[Senate Hearing 107-982]
[From the U.S. Government Publishing Office]
S. Hrg. 107-982
IMPACT ON CONSUMERS OF BANK AND FINANCIAL
HOLDING COMPANIES' ENGAGEMENT IN REAL
ESTATE BROKERAGE AND PROPERTY MANAGEMENT
=======================================================================
HEARING
before the
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
of the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
ON
THE EXAMINATION OF BANKING AND FINANCIAL HOLDING COMPANIES' ENGAGEMENT
IN REAL ESTATE BROKERAGE AND PROPERTY MANAGEMENT
__________
MAY 23, 2002
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
89-250 U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2003
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
PAUL S. SARBANES, Maryland, Chairman
CHRISTOPHER J. DODD, Connecticut PHIL GRAMM, Texas
TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York WAYNE ALLARD, Colorado
EVAN BAYH, Indiana MICHAEL B. ENZI, Wyoming
ZELL MILLER, Georgia CHUCK HAGEL, Nebraska
THOMAS R. CARPER, Delaware RICK SANTORUM, Pennsylvania
DEBBIE STABENOW, Michigan JIM BUNNING, Kentucky
JON S. CORZINE, New Jersey MIKE CRAPO, Idaho
DANIEL K. AKAKA, Hawaii JOHN ENSIGN, Nevada
Steven B. Harris, Staff Director and Chief Counsel
Wayne A. Abernathy, Republican Staff Director
Martin J. Gruenberg, Senior Counsel
Linda Lord, Republican Chief Counsel
Sarah Dumont, Republican Minority Professional Staff
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George E. Whittle, Editor
______
Subcommittee on Financial Institutions
TIM JOHNSON, South Dakota, Chairman
ROBERT F. BENNETT, Utah, Ranking Member
ZELL MILLER, Georgia JOHN ENSIGN, Nevada
THOMAS R. CARPER, Delaware RICHARD C. SHELBY, Alabama
DEBBIE STABENOW, Michigan WAYNE ALLARD, Colorado
CHRISTOPHER J. DODD, Connecticut RICK SANTORUM, Pennsylvania
JACK REED, Rhode Island JIM BUNNING, Kentucky
EVAN BAYH, Indiana MIKE CRAPO, Idaho
JON S. CORZINE, New Jersey
Michael Nielsen, Republican Professional Staff
(ii)
?
C O N T E N T S
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THURSDAY, MAY 23, 2002
Page
Opening statement of Senator Johnson............................. 1
Opening statements, comments, or prepared statements of:
Senator Bennett.............................................. 3
Senator Reed................................................. 4
Prepared statement....................................... 35
Senator Allard............................................... 4
Senator Crapo................................................ 4
Senator Santorum............................................. 5
WITNESSES
Tom Murphy, President, South Dakota Association of
REALTORS', Sioux Falls, South Dakota,
REALTOR', Chell REALTORS', representing
the National Association of REALTORS'............... 6
Prepared statement........................................... 35
Response to written questions of:
Senator Reed............................................. 105
Senator Miller........................................... 113
James E. Smith, President, American Bankers Association, Chairman
and Chief Executive Officer, Citizens Union State Bank and
Trust Company, Clinton, Missouri............................... 8
Prepared statement........................................... 47
Response to written questions of:
Senator Reed............................................. 117
Senator Miller........................................... 119
John Taylor, President and Chief Executive Officer, National
Community Reinvestment Coalition, Washington, DC............... 10
Prepared statement........................................... 65
Howard W. Hanna, III, Vice Chairman, The Real Estate Services
Providers Council, Inc. (RESPRO'), Principal and
former Chairman, The Realty Alliance, President and Chief
Executive Officer, Howard Hanna Real Estate Services,
Pittsburgh, Pennsylvania....................................... 13
Prepared statement........................................... 76
Additional Material Supplied for the Record
Statement of the American Homeowners Grassroots Alliance......... 121
Statement of The Financial Services Roundtable................... 123
Letter submitted to Senator Tim Johnson, by CCIM Institute,
Consumer Union, Institute of Real Estate Management, National
Association of Auctioneers, National Association of Home
Builders, National Community Reinvestment Coalition, National
Fair Housing Alliance, and National Association of Industrial
and Office Properties, dated May 20, 2002...................... 127
Letter submitted from Martin Edwards, Jr., CCIM.................. 128
(iii)
IMPACT ON CONSUMERS OF BANK AND
FINANCIAL HOLDING COMPANIES'
ENGAGEMENT IN REAL ESTATE BROKERAGE
AND PROPERTY MANAGEMENT
----------
THURSDAY, MAY 23, 2002
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Subcommittee on Financial Institutions
Washington, DC.
The Subcommittee met at 10:05 a.m. in room SD-538 of the
Dirksen Senate Office Building, Senator Tim Johnson (Chairman
of the Subcommittee) presiding.
OPENING STATEMENT OF SENATOR TIM JOHNSON
Senator Johnson. The Subcommittee on Financial Institutions
will come to order.
I want to thank you for joining us for today's oversight
hearing to discuss the impact on consumers of national bank and
financial holding companies' engagement in real estate
brokerage and property management.
Welcome, Ranking Member Bennett, who I am advised will be
with us very soon, and my colleagues, and thank our
distinguished panel of witnesses for taking the time to help
the Financial Institutions Subcommittee consider this important
issue.
Over the past several months, the consumer real estate
market has served as an anchor in stormy economic seas, and I
have been impressed by the resilience of the marketplace. It
has been clear for some time the critical role that
homeownership plays in creating strong communities, strong
families, and helping individuals achieve the American Dream.
We have come to understand, though, the additional role that
consumer real estate plays in our economy.
For these reasons, it is critical that we proceed with
caution with any changes in the real estate market. At the same
time, however, under Gramm-Leach-Bliley, Congress did intend to
create flexibility for the financial services industry to
innovate. We should be mindful of the manner with which we
proceed because the potential change provides an early test of
the Gramm-Leach-Bliley regulatory process.
Today, it is not our job to discuss any particular
proposal, but, rather, to step back to discuss the general
issue of what impact financial holding company and national
bank affiliate entry into the real estate brokerage and
property management businesses might have on American
consumers. It is far too easy to lose sight of why this debate
is important. We need to keep in mind that our objective is to
keep America strong through a strong economy, strong
communities, and continued opportunity for all of our citizens
to achieve the dream of homeownership.
With that, it is an honor to introduce our panel of
excellent witnesses, who have clearly spent considerable time
and energy producing some very thoughtful testimony. We
appreciate their willingness to appear before us today, and I
will introduce three of the four guests, and then yield to
Senator Santorum, when he comes in shortly, to introduce Mr.
Hanna, who hails from the State of Pennsylvania.
First, I am pleased to introduce a fellow South Dakotan,
Mr. Tom Murphy, of Sioux Falls. Tom, who is here today on
behalf of the National Association of REALTORS', is
the President of the South Dakota Association of
REALTORS', which has been serving my home State for
over 50 years.
Tom is affiliated with Chell REALTORS' of Sioux
Falls, and is a graduate of the REALTORS' Institute.
Tom has been, and is very active at the national, State and
local REALTOR' levels. He is a past State
Governmental Affairs Chairman of the South Dakota Association
of REALTORS' and is serving on the grievance
committee of the Sioux Falls Board of REALTORS' and
has served in numerous task forces and work groups at the State
and local levels.
We appreciate Tom taking time from both his job as a
REALTOR' and the father of three to join us here
today. Tom and his wife, Dr. Carla Murphy, of Physicians
Laboratory of Sioux Falls, are widely recognized community
leaders, and Tom's willingness to travel to Washington bears
out his commitment to his community and to his colleagues.
Next, we welcome Mr. James Smith, President of the American
Bankers Association. Mr. Smith is Chairman and Chief Executive
Officer of Citizens Union State Bank and Trust in Clinton,
Missouri. Mr. Smith has a long and distinguished career in
banking, having entered that profession in 1967. I would also
note that there appears to be a link between baseball and
banking. Like the distinguished Senator from Kentucky, Mr.
Smith played professional baseball in his past life, was part
of the New York Yankees from 1963 to 1966, and we have no doubt
that he has been practicing his pitch for today's hearing.
[Laughter.]
During his service with the ABA, Mr. Smith has chaired the
communications council, the government relations council, the
bankers electronic network, and task force on government
relations grassroots.
Mr. Smith, thank you for being with us today.
Mr. Smith. Thank you.
Senator Johnson. Our next guest and witness is John Taylor,
President and Chief Executive Officer of the National Community
Reinvestment Coalition, whose stated mission is to promote
economic justice.
With over 820 national, regional, and local organizations,
the NCRC has led the effort to increase low-income and minority
access to credit and capital.
I would like to thank you, Mr. Taylor, for your
organization's hard work on behalf of so many Americans. Mr.
Taylor has worked in the community development and reinvestment
industry for over 24 years, and in 2001, ran for the U.S.
Congress to fill a vacancy in the 9th Congressional District of
Massachusetts.
Mr. Taylor has been widely recognized for his commitment to
community service and in 1996, received a presidential
appointment to the community development financial institutions
advisory board. He also serves on a number of boards and has
received numerous awards and citations over the years for this
work in economic justice efforts, including the Martin Luther
King, Jr. Peace Award, two Congressional citations awards from
the Congress, and many others.
Mr. Taylor, thank you for taking time to appear with us
today.
Our final witness is Mr. Howard Hanna, from Pittsburgh,
Pennsylvania. And I will defer to Senator Santorum to introduce
Mr. Hanna.
