[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








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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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