requires
    a lot of borrowing capital. And so what you would place us
    involved in is we would be now very similar to our folks at the
    shopping center, my firm would be borrowing money from my
    competitor. And I am sorry, that is not a level playing field
    that I am accustomed to.
        Now, if you in fact want to hand over, and I do not think
    you should, and insure it, hand over a federal bank charter to
    our commercial real estate firm where we are on the same
    capital level with First Tennessee Bank, then that is something
    else.
        But to answer your question directly, I think there is a
    great deal of difference between us being responsible for that
    capital and how it is paid back and the taxpayers.
        Chairman Bachus. Let me ask Ms. Holland, one thing that
    obviously--the scenario you outlined is really disturbing, but
    do you have to share all that information with the bank to get
    financing? Do you have to tell them about who you have lined up
    to go in the shopping center or who you are negotiating with or
    who you have a--do you have to do all that?
        Ms. Holland. Yes. Actually, at the construction finance
    stage, where the project is a one-dimensional photo with
    colored trees and beautiful bushes and well-dressed people
    walking by into the stores, you most definitely have to tell
    the bank who your tenants are going to be, what your expected
    rents are going to be, what the demographics are in the area
    where you are planning on building the shopping center, why
    those demographics support the project.
        Because the bank at that stage currently, under current
    law, where they are not our competitors, knows that unless
    there is a life insurance company or the capital markets in the
    form of a CMBS that is going to take them out on opening day
    with all of their fees and attendant higher levels of interest
    than a standard mortgage, they are not interested in building
    your shopping center for you.
        Chairman Bachus. So you in fact would be sharing your
    information with someone who would be in competition and that
    information would be valuable to them.
        Ms. Holland. Most certainly, particularly under the
    scenario where I am a self-developer, self-manager, self-
    lessor, and if I have to go to the bank to say that this is
    going to be my project, and the bank says, ``Well, gosh, we
    could work with Liz or we could work with Larry and Larry is
    going to give us the brokerage and the management. Let's tell
    Larry about Liz's great project.''
        I will say this: Chairman Oxley asked that we have this
    hearing, and as I stated at the start of the hearing, this was
    not my idea of a reasonable time to have the hearing. I will
    say that I stand corrected in that I think this has been a very
    good hearing. I think that there have been issues raised on
    both sides that had not perhaps been thought out. And I will
    leave this hearing with some new concerns that I did not have
    going in with this proposal.
        Maybe any of the members that attended any part of this
    hearing or read the transcript of this hearing and I would
    think the regulatory body that proposed this rule that this
    will be reason for some further question and deliberation on
    their part. So I think the hearing has in fact confirmed the
    wisdom of the chairman of the full committee's desire to have a
    hearing at this time.
        I appreciate your attendance at the hearing. I do have
    other questions but the lateness of the hour I am going to
    submit them, not only to this body. The one thing we did not go
    into, did not get into this hearing is who would regulate this
    process. Would these individuals be--I mean there is not a
    federal regulator. Who would they be regulated by? And that
    question has not been asked.
        Mr. Sherman. Mr. Chairman, if I can just commend you for
    holding these hearings and saying the only thing more exciting
    than a hearing on this bill would be a markup on this bill.
        Chairman Bachus. I also do think that the OCC, maybe a real
    estate commissioner would be--certainly we should hear
    testimony from them at a later date before we proceed.
        Mr. Edwards?
        Mr. Edwards. I think you had the letter from the chairman
    of ARELLO, which is the Association of Real Estate
    Commissioners. I do think it would be a good idea, as a
    witness, to have possibly one or two state real estate
    commissioner, because I have had several of them come to say,
    ``This is an opportunity for unlicensed brokerage.''
        But I think that is an area that ought to be looked into,
    because I think that your letter that you received points out
    who is the regulator, who would be? Would it be the OCC or
    would it be the Tennessee Real Estate Commission? I do not know
    that we have answered those questions, nor would we know as an
    industry, if it were done tomorrow, what would go next. Who do
    you report to? So I think that that would be a good idea. Thank
    you.
        Chairman Bachus. Okay. At this time, we will recess and--
    well, not recess, we will adjourn the hearing.
        [Whereupon, at 6:26 p.m., the subcommittee was adjourned.]

                                A P P E N D I X

                                 July 24, 2002
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