But before I yield, I would ask that a written statement
prepared by the Financial Services Roundtable and the American
Homeowners Grassroots Alliance be included in the record. And
we will proceed from there.
We will await Senator Santorum's arrival for the
introduction of Mr. Hanna, and I would recognize my Ranking
Member, Senator Bennett, for any introductory comments that he
might choose to make.
STATEMENT OF SENATOR ROBERT E. BENNETT
Senator Bennett. Thank you very much, Mr. Chairman. I
appreciate it, and I apologize for being a minute or two late.
The Gramm-Leach-Bliley Act was a culmination of, I guess,
20 years of effort in the Congress to try to resolve the
question of how banks and other financial institutions would
operate in a nondepression atmosphere.
The Glass-Steagle was drawn up in a very different economic
circumstance. I remember as a Member of this Subcommittee when
Don Riegle was the Chairman, they were talking about it. When
Al D'Amato was the Chairman, we made a number of runs at trying
to deal with it.
It was not until Phil Gramm became the Chairman that we
finally got a resolution, at least momentarily, of many of the
issues of banking and commerce.
Now we are seeing the first test of regulations that have
been proposed under Gramm-Leach-Bliley. I think it is very
timely that we have the opportunity before the Congress to
examine all the implications of what has been proposed.
So, I congratulate you on holding the hearing. I look
forward to hearing from the witnesses and appreciate their
willingness to come and share with us their views and attitudes
on this very important subject, as I say, the first real test
of revisiting, the possibility of revisiting, Gramm-Leach-
Bliley that we have had since that landmark legislation was
passed.
Thank you, Mr. Chairman.
Senator Johnson. Thank you, Senator Bennett.
Senator Reed.
COMMENTS OF SENATOR JACK REED
Senator Reed. Mr. Chairman, I just want to commend you for
holding this hearing. It is a very important topic for both the
banking industry and the real estate industry. And I would like
to submit my formal statement to the record.
Thank you, Mr. Chairman.
Senator Johnson. Very well.
Senator Allard.
STATEMENT OF SENATOR WAYNE ALLARD
Senator Allard. Mr. Chairman, I would like to thank you for
convening this hearing.
As my colleagues know, this is an issue that I have
followed very carefully. I appreciate the opportunity to gather
more information.
Last year, I introduced Senate bill 1839, the Consumer
Choice in Real Estate Act of 2001. This bill would clarify
Congressional intent that real estate brokerage and management
are not financial activities and would therefore retain the
separation of commerce and banking that we intended during the
consideration of the Gramm-Leach-Bliley Act in 1998.
The Gramm-Leach-Bliley Act closed the unitary thrift
loophole that allowed a single savings and loan to be owned by
a commercial entity. This clearly established that banking and
commerce were not to mix.
Congress explicitly defined several functions to be
financial in nature or incidental to finance to clarify the
separation. Real estate management and brokerage services were
not defined as financial services.
Congress already established a clear position regarding
banks' involvement in real estate management and brokerage
activities. My bill would reiterate that prohibition. I believe
that we should not permit Federal regulators to preempt the
intent of Congress.
The real estate and banking industries have served America
well, and I believe that the current system provides consumers
with many important options. I know that the regulators
received many letters during the comment period and I commend
them for taking the time to allow all interested parties to
comment and for their pledge to carefully review all comments.
I believe that this hearing is a good opportunity to
continue the dialogue on the matter of banks' involvement in
real estate management and brokerage. I know that our witnesses
will have very strong viewpoints and I look forward to their
testimony.
Thank you, Mr. Chairman.
Senator Johnson. Thank you, Senator Allard.
Senator Crapo.
STATEMENT OF SENATOR MIKE CRAPO
Senator Crapo. Thank you very much, Mr. Chairman. I too
appreciate your holding this hearing. In fact, I think it was
more than a year ago that I asked the Subcommittee to hold a
hearing, and I appreciate the fact that we are holding one, and
it is interesting that it is still timely.
The Treasury and Federal Reserve have seen fit to delay
their rulemaking on this matter. I do not know whether that is
a good thing or a bad thing. But at least it gives this
Subcommittee time to hold this hearing and to evaluate the
issues.
When I served in the House, I was a part of the effort to
review these issues. As I was elected to the Senate and on the
Banking Committee, I was a part of the Gramm-Leach-Bliley
effort.
As a part of that, I feel that we should let the law work,
but also, oversee the law to make sure that it does work. And
if this hearing can give us, as well as the Treasury and the
Federal Reserve, guidance on what Congress intended and what we
think is the appropriate direction which the regulations should
take, then so be it.
But, for me, this is going to be an informational hearing.
I want to hear the arguments on both sides laid out. I want to
be able to compare those arguments to what we should achieve in
the legislation, and then determine whether it is appropriate
for Congress to take any further action at that point.
So, again, I thank you for this hearing.
Senator Johnson. Thank you, Senator.
Senator Santorum--and I would note that we withheld
introductions of Mr. Hanna pending your arrival. We are pleased
to have you here.
Senator Santorum. Thank you, Mr. Chairman.
Senator Johnson. Any opening remarks?
STATEMENT OF SENATOR RICK SANTORUM
Senator Santorum. Let me apologize to my constituent for
having his introduction being withheld. But I appreciate you
doing so, so I would have an opportunity to introduce someone
who has been a friend of mine for a long time, from my hometown
of Pittsburgh, someone who has been just a great citizen of
southwestern Pennsylvania, who owns the largest real estate
company in southwestern Pennsylvania.
They are tremendous corporate citizens and assets to our
region and Howard Hanna, in particular, is someone who I have a
tremendous amount of respect for.
My respect has been increased in that here he is as a
REALTOR' coming and testifying on this issue, which
is not in conformity with many in the real estate profession. I
asked him whether he was bringing security to this hearing.
[Laughter.]
But he assured me that, other than Chip Roach, he was not
going to bring security.
[Laughter.]
I do commend him for his articulation on this issue. I
think he does provide a thoughtful perspective on this very
important issue. I want to say that Senator Crapo's remarks are
very close to mine. I think that this is an issue that we need
to look at.
I have not come down firmly in stone on one side or the
other, but I think it is important to weigh all the evidence. I
think Mr. Hanna's perspective is a very thoughtful one and one
that I think that this Subcommittee can benefit greatly from,
and I appreciate his willingness to come forward and share that
with the Subcommittee.
Thank you, Mr. Chairman.
Senator Johnson. Well, thank you, Senator.
We will operate on a 10-minute clock during the course of
this hearing. And so, we will begin testimony with the first
witness, affording 10 minutes for each of the witnesses.
We will withhold Subcommittee questioning until after all
four witnesses have had an opportunity to either read or to
summarize their comments before the Subcommittee.
The first witness is Mr. Tom Murphy.
Tom.
STATEMENT OF TOM MURPHY
PRESIDENT, ASSOCIATION OF REALTORS'
SIOUX FALLS, SOUTH DAKOTA
REALTOR, CHELL REALTORS'
REPRESENTING
THE NATIONAL ASSOCIATION OF REALTORS'
Mr. Murphy. Good morning, Chairman Johnson, Senator
Bennett, and Members of the Subcommittee. My name is Tom
Murphy. I am a REALTOR' with Chell
REALTORS', a small residential real estate firm in
Sioux Falls, South Dakota. I am also President of the South
Dakota Association of REALTORS'. Our State
Association membership of over 1,400 REALTORS' are
engaged in helping people buy, sell, and manage real estate
every day.
I am here on behalf of the National Association of
REALTORS', which represents more than 800,000
members engaged in all aspects of commercial and residential
real estate. I want to thank you for the opportunity to testify
today on this critical issue.
It is important for all of us to take a good look at how
the economy and consumers would fare if banks are allowed into
the real estate business. That is one reason why I am glad we
have the views of consumer groups represented on this panel.
Mr. Chairman, you and your Subcommittee Members are to be
commended for examining all perspectives on this proposed
regulation--those of the little guy, as well as those of the
big guy.
As I mentioned, my business is a small, one-office real
estate firm, just like nearly 80 percent of REALTOR'
firms. My colleague from Pennsylvania here represents a large
regional, multioffice firm. Obviously, we come here today to
present different perspectives of this Nation's dynamic and
diverse real estate market.
The fact that some of our members can differ on an issue,
while respecting and supporting each other on most, is a great
example of the vitality of the National Association of
REALTORS'. It is a sign of the hearty competition of
the real estate business today.
My comments today represent the overwhelming majority of
NAR's members. Ninety-six percent of our members support the
position of the National Association of REALTORS' to
oppose this rule. Eighty-two percent of large broker/owners
support this position, while 81 percent of our members believe
we should be doing even more to stop the banks from unfairly
entering our business.
We firmly believe that redefining real estate brokerage,
leasing, and property management as financial in nature is
totally unacceptable because it mixes banking and commerce. If
the Nation's most aggressive megabanks are allowed to add real
estate to their long list of approved activities, you can be
sure that consumer choices in real estate services will shrink.
The Nation's bankers, who petitioned the Federal Reserve
and Treasury for this proposed rule, should not gain by
regulation what they failed to gain by legislation. In 1999,
Congress clearly went on record supporting the separation of
banking and commerce.
Oddly enough, the American Bankers Association strongly
supported an amendment you offered, Mr. Chairman, during the
Gramm-Leach-Bliley debate to bar unitary thrift holding
companies from engaging in commercial activities like real
estate brokerage. It now appears that members of the ABA would
like to corner the market on commercial businesses like real
estate brokerage, leasing, and management.
Currently, we have a balanced marketplace for commerce,
banking, and financial services. Let me direct your attention
to the two charts enclosed in my statement.
The first chart shows how the commercial and banking
industries compete in the ``financial services'' arena.
REALTORS'do not engage in banking. They do not take
deposits or run ATM's.
Again, REALTORS' are not engaged in banking.
Banks do not sell real estate. Banking and commerce are
separate. It is that simple. Otherwise, why shouldn't banks
sell cars or appliances?
The second chart shows that in the arena where banks and
REALTORS' do compete on mortgage originations, banks
are already the winners. REALTOR'-affiliated
mortgage lending companies only originate about 5 percent of
mortgages, while the large banks handle 44 percent.
Today's competition occurs in the financial services arena
where it belongs. Consumers benefit from this arrangement
because the direct competition for financial services between
commercial companies and banks results in greater consumer
choice and consumer service. When banks say they want ``one-
stop shopping,'' what they are really saying is they want
``one-bank shopping.''
The reality is that the entry of Federally chartered banks
into the real estate brokerage business would tilt this
balanced marketplace toward the Nation's megabanks. It would
pit Government subsidized banking companies against privately
funded real estate enterprises. It would put taxpayer money at
risk.
Mr. Chairman, the National Association of
REALTORS' believes this issue is just too big to be
decided by the regulators. The decision belongs with the
Nation's lawmakers. That is why we have called on Congress to
enact The Community Choice in Real Estate Act, S. 1839, and
H.R. 3424, a companion bill in the House, to clarify
Congressional intent.
REALTORS' from all over the country have sent
more than 100,000 letters to their Congressional
representatives urging support for this bill. We have sent more
than 40,000 letters to the Federal Reserve and the Treasury
expressing our opposition to the proposed regulation. And we
have sent more than 50,000 letters to President Bush urging his
support.
So far, H.R. 3424 has generated tremendous support in the
House, with more than 230 cosponsors. So far, a dozen Senators
have cosponsored S. 1839. Last month, Treasury Secretary
O'Neill announced that he plans to postpone making a decision
on this issue until next year. The ball is back in your court.
It is time for Congress to resolve this issue.
Mr. Chairman, REALTORS' are not alone on this
issue. A diverse group of trade associations and consumer
groups stand with us on this one.
Passage of the Community Choice in Real Estate Act will set
the record straight. At the same time, it will ensure more
balanced competition and more consumer choice.
This legislation will help to keep local entrepreneurs and
businesses operating in our communities. It will help to keep
some of our best community leaders and volunteers in place.
REALTORS' are more than business people. We are
community leaders. Look in countless cities and townships
across America and you will find it is a REALTOR'
serving as a den mother, a REALTOR' who is leading
the city-wide cleanup, a REALTOR' who is hosting the
candidate meet-and-greet, and a REALTOR' who is
coaching Little League. REALTORS' are linked to
their communities in more ways than simply through their
businesses. REALTORS' have a stake in the same
neighborhoods where their clients live or want to live.
Finally, this proposal just doesn't make sense. Banks have
it backward. Real estate brokerage is not incidental to a
financial activity. It is the mortgage that is, in fact,
incidental to buying
a home. Twenty percent of all the homes in America involve no
lender financing at all.
America's system of homeownership is the envy of the world.
Homeownership is at an all-time high. Five out of six
homebuyers and home sellers are satisfied with their real
estate agent and they would use him or her again. Let's not
destabilize this pillar of our economy and relationship that
works in communities throughout America.
Thank you.
Senator Johnson. Thank you, Mr. Murphy.
Mr. Smith.
STATEMENT OF JAMES E. SMITH
PRESIDENT, AMERICAN BANKERS ASSOCIATION
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
CITIZENS UNION STATE BANK AND TRUST COMPANY
CLINTON, MISSOURI
Mr. Smith. I want to thank you, Mr. Chairman, for holding
this hearing.
I believe that bankers and REALTORS' have more
in common on this issue than the rhetoric suggests. Many agents
and bankers already work closely with one another. We both
believe that customers deserve to have the best possible
service. We both want customers to have many choices of whom to
deal with so they can seek out that agent or company that they
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 brokers would have more choices of potential
employers. And real estate companies would have more choices of
companies to partner with, providing new sources of capital and
technology. By prohibiting bank involvement, S. 1839 results in
fewer choices for everyone.
As we begin our discussion, it is important to note that
combining real estate mortgage 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 of
the depository institutions in this country, including many of
the largest banks, can do it. In fact, my community bank in
Clinton, Missouri, already has the authority to do it. The
packages many real estate firms offer provide valuable cost,
convenience, and service options. This is good for consumers.
The ABA believe that all banks should have the same opportunity
to meet the needs of our customers.
This issue of open and fair competition is not new--it has
been debated in this body for years. What is new is that in
1999, Congress enacted the Gramm-Leach-Bliley Act. In the 20
years of debate on the Gramm-Leach-Bliley Act, Congress often
found itself in the middle of arguments between financial
services industries about who should do what. The result was an
out-of-date financial system.
In light of these marketplace realities, and the pervasive
changes due to technology, the need for regulatory flexibility
is vital. Congress recognized this and expressly left it to the
Fed and the Treasury to determine what additional services
could be offered by banks. The proposal on real estate follows
exactly the process Congress set forth.
It should be allowed to work, and Congress should not be
put back in as referee for future competitive disputes. After
so many years of effort to enact the Gramm-Leach-Bliley Act, it
would be sad indeed to see Congress undermine its key provision
the very first time it is used.
Let me assure you that this issue is important to banks of
all sizes. In fact, the ability to offer real estate services
may be more important for smaller banks in rural areas like
mine. In these communities, the bank is perceived as having the
best information on properties for sale, including farmland. I
believe, as do my fellow community bankers, that these services
would significantly benefit our customers and our communities.
In my small community, I am losing customers. The local
real estate firm is offering mortgages and insurance. Since the
customer often goes to the real estate firm first, I lose out
on the ability to offer those products. And quite frankly, the
customer misses out on the opportunity to have a choice. I may
need to partner with a local firm to compete.
Furthermore, as national chains take over local real estate
firms, any remaining local firms may have trouble competing.
One of them may want to partner with me. This is exactly the
kind of scenario Gramm-Leach-Bliley was designed to take into
account. That law knocked down the walls between financial
players and it gave the Federal agencies flexibility to decide
what new powers would be appropriate for banks as markets
change. So let's look ahead, not backward.
We want to work with REALTORS' to realize
advantages for both our industries. We want to cooperate, not
compete. To prosper, not pull down. To make the most of the
skills and advantages each side brings to a common goal--
thriving in a marketplace of rapid change. Above all, we want
to be able to partner with REALTORS' to provide
good, honest real estate services to America's homeowners and
homebuyers.
I would like to add for the record, that the market
origination number that the NAR has just provided is 1 percent.
We would like to add for the record information that the market
share of just three firms alone--Cendant Mortgage, GMAC, and
Weickert Mortgage--is 10 percent in today's market, not 1
percent as proposed.
Thank you, Mr. Chairman.
Senator Johnson. Thank you, Mr. Smith.
Mr. Taylor.
STATEMENT OF JOHN TAYLOR
PRESIDENT AND CHIEF EXECUTIVE OFFICER
NATIONAL COMMUNITY REINVESTMENT COALITION
WASHINGTON, DC
Mr. Taylor. Good morning, Chairman Johnson, Senator
Bennett, and other distinguished Members of the Subcommittee
and staff representing other Members.
My name is John Taylor and I am President and CEO of the
National Community Reinvestment Coalition, and I am here
representing 820 community-based organizations and local public
agencies who work daily to promote economic justice in America
and to increase fair and equal access to credit, capital, and
basic banking services to traditionally underserved populations
in both urban and rural areas.
Mr. Chairman, I ask that my written statement be entered
into the record.
Senator Johnson. It is so ordered.
Mr. Taylor. Thank you. On behalf of NCRC, I thank you for
the opportunity to testify before you today on this important
issue that will impact our Nation's progress in extending the
American Dream of homeownership to minority and low- and
moderate-income families--banks becoming real estate brokers.
NCRC's community organizations are at the helm of driving the
reinvestment movement. Today, as a result of the fair lending
laws like the Community Reinvestment Act, which turns 25 this
year, poor neighborhoods have been empowered by bank
partnerships with community organizations to address credit
needs and missed market opportunities. As a result, the number
of loans to minority and working class borrowers over the last
decade has increased faster than the number of loans to the
more affluent borrowers. Bank CRA commitments have grown from a
few million dollars a year to over $50 billion annually.
Without these loans and commitments, the economic flow of
private capital and credit into our communities would be
extinct and hence, certain death for disinvested neighborhoods.
The arena of competition has dramatically shifted in the
wake of Gramm-Leach-Bliley, in our opinion, which we believe
actually blurred the distinction among financial industries. In
March 2000, the Federal Reserve Board issued a list of the
first 117 bank holding companies that elected to become
financial holding companies to take advantage of the
opportunities of entering into the insurance and securities
markets. As of April 2002, over 600 bank holding companies have
elected to become financial holding companies in order to
diversify their businesses. Conversely, less than a dozen
nonbank companies have converted to financial holding companies
for the purpose of seeking a banking charter.
NCRC supports competition in its truest sense--when parties
act independently and offer the most favorable terms to secure
business. But one must wonder if today's financial market
upholds
the true meaning of competition when it seems like Gramm-Leach-
Bliley has allowed all roads to lead back to the bank. While
nonbank lenders own real estate companies, they have not
utilized Gramm-Leach-Bliley to amass the market power that
banks now enjoy after their mad rush to become financial
holding companies. Would adding real estate to the menu of
businesses that banks can own level the playing field between
banks and nonbanks, or only serve to make banks more powerful
to the detriment of real competition in the financial industry?
NCRC maintains that the addition of real estate to the
already dizzying array of products now offered by ``financial
supermarkets'' will lead to an even greater consolidation of
bank market power and result in fewer choices for consumers.
Our worst nightmare is a consolidated financial market that
includes real estate brokerage is: A bank offers favorable
terms to its real estate affiliate, giving it significant
advantage over a competing real estate business that does not
have an affiliate; The bank with the real estate affiliate
stops offering loans to customers of nonaffiliated real estate
competitors; The number of product choices offered to customers
of nonaffiliated real estate businesses decreases, resulting in
higher cost loans for consumers.
When considering banks in real estate, policymakers have
not adequately addressed the negative impacts on small real
estate businesses of further industry consolidation. And I
think you heard Mr. Murphy allude to that. The over 375,000
women- and minority-owned small businesses in our country have
played a significant role in community revitalization. Many of
these real estate entrepreneurs have established themselves in
working class communities and dedicated their business to
helping rebuild formerly redlined neighborhoods through
partnerships with affordable homeownership programs.
NCRC strongly takes the position that by allowing banks
into the real estate business, small real estate businesses
will be forced out of the marketplace by the monopolized
``financial supermarkets.''
Finally, on this point, the banking industry holds a
special status, different from any other industry. They are the
stewards of the American public's wealth. To encourage people
to do business with these stewards, we taxpayers guarantee that
investors cannot lose if they do business with these banking
institutions.
With FDIC insurance, we guarantee the viability of these
institutions. Was it the intent of Congress in doing that, that
we were ensuring that these banks would be managed safely and
soundly and making sure that credit and capital was made
available to consumers, or was Congress really thinking that
banks should become real estate brokers and enter other forms
of businesses and possibly lose the public's money and cut off
the spigot to credit and capital?
The next area I would like to address in regards to today's
subject matter is the consumer protection issues. In testifying
before you today, I must be honest to NCRC's mission of
economic justice and state emphatically that injustice exists
in the banking, insurance, and real estate industries. Until
those problems are solved to protect borrowers and consumers,
these markets should not be commingled.
According to the Department of Housing and Urban
Development, a report just released entitled, Black And White
Disparities in Subprime Mortgage Refinance Lending, borrowers
in upper-income African-American neighborhoods were 2.9 times
more likely to refinance with a subprime lender than borrowers
in upper-income neighborhoods overall.
Our own research at NCRC has found similar disparities. For
example, major subprime and manufactured home lenders made 47
percent of the refinance loans in predominantly African-
American and Hispanic neighborhoods in the District of Columbia
in the year 2000, a significant increase from the 39 percent of
the loans in 1999, and 25 percent of the loans in 1994. In
contrast, subprime and manufactured home lenders made less than
4 percent of the loans in predominantly white neighborhoods in
the 3 years of the study.
The major secondary market institutions have found pricing
inefficiencies in the subprime loans. Freddie Mac states that
up to 30 percent of subprime borrowers which they securitized
were in fact qualified for prime loans. Fannie Mae's Franklin
Raines is quoted as saying almost half of the subprime loans
they see should have received prime loans.
The issue of insurance redlining is also a problem, but
unlike home mortgage lending, insurance data is limited only to
a handful of States. In California, for example, the Center for
Economic Justice found that the average insurer wrote only
about 5.57 percent of its private passenger automobile
liability policies and only 6.62 percent of its homeowner
policies in low-income and minority neighborhoods.
As I mentioned, the real estate market is not without its
unscrupulous actors. Property flipping involves buying a home
at a low price and then reselling it at a fraudulently inflated
price within a short timeframe, often after making only
cosmetic improvements to the property. NCRC has seen the
following practices employed in property flipping schemes: Real
estate investors continuing buying neglected properties at
sheriff sales and reselling homes at escalated prices to
unsophisticated first-time homebuyers; Targeting immigrant
communities, particularly non-English-speaking individuals;
Colluding with property appraisers to inflate property value;
Tricking homeowners into thinking they are dealing with
legitimate real estate companies; and Defrauding the Government
by steering people to FHA financing, knowing the property is
either inflated or has been frequently flipped.
In the year 2000, the Department of Housing and Urban
Development's Inspector General testified about the rampant
flipping rings the agency was combatting. One investigation
alone uncovered over 1,200 flipped loans, totalling
approximately $160 million. Twenty-five percent of the loans
were in default. The IG indicated that approximately one
hundred representatives of lending and real estate industries
colluded on this scheme. If Congress allows banks and real
estate firms to combine without strengthening the consumer
protection laws, our communities are more likely to be the
victims of these scams than beneficiaries of greater product
choice and lower prices.
A couple of years ago, I and several others testified
before different committees in Congress to not undo the 70-
year-old Glass-Steagle law that allowed commercial banks to
merge with securities firms and insurance companies. We argued
that it would injure the banking industry and, more
importantly, consumers' interests.
Not even 2 full years have passed before we see the perfect
example of why Congress of 70 years ago argued against the
merging of the banking industry with other industries--the fear
of scandal, self-dealing, and swindling of investors. Need more
proof of the need for the separation of finance from other
industries than the biggest bankruptcy and business failure in
the history of the American economy, the Enron swindle.
Mr. Chairman, I see that I am out of time. I just want to
close by adding that we strongly oppose, from a consumers'
perspective, the allowance of the banking industry into the
real estate industry.
Should that occur, and we hope that it wouldn't, we would
also hope that, along with that would be some very strong
language about the real estate industry being able to provide
data and be obligated to not ignore the interests of working-
class and working-poor consumers and minorities and women who
have difficulties often accessing credit and capital and
homeownership.
I thank you for the opportunity to comment.
Senator Johnson. Well, thank you, Mr. Taylor.
Mr. Hanna.
STATEMENT OF HOWARD W. HANNA, III
VICE CHAIRMAN, REAL ESTATE SERVICES
PROVIDERS COUNCIL, INC. (RESPRO')
PRINCIPAL AND FORMER CHAIRMAN
THE REALTY ALLIANCE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
HOWARD HANNA REAL ESTATE SERVICES
PITTSBURGH, PENNSYLVANIA
Mr. Hanna. Thank you and good morning, Mr. Chairman, and
Members of the Subcommittee. And thank you, Senator Santorum,
for the overly kind introduction.
My name is Howard Hanna and I am President of Howard Hanna
Real Estate Services, a family owned and operated real
estate brokerage company headquartered in Pittsburgh,
Pennsylvania, and founded by my parents in 1957.
Howard Hanna Real Estate Service has 66 neighborhood and
community offices, serving Pennsylvania, Ohio, West Virginia,
and New York State. We also own a mortgage company that was
established in 1982, Hanna Financial Services, which is
licensed in those States, plus an additional nine States in the
United States.
Our firm has 1,500 sales associates and employees, of which
1,128, as of Monday, are members of the National Association of
REALTORS'. I am proud and honored to be a 32-year
member of the REALTORS' Association of Metropolitan
Pittsburgh, the Pennsylvania Association of
REALTORS', and the National Association of
REALTORS'.
I currently serve as Vice Chairman of the Real Estate
Service Providers Council--known as RESPRO'--and I
am a member of the Realty Alliance, as well as a past Director
and Chairman. I represent both organizations today.
RESPRO' is a national association of
approximately 200 residential real estate brokerage, mortgage,
homebuilding, title, and other settlement service companies who
promote an environment that enables providers across industry
lines to offer one-stop shopping for homebuyers.
The Realty Alliance is a national organization of 45
regional residential real estate brokerage firms that provide
us with idea sharing venues, industry forecasts and analysis,
financial bench-
marking, and technology information.
Mr. Chairman, I would like to ask that my written testimony
be included in the record, and additionally, the written
testimony from Murray Consulting, who performed a one-stop
shopping survey that I will be discussing during my comments,
be included in the record.
Senator Johnson. They will be placed into the record.
Mr. Hanna. Thank you, sir. Together in the year 2001,
RESPRO''s real estate broker members and Realty
Alliance members closed over 2.6 million of the total 6 million
home sales in the United States, utilizing over 315,000 sales
associates who also are National Association of
REALTOR' members, and 78,000 employees in our over
57,000 offices.
Like the majority of the Nation's top 350 residential real
estate brokerage firms, most RESPRO' real estate
broker members and Realty Alliance 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 & Associates, the
top 350 real estate brokerage firms closed $22 billion in
mortgage loans in 1998, and the realty-based and builder-based
lending accounted for about 10 percent of the purchased money
mortgages in that same year. Edwards also estimated that this
amount would double within 3 years.
In fact, senior management from four real estate brokerage
firms that own or partially own mortgage companies, who all are
RESPRO' and Realty Alliance members, are here with
me today: myself from Howard Hanna Real Estate Services in
Pittsburgh, Pennsylvania; Dick Christopher, CEO of Patterson
Schwartz in Wilmington, Delaware; George Eastment, Executive
Vice President of Long and Foster Real Estate in the
Washington, DC metropolitan area; and Chip Roach, Vice Chairman
of Prudential Fox and Roach REALTORS' in
Philadelphia, Pennsylvania.
We believe that the combined purchase money mortgage
originations of our four mortgage companies equaled
approximately 3 percent of all purchase money mortgage in the
country in 2001. So the 5 percent that NAR referred to in its
testimony, we have some question about.
Edwards also found in his study that 72 percent of the
Nation's 350 largest real estate brokerage firms offered
mortgage services in 1998, that 45 percent of those firms
offered title insurance, closing, or escrow services, and that
36 percent offered personal insurance.
Mr. Chairman, RESPRO' and Realty Alliance favor
the American free enterprise system and open competition. Any
bank should be able to compete with us in providing homebuyers
with one-stop shopping programs. All available evidence shows
that the homebuyers prefer one-stop shopping and that realty-
based one-stop-shopping programs offer those homebuyers
potential benefits.
The most recent consumer survey in this area was performed
in March of this year by Harris Interactive, the parent of the
Harris Poll. Harris surveyed over 2,000 recent and future
homebuyers and found that 82 percent of the homebuyers prefer
using a one-stop-shopping service for their home purchase. The
survey also found that 64 percent of the homebuyers who
recently used a realty-based one-stop-shopping program had a
much better overall home-purchase experience.
Other studies, some of which are described in my written
statement, have found that the services offered through realty-
based one-stop-shopping programs are not only competitive, but
are even lower in cost in many cases, than those offered by
independent firms.
RESPRO' and Realty Alliance do not believe the
entry of financial holding companies and national banks would
change the potential customer benefits of realty-based one-
stop-shopping programs.
Over the last two decades, a number of financial
conglomerates have entered the residential real estate
brokerage business--Sears Roebuck, Metropolitan Life, Merrill
Lynch, GMAC, Prudential Insurance Company, Cendant Corporation,
and Warren Buffet's Berkshire Hathaway, which now owns the
number two largest residential real estate brokerage company in
the country.
On the surface, these companies appeared to have
significant competitive advantages over traditional real estate
brokerage companies, such as national distribution outlets,
consumer marketing lists that made it easy to reach everyone,
valuable data about buying habits, and name recognition. In
fact, Sears even had access to Federally insured deposits
through its affiliate, Sears Savings Bank.
Sears, Merrill Lynch, and Metropolitan Life have since left
the real estate brokerage business, while Prudential, GMAC,
Cendant, and Berkshire Hathaway remain good competitors. Their
presence has not changed the basic character of the real estate
brokerage marketplace; in fact, many of us believe that their
entry has contributed to the development of a wider range of
services and products and has caused traditional real estate
brokerages, to be more efficient, more consumer-focused, than
we ever were before.
Federally-insured financial institutions also have entered
residential real estate markets recently, such as Great Western
Bank in California, Metropolitan Financial Corporation in
Minneapolis, First Place Bank in Ohio, Empire Savings Bank in
Wilmington, Delaware, and Pennsylvania, and Dollar Drydock in
Connecticut. However, in a short period of time, most of these
financial institutions have either sold their real estate
brokerage businesses and entered new markets in which they feel
that they can compete more favorably.
Finally, I believe it is important to remember that this
would be a two-way street, in that real estate brokerages also
would have the ability to own banks.
For example, my company had a close working relationship
with a bank that was recently sold in our region. And Howard
Hanna Real Estate Services, quite frankly, would have been very
interested in purchasing this bank if Federal law had allowed
it.
Mr. Chairman, I thank you for the opportunity to testify
and I would be glad to answer any and all questions.
Thank you very much.
Senator Johnson. Thank you, Mr. Hanna, and thank you,
members of the panel.
The Subcommittee will abide by a 10-minute question rule.
That doesn't mean that it is mandatory that you consume 10
minutes each on questioning, but we will try to place some
limits to make sure that everyone has an opportunity to ask
their questions.
Let me begin by asking, with particular reference to Mr.
Murphy and Mr. Taylor, I am sympathetic to the desire to
maintain a variety of small independent businesses throughout
our country. In my home State of South Dakota, we rely on small
businesses to serve our small communities, and while large
corporations play an important role in the economy, market
economics do not always provide incentives to serve those small
towns. But there have been concerns raised that bank entry into
real estate brokerage could spell the demise of small local
REALTORS'.
And yet, it seems that some of the largest corporate
conglomerates are real estate brokerages with lending and
insurance affiliates which operate today under existing
authority. Would you elaborate a bit more on why bank entry
into real estate brokerage is different than broker entry into
the mortgage and insurance business?
Either one of the two of you can choose to elaborate a bit
on that.
Mr. Murphy. Thank you, Mr. Chairman. First of all, in a
State like South Dakota, it would be no different than any
other State.
What we have is a situation where, in a community where
there is 10 or 20 real estate firms, if one banking institution
starts its own real estate firm, the other two will follow in
line.
With that, automatically, the smaller businessman cannot
compete. They do not have the dollars to compete with the
advertising. They cannot afford to lose the money or spend the
money that is really stockholders' money.
When that deteriorates, we have fewer people in the
business because if you are not working for the bank, we need
people to keep generated into our industry. You have put a
chokehold on that because if you cannot work for a bank, you
cannot get started, then, into this business.
Now that is in a small State. So we will say in 10 of 12
communities in South Dakota, instead of having 150 real estate
firms, you would be down to about 25, maybe 20. And with that,
you would lose a minimum of 25 percent of the ages that we
would look at. And with that also, these people are not going
to have jobs in their area. They are all independent
contractors. They are all small businessmen. They are being
choked out of this.
But if we look at it as national, if you went to a State
like California, instead of a thousand offices, you would be
down to 6 or 10 megabanks who control the whole market. You
have not only controlled the number of independent contractors,
they also have the ability to choke out all their competition.
When that happens, it not only takes the number of
independent contractors out of the business, but they are also
in a situation where they can control the valuation of a
property, because if you do not have thousands of
REALTORS' involved in this, from many markets, the
only comps they are going to have are within their own
association. It is a chokehold.
Senator Johnson. Mr. Hanna.
Mr. Hanna. Senator, I mentioned Metropolitan Financial,
which once owned Edina Real Estate Company in Minnesota. I
believe they also had offices in South Dakota. I have not
noticed that when they owned Edina Real Estate Company, they
took a stranglehold in that market.
Senator Johnson. Mr. Smith, since brokers receive
compensation on a commission basis, they have a strong
incentive to make sure that property sales go through.
There have been instances where appraisers have been
pressures by brokers to make sure that the appraised value met
underwriting requirements. Is it conceivable that a bank-
affiliated broker would have an incentive to pressure the
lender in the same way, especially if the two worked in the
same organization?
And would you comment just briefly on whether banks have
appropriate internal controls to address that kind of concern?
Could these pressures lead to substandard underwriting by
insured depositories, especially during times when the property
sales are slow?
Mr. Smith. Well, we do have safeguards in place and our
appraisers have to be registered and certified and go to school
and have the State qualifications in order to be an appraiser
for us. And that is required by the FDIC and our regulatory
bodies that examine us because they do check the appraiser's
qualifications.
It behooves every banking organization to make loans in a
very safe and sound manner and to pressure an appraiser to make
an appraisal that doesn't fit the qualifications of the real
estate would be backward in making a safe and sound loan. And
as the CEO of a bank, I want to be sure that my collateral is
in place in order for that loan to be repaid properly. So that
definitely would not be something that we would want to see.
Mr. Taylor. Mr. Chairman.
Senator Johnson. Yes.
Mr. Taylor. Currently, a broker has a main objective to get
you to purchase that home. They get their fee for that. And so,
it is
in their interest to be able to draw upon an array of financing
in-
stitutions that can satisfy whoever the borrower is, whoever
the
buyer is.
When that person is then employed by a specific financial
institution, I would think that it is reasonable to think, in
addition to the compensation they get from being a broker, that
they will also be compensated for the amount of business that
they steer into the mortgage segment of that financial
institution, whether that is the best deal for the borrower or
not. And I do not think that that gives consumers more choice.
I think it actually narrows the choices.
Mr. Hanna. Wouldn't the same rules apply under RESPA for a
bank's sales associates as they would for sales associates at
Howard Hanna Company or Long & Foster today?
The RESPA rules wouldn't change. They prohibit a mortgage
company from giving compensation to a real estate sales
associate for referral of a mortgage.
Senator Johnson. Let me, in my remaining few minutes before
we go on here, ask a question to the panel here. And this
alludes somewhat to observations made by Mr. Hanna.
Based on the information available through the Conference
of State Bank Supervisors, 25 States currently allow banks to
engage at some level in real estate brokerage and property
management. It would appear from available data that, in spite
of this authority, only a small number of banks have actually
taken advantage of the authority.
Also, it is my understanding that credit unions have had
the authority to engage in real estate brokerage and property
management through the credit union service organizations. Yet,
data indicate that only two or three have engaged in any type
of brokerage. None have engaged in property management.
Given how few banks, thrifts, and credit unions have taken
advantage of the existing authority, I wonder if, first, Mr.
Taylor and Mr. Murphy would elaborate a bit on the
justification for the REALTOR' opposition to the
entry of financial holding company national bank affiliates
into the business, and for the rest of you, any brief
observation on that as well.
Mr. Murphy.
Mr. Murphy. Yes, Mr. Chairman. If you add up all the assets
of these companies, it is not enough to do what one megabank
does in a day.
Most of these places have one licensee sitting in a lobby.
That is not their main course of business. They are in places
where, to provide a service for their community, they cannot
even make a living doing this in most of those communities.
So they are providing a service for their community that no
one else can do for them. But at the same time, they are not in
this to do real estate brokerage on a level that we are talking
about here today.
Mr. Taylor. One of my major concerns would be that a major
subprime lender gets in the business of becoming a real estate
broker and I think creates further challenges, particularly for
the population that we are concerned with, low income and
minority. I have not heard an argument yet as to why the
merging of this kind of financial services would at all serve
consumers better.
Right now, we have an extremely competitive real estate
brokerage industry. We have an extremely competitive financial
services industry. And what is being proposed essentially
would, in our opinion, lessen that competition and lessen the
choices for consumers.
And when we hear about the large real estate firms that are
already in the mortgage industry, we have not done this, but
perhaps we should, is take a look at, to the extent that they
are in the mortgage industry, who are they really serving?
Unlike financial institutions that have a CRA obligation,
they have an obligation to make sure that the person at the
bottom rung of the ladder working their way up to their version
of the American Dream, has access to credit and capital.
Real estate brokerage firms do not have that obligation,
neither do mortgage companies. And that is why, when you take a
look at the difference in industries and who is serving people
of color and who is serving working-class, working-poor people,
disproportionately, you will see banks doing a much better job
at that, because that is who the law applies to. Then you look
at mortgage companies and real estate firms that are
independent, I think you will see great disparities in terms of
who they are really serving. And that should be of concern to
everybody on this Subcommittee.
Senator Johnson. Any brief response?
Mr. Smith.
Mr. Hanna.
Mr. Smith. I would just like to add that the banking
industry is under the CRA and the REALTORS' are not
under CRA.
I think if the banks are permitted to partner with the
local real estate firms, that both of us could do a much better
job of providing mortgages, products, and services to the low-
income people in our communities.
Mr. Taylor. Well, if Mr. Smith is agreeing, and I would
agree with him that having the real estate or even insurance
industry come into the banking industry, that they would agree
to be obligated to produce data on who they are serving and to
have an affirmative obligation to make sure that they are not
ignoring the needs of underserved populations, we may
reconsider our position on this if that is the position of the
ABA.
[Laughter.]
Senator Johnson. Mr. Hanna.
Mr. Taylor. And I am a Red Sox fan, anyway.
[Laughter.]
Mr. Smith. I would just like to respond, that I do go
through CRA examinations every year. I would welcome my
colleague here to come and sit through the CRA examination so
that he could understand what we are doing in our community.
Senator Johnson. Mr. Hanna.
Mr. Hanna. We would recommend the distinguished gentleman
to my right visit Howard Hanna Company because we are a very
open shop, and we would be happy to go over those numbers with
you.
Mr. Taylor. I am going to take you up on those invitations.
Senator Johnson. My time is expired.
Senator Allard.
Senator Allard. Thank you, Mr. Chairman.
I am interested in trying to get the exact number of State-
chartered banks, credit unions, and thrifts who engage in real
estate brokerage. Do we have any idea how many financial
institutions actually engage in real estate brokerage activity,
and how many are involved in real estate management?
Does anybody have those facts?
Mr. Murphy.
Mr. Murphy. Yes, Senator Allard. Only six States have banks
in residential real estate brokerage operations. In these
States, 18 banks have residential real estate brokerage
operations.
These banks represent 0.2 percent of all banks and serve
areas with 0.57 percent of the U.S. population. And it looks to
me like there are about 18 banks, anyway, that are involved in
this.
Mr. Hanna. I believe 26 States currently allow State-
chartered banks to engage in real estate brokerage.
Senator Allard. I picked that up in the 26 States. I was
just wondering how many institutions in those 26.
Mr. Murphy. I have 18 down here, Senator.
Senator Allard. Okay. Currently, if a national bank wished
to become involved in real estate in any of those 26 States,
they could switch their charter, could they not?
Mr. Smith. That is correct.
Senator Allard. They could switch that charter.
Mr. Smith. That is correct.
Senator Allard. Okay. Now, if national banks are allowed to
engage in real estate management brokerage, what percentage of
banks do you estimate would enter the industry within 5 years?
Mr. Smith or Mr. Murphy, do you have any suggestions?
Mr. Smith. I can only relate that to my personal
experience.
I have had real estate powers since 1984. So 18 years.
Senator Allard. And you are a State bank. Is that right?
Mr. Smith. I am a trust company. And Missouri trust
companies have agency powers. I have had that ability since
1984.
But only recently has it become apparent that I may need to
try to partner with one of the local real estate firms in order
to continue to offer the products and services that I would
like to offer.
In our community of 8,500 people, we have three or four
real estate firms. But the largest one is a Re/Max firm. And at
that office, a person drives to town, getting ready to move to
town, goes in, finds a house, signs a contract to purchase the
house. They walk into the next office of that firm, sign the
papers to the mortgage. They walk into the next office of that
firm and sign the papers for the title insurance.
I never have a chance to see that customer or offer that
customer a product unless he or she happen to walk in the door
of my bank to open a checking account. I would submit to you
that is a Re/Max firm, which is the second largest real estate
firm in the United States.
The question I would have is what are the other smaller
real estate firms doing to compete with that? If I cannot
compete with that, how are they going to compete with that? And
I suggest to you that they may want to partner with the bank to
have the capital and technology to compete with that. And
likewise, I want to partner with them to have the ability to
compete with those products and services.
I would submit to you that it is very important to the
smaller real estate firms to have that opportunity to partner
with the bank, so they can continue to survive in that same
marketplace.
Senator Allard. Does anybody else on the panel want to
comment on that question?
Mr. Murphy.
Mr. Murphy. Yes. Senator, the problem with the one-stop
shopping is, in our marketplace now, we have buyer brokerage,
we have leases and we protect each other. So if I represent the
buyer, and he does not like me, he can fire me.
The problem with the setup that we are talking about today
is, if you have inducements that are keeping you with an
organization, and we have all seen negative closings in our
State, it is kind of hard for you to feel like you can break
your relationship with that organization.
With me, the way it is set up, you can break that because
there is nothing that is bound together besides the contract.
We do not have inducements--we cannot offer inducements that
would keep them there for the whole term--title insurance, the
mortgage,
the appraisal, the closing fees. It puts the consumer at risk
in the future.
Senator Allard. Mr. Hanna, did you have something?
Mr. Hanna. Are you talking about the consumer or the
REALTOR'?
Mr. Murphy. The consumer, sir.
Mr. Hanna. I find that the consumer is looking for the best
service at the lowest possible cost and wants to make the
process simpler and easier for them to buy homes. I think that
is what our role is as REALTORS' in the market, to
make it simpler and easier and less expensive for people to buy
homes.
Senator Allard. Go ahead, Mr. Smith.
Mr. Smith. I would just like to add that the banks are
under the Bank Holding-Company Act is antitying provisions,
which specifically says, we cannot force a product onto the
customer in order to sell another product. We have to file
disclosures in that respect. So we cannot tie those products
together.
Mr. Taylor. Senator Allard.
Senator Allard. Mr. Taylor.
Mr. Taylor. If I may. This is a piece of my testimony--it
is short--that I did not get to, that relates. I think it gets
to your point.
It is a real story about someone in this city, an elderly
couple who were victims of a real estate problem. They owned a
house in the Mt. Pleasant neighborhood in DC, for over 43
years. And in order to pay their medical expenses, an
independent mortgage company convinced them to take out an
adjustable-rate mortgage with a prepayment penalty and a loan
payment that exceeded the couple's monthly income.
The victims retained an independent REALTOR' to
facilitate the short sale of their home, who quickly identified
the appraisal conducted by the mortgage company was
substantially inflated. It was only after the victims'
REALTOR' requested NCRC to intervene, that the sale
took place instead of a foreclosure.
Now imagine if that real estate agent had been affiliated
with that lender. They would have had no incentive to even
catch anything or do anything other than to continue to take
advantage of that person.
I am not suggesting that Mr. Hanna personally, that he
conducts business this way. But that is the kind of problem we
have, and people act funny when there is the opportunity to
make a buck. And let's not allow that situation to occur by
simply making it illegal to have those kinds of incestuous
relationships between REALTORS' and bankers.
Mr. Hanna. The real estate agents that work for us, and
most of the REALTORS' that I know, are pretty
independent contractors I do not think that example you gave is
typical of a REALTOR', whether it works for Long &
Foster, Howard Hanna, or Mr. Murphy's firm.
Mr. Taylor. I am just saying, if that REALTOR'
had a relationship with the mortgage lender, in which they
actually were their employee, because the Federal Reserve,
without this law, allowed that to happen, why would an employee
turn on their employer and say, hey, gee, this is an inflated
appraisal value. This is not in the interest of the consumer.
They'd be silent. They wouldn't do it.
Senator Allard. Mr. Smith brings up an interesting issue on
the antitying provisions that we have now.
The question I have for you, Mr. Smith, is regarding the
concern that is raised about whether homebuyers might feel
pressure to use a bank's entire range of services. In other
words, if you are going to get a loan from us, then you have to
use us for real estate and everything else.
Do current antitying provisions offer consumers sufficient
protection against such a possibility? How are these antitying
provisions enforced?
Mr. Smith. Well, we have to disclose to our customers any
arrangements we have on any products and services. We have to
disclose that. They have to sign it to say that it was
disclosed properly to them. And then the regulatory body that
comes in to examine us makes sure that we have those documents
in the file and that the customer in fact did sign that, saying
that they are aware of any tying arrangements. That is checked.
I can tell you explicitly and by all the regulatory bodies,
whether it be the OCC, the FDIC, or our State banking center.
Senator Allard. Do people even sign this provision when
they are not granted a loan, for example?
Mr. Smith. Yes, they sign the documents, and then the loan
goes to the loan committee to see if the loan is going to be
approved.
Senator Allard. But you are a customer. You come in and you
talk to the bank and you say, ``look, I would like to have a
loan.'' And the bank says, ``well, where is your savings
account?'' I have it over, some place else over here. But I
have a checking account.
Then the bank could say, ``well, before we give you a loan,
we want to have the savings account moved over into our bank.
And if you happen to have real estate, which is a concern
raised, we would like to have you deal with our real estate
agent to do that.''
Now if the person who is applying for the loan says,
``forget it, I am not going to deal with you on that,'' then do
you ask him to sign that form that there was no antitying
provisions? My question is, how is it enforced?
Mr. Smith. Well, obviously, if you make the loan or you
would sell the real estate, then you have to disclose that.
Senator Allard. That there were no antitying.
Mr. Smith. That there was no tying. And that is how it
would be enforced.
Senator Allard. Yes, sir.
Mr. Taylor.
Mr. Taylor. Senator, antitying can actually be waived. You
can get exemptions from the Federal Reserve. And indeed, that
is just what Citibank did last year. It received a favorable
exemption from antitying prohibitions to offer incentives to
their credit card, mortgage, or loan customers who maintained a
combined balance in a package of products and services that
included annuities, a homeowners life and long-term care
insurance for insurance affiliates of Citibank.
So the regulators currently have the ability and I could
foresee them having the ability to create other exemptions,
which would include real estate brokerage.
Mr. Hanna. This all, I believe, comes under RESPA which
prohibits real estate firms or mortgage lenders, from requiring
the use of an affiliated product.
Senator Allard. Thank you for your responses.
Thank you, Mr. Chairman.
Senator Johnson. Thank you. My Democratic colleagues
unfortunately had to leave for a ceremony event. They have left
questions to be submitted to the panel. And we will
respectfully be extending those questions on to the panel
members to respond to those at the appropriate time.
Senator Bennett.
Senator Bennett. Thank you, Mr. Chairman.
We have heard a lot of dire predictions and we have heard a
lot of rosy scenarios. I would like to stay away from
conjecture for just a moment and go to experience.
Mr. Smith, you say that your bank has the right to do this
at the present time.
Mr. Smith. That is correct.
Senator Bennett. All right. Have you done it?
Mr. Smith. No, I have not.
Senator Bennett. Why not?
Mr. Smith. Only in the last 2 or 3 years has it become a
need in order to compete with the real estate agent, the Re/Max
agency. Only has it become apparent in the last 2 or 3 years
that there is need for me to get into this line of work in
order to offer the products and the services.
Senator Bennett. So you are telling me that the reason you
are now contemplating it is because Re/Max is cutting into some
of your mortgage business, not because you see this as a great
opportunity to do any of the predatory things that concern Mr.
Taylor.
Is that a fair assertion?
Mr. Smith. I think that certainly is fair. Also, and we
have a test case here with the insurance agencies, it is very
difficult to start something de novo. And it is very critical
to the success of an operation to be able to partner with
someone that has the expertise and the experience in doing this
business.
So in order to take my bank into this market, I am going to
want to partner with a real estate agency in order to have the
experience and the expertise to offer these products.
Senator Bennett. Okay. Mr. Hanna, you have real estate
agents that you do partner with, and you say they are pretty
independent people.
Mr. Hanna. Our agents, our sales associates, are
independent contractors.
Senator Bennett. Independent contractors.
Mr. Hanna. Independent contractors.
Senator Bennett. Can they take a loan some place else if
they do not like what you are giving them?
Mr. Hanna. They not only can, but they do 70 percent of the
time. Our capture ratio is about 30 percent. Our mortgage
company, our financial service company, captures about 30 to 32
percent of our total sales.
Senator Bennett. So you would insist that the experience
would not produce the result that Mr. Murphy is talking about
of driving agents out of business.
Mr. Hanna. We have been in the mortgage business since
1982, and as I mentioned, in the real estate business since
1957. So we have a very long track record. We would like to
convert more of our buyers' sales to our mortgage company, but
we are happy with 30 percent because we are providing great
service and great pricing to our real estate associates to
provide to their customers.
Senator Bennett. You are suggesting, then, that the
relationship that these agents have with you does not produce a
circumstance where they can use their leverage with the
homebuyer to get a higher price for you.
Mr. Hanna. Our sales associates are very independent and
they are looking for long-term relationships with their client.
So they want to make sure that they get the best terms and
conditions in that mortgage and closing process for their
homebuyer so they can get future referrals from that homebuyer.
Their primary responsibility is to create a comfortable and
happy sale for that homebuyer. And they are out looking for the
best possible mortgage product for them.
Hopefully, it is with Howard Hanna Financial. But we don't
require that they use our mortgage company, and RESPA would
prohibit us from doing so.
Senator Bennett. So you would insist that the experience
indicates that the consumer is better served?
Mr. Hanna. No question in my mind that the consumer is
better serviced.
Senator Bennett. And so, you--well, obviously, your
testimony here--now, Mr. Murphy, I have some experience.
Unfortunately, I have not only bought a lot of homes. I
have six children who have come to me for help in buying homes.
Mr. Murphy. I have two teenagers, so, I understand the
feeling.
Senator Bennett. Yes. My wife and I, plus our six children,
all of whom are married, of that group of seven, six are moving
this year.
Mr. Murphy. Good. I would have liked their referrals,
Senator.
Senator Bennett. No, the reason that I bring that up, when
we made our first move to Salt Lake City, we came across an
agency whom we really liked. I thought her service was
outstanding. She shopped for the very best mortgage rate for
us.
Quite frankly, Mr. Smith, the experience we had with the
bank was less than satisfactory. I remember being enormously
frustrated with the difficulties we had with the bank.
This was the bank that she took us to, pointed us to as
having the lowest rate. But they were not user-friendly in the
way that we finally got our loan.
Mr. Murphy, my point is that this particular woman has
changed agencies several times. She's a hot property. Maybe I
shouldn't put it in those terms.
[Laughter.]
Lest this be misunderstood.
[Laughter.]
She is a very competent professional who is in high demand
for what she does in the area.
[Laughter.]
And consequently, independent real estate agencies keep
trying to steal her from each other. I have gone back, and my
family has gone back to her for her services repeatedly. She
has not only handled all of our homes, she has handled a number
of our children's homes. I have a little trouble assuming that
she would be driven out of business if a bank were to come in
and be able to offer other services.
Can you help with that one?
Mr. Murphy. I think in any community, Senator, there is
going to be a number of REALTORS' who have
established themselves over the years, 10 years, myself 15, my
partner, who the Chairman knows, over 25 years.
Most of our business is repeat business. The problem that
we have is we need new people in our business regularly. Even
in a State like South Dakota, which is small, with only 1,400
REALTORS', we need, on the average, of 150 to 200
new agents getting into our business.
If you have to go to work for a bank because of the options
of being new, the banks do not need you. Smaller offices cannot
afford to have you around. They have a desk cost, just like
anyone else. It doesn't matter that you are an independent
contractor. We are all independent contractors.
But I can tell you, I have seen a poor REALTOR'.
I have never seen a poor banker when it comes to what they can
live on. And the new people in our business just do not
generate the income that it takes to sustain themselves to get
themselves established.
Senator Bennett. Well, I am very much aware of the fact
that many real estate agents do not earn a full-time living at
this. It becomes almost a part-time job or an adjunct to what
else they do.
I have some cousins that are in that circumstance. And
frankly, I have not used their services.
[Laughter.]
Mr. Murphy. You should have sent them a referral, though.
[Laughter.]
Senator Bennett. Yes. I am trying to see if we can get any
evidence or experience, rather than prospective assumptions,
that the pool of agents will shrink if the banks go into this
business.
Now, Mr. Smith, I was hoping could help us. But he is not
in the business, so his vision of this is prospective as well.
The best place I think I can look is in the examples that
Mr. Hanna has given us, and Mr. Taylor, I would like you to
comment on this, too.
As these large, presumably reputable, firms have come into
the real estate business, have they either dried up the number
of available agents or have they engaged in the kind of
predatory practices that you so rightly deplore?
Or has there been a reverse? That is, the more prestigious
and national the firm, the less likely that firm is to engage
in that kind of practice and the more likely they are to look
for agents who would welcome the opportunity of an affiliate.
I do not know. You have had some experience. We have heard
from Mr. Hanna. Now let us hear from those of you who have had
experience. With these large firms coming into the business,
what has happened in the area of consumer protection and agent
employment?
Mr. Taylor. First of all, let me say I think that is an
excellent question. If you do not mind, I would like to go back
and actually do some research and see what the kind of
performance was versus what the numbers are relative to how the
industry is either growing or shrinking and what the
performance of the large firms are versus the smaller firms.
But I cannot say, I was listening to Mr. Smith. And you
cannot help but sympathize with the fact that he's sitting here
saying, look, my business as a small bank, I have to find other
ways to survive. And I appreciate that.
But I think his problem has more to do with the
consolidation of the banking industry and then the evolution of
the banking industry. There is still de novo bank applications
coming in. So, obviously, people are getting into the banking
industry, starting small, specialized banks.
But I would say his problem is more with that and perhaps
some of the many decisions that this Congress has made relative
to allowing for mergers and the superconglomerates.
Now, having said that, it is interesting to look at some of
the large institutions and the way they have gone. The old Bank
of America was one of the best community banks when it came to
small business lending. They got acquired by NationsBank and
NationsBank eliminated all of that very good small business
lending opportunities.
And so, you had one very large bank being acquired by
another large bank, and there was a difference at the end of
the day as to their performance was.
You can look at the home mortgage disclosure data of some
of these large institutions and you will see some doing a
pretty decent job and others who you wonder whether they have
just decided, and indeed, many of them have, decided to get out
of the business of mortgage lending. So, I do not think that
there is this one blanket statement that you can make relative
to a large institution versus a small institution.
Indeed, some of the minority-owned institutions might be
doing a very excellent job, or are doing a very excellent job
in some cities serving underserved populations. And yet, they
are small institutions. Some of the community banks.
I am a big believer in banks. And the reason I believe in
banks is because there are laws, fair lending laws like CRA and
the Fair Housing Act and others, which they are obligated to
do.
I think, left to their own demise, and this is just the way
that you have to tweak the capitalist system so it works for
everybody. But left to their own demise, they might only want
to lend to the well-healed. And for others, we would be really
struggling with much higher costs and much more difficult
access to credit and capital. But we have laws against that,
thank God.
Well, that is not true for a lot of the other industries.
So, again, if this were to occur, I would really hope that
those same kinds of obligations that allow all Americans to
build wealth, all Americans to have the opportunity.
What I hear from your experience is, you know what, we have
a heck of a brokerage industry and you have had a good
experience working with an independent broker, not owned by a
bank. And if it is not broken, why are we going to fix it,
would be one of my conclusions.
And the other would be, if we must go in that route to make
sure that, in the same way that the banks are obligated to make
sure that people are treated fairly and equitably and get
access to credit and capital, their brokers do that same thing.
They do not just open offices in the suburbs, but they have
offices in rural America and inner-city America, so that people
have access to the services.
Mr. Smith. Senator, if I may respond?
Senator Bennett. Let me hear from Mr. Murphy on the issue.
You have raised a whole series of issues that we could have a
whole series of hearings on.
Mr. Smith. Right.
Mr. Murphy. I liked his answer, first of all.
Senator Bennett. Yes.
Mr. Murphy. A large real estate firm in South Dakota, the
largest one that I can think of, has 42 people in it. That is
the largest. And everyone that I know of, anyway, in our
industry in South
Dakota is an independent contractor.
We do not see problems with what we have right now. My
arrangements with my loan officers, half the people that come
to our noon monthly luncheons are the affiliates. We like the
arrangement that we have right now. None of them wants to get
into this business. Or at least, would come right out and say
it, to be honest with you. They feel the same way. It is not
broken.
They believe that they need separation of commerce and
finance. There is no doubt in any of their minds. They are not
convinced that there would be separation, I think. But they are
not going to come right out and say that, I guess.
Senator Bennett. Mr. Smith, you were going to comment.
I apologize for going on. But I apparently touched a nerve
here.
Mr. Smith. Very quickly, I would like to say something
about the consolidation.
My community is 8,500 people. We have five banks. Three of
them are community banks. I would tell you that our office, as
well as two of the other offices of the banks, are downtown.
I would like to point out that we have a highway bypass, of
course, around our community like a lot of small communities.
The real estate agencies have moved out on the bypass.
But our office is downtown. We worked very hard to maintain
a very viable downtown where we have a town square. And in
fact, something that you will not see very often, our bank
offers interest-free loans to the business owners if they will
repair and remodel their storefronts so that we can keep a very
attractive downtown area to pull people into our community, to
spend their money and provide jobs, et cetera.
Senator Bennett. Thank you. Sorry to open up the floodgates
about bank consolidation.
Senator Johnson. Thank you, Senator Bennett. Let me just
ask a couple real quick questions here of the panel.
Let me branch out here. Brokerage and property management
are two distinct activities, but they are lumped together in
the proposed regulation as if they are linked in some manner.
There hasn't been a lot of discussion in the testimony from
this panel relative to property management. Would any of you
choose to elaborate on whether these should be viewed as
separate and distinct activities as we consider this issue?
Any of you.
[No response.]
It may be that there are no strong opinions one way or
another.
Mr. Murphy. In South Dakota, they are all lumped under the
same licensing program.
Mr. Hanna. That is the way they are in most States, I
believe. It is under real estate licensing. It is hard, I think
in most States, to distinguish the difference. It is part of
the real estate brokerage activity.
Mr. Taylor. I would like the opportunity to submit a
comment in the future on that, if I could.
Senator Johnson. So the licensure process in most States,
you are suggesting, would lump them together, even though,
conceptually, it would seem that there would be a difference
between property management and actual brokerage activities.
Mr. Hanna. In most areas, the residential real estate
brokerage firm is not involved in property management as we
know it. This might not be true in some of the smaller markets,
but typically, of commercial real estate brokerage companies,
who are all under the same licensing law, that would be most
responsible and part of their business model.
Senator Johnson. Well, a follow up question probably has
the same response, then, but let me ask.
The focus we have had here today has been primarily in
residential real estate and the importance of local
REALTORS' in providing communities with that
personalized service that they need.
Do you see any difference between bank getting involved in
commercial real estate transactions versus residential? Are
there different issues that we should consider in terms of
determining the potential impact on consumers?
Mr. Taylor. I would hate to be the business owner who's
trying to rent commercial property in a downtown building that
is not managed by the major lender or lenders in that area, and
then be going to those lenders trying to access credit and
capital when they are obligated and have a financial interest
in seeing to it that the other properties are leased out. I can
see a conflict there that makes me somewhat uncomfortable.
Senator Johnson. Anyone else care to comment on the
difference between residential and commercial?
Mr. Hanna. Well, certainly, commercial brokerage lending,
in particular, does not come under RESPA laws. So, I think you
probably have to look at that as an issue.
Senator Johnson. Anyone else?
[No response.]
Mr. Smith, one area of concern is a potential for conflicts
of interest, or the appearance of conflict of interest, if
banks were to get into the real estate business.
I know that there are strong antitying and privacy laws
that provide protection against doing things, such as
recommending inappropriate title insurance or property
insurance products.
But it would seem that there could be a temptation that
could exist to steer customers to related areas of the banking
organization, notwithstanding these restrictions.
Could you very briefly elaborate a bit on what safeguards
exist inside banks to ensure that this would not happen? And
what would be the enforcement mechanism to ensure that any
firewalls are maintained?
Mr. Smith. Well, under the RESPA, we have to identify all
those things that we have in the bank. And again, the customer
has to acknowledge the fact that we have those products and
services and has to sign off on that.
And the regulatory bodies review those documents whenever
they come into the bank. They look at the mortgage documents to
make sure that we have complied with all the various provisions
that we have to comply with.
I sincerely apologize to Senator Bennett for having an
unfortunate experience with a bank. Sometimes we bankers get
very frustrated with the regulatory process that we have to
comply with. But, again, that is ensuring that we provide to
the customer the proper safeguards that we have to comply with.
So that is part of the process in making sure that the
consumer fully understands what they are signing and what the
transaction involves.
Senator Johnson. Mr. Taylor, are you satisfied with those
constraints?
Mr. Taylor. Well, actually, I wanted to raise a related
point that I think your question raises because what is
interesting is, if you watched over the last several years as,
indeed, mortgages have become more affordable and interest
rates have gone down, is you have seen the banks continuously
lower fees and do the kinds of things that competition drives
them to do.
But you mentioned some of the other products that are also
offered and that are necessary as part of the deal. Title
insurance, for example.
That hasn't gone down. Lawyers' fees haven't gone down. You
look at some of those costs associated with that and I am
wondering if--I do not know if you have picked it up in
American Banker, but what we are looking at is, we would like
to see more competition in those arenas because, indeed, those
closing costs mean a lot, particularly for the populations we
care about.
Title insurance, you refinance or you get a home equity
loan or anything like that, you get title insurance again.
Well, you may not know this, sir, but the title insurance you
originally had already covers you as the borrower, and it stays
with you until you have sold off or until you drop dead.
And yet, the bank hands you an additional title insurance
policy for another $800-$900 dollars, on average, and if you
are not savvy enough in some States to know that you are asking
for a reissue policy, because if you ask for that, you actually
get a discount. But, still, it is this incredibly inflated cost
that has nothing to do with anything, except covering that new
lender for that period of time that there are no liens on the
property since the original title.
I did not mean to get off on this, but the point of this is
that, I think, in the same way with brokers, I am hoping that
by keeping the industry separate, by keeping the competition at
the level it is at, we have seen the broker fees go down.
In some of these other industries where we have seemingly
no influence, in spite of the market, in spite of the
competition, I think there are all of five major title
insurance companies, they have a nice little game going in
which the consumer gets gouged.
I like the idea of separate, competing industries that have
to compete for the consumer dollar, rather than being just
lumped together. That doesn't answer your question and I
apologize for that, but it gives me the opportunity to talk
about title insurance.
[Laughter.]
Senator Johnson. Mr. Murphy, last week, we were chatting a
little bit, and I thought you raised an interesting point that
goes to one of the more fundamental issues that this whole
hearing is about, and the difference between transactions that
are funda-
mentally financial in nature versus those that are commercial
in nature.
You shared with me an observation appropriate to our home
State about selling cattle. You asked how real estate as an
asset is different from selling head of cattle.
In both cases, one has documented rights of ownership. Both
types of transactions generally involve financing through a
bank or other financial intermediary, and in both cases, the
purchaser has the expectation that the asset will increase in
value over time.
Yet, buying and selling cattle is universally viewed as a
commercial enterprise. Whereas, we have heard today the
argument that buying and selling a home or investing in real
estate is financial in nature.
I think this is an interesting observation you have raised,
and I wonder if you would comment a bit about, as you see it,
the differences between transactions that are fundamentally
financial versus those that are commercial.
Mr. Murphy. Thank you, Senator. Well, obviously, in the
Midwest, we look at things pretty straightforward. We raise 1.8
million head of cattle in South Dakota, which is twice as many
cattle or livestock as we have people in our State.
We also had 400 million bushels of corn in our State. And
farmers and ranchers, it wouldn't matter which operation you
look at, they all feel the same way, everything that you can
touch is real. That is the way they look at this issue.
They look at real estate the same way. You could never
convince, at least anyone that I know of in South Dakota, that
real estate is financial in nature. It just doesn't go that
way.
And if you were going to go on that route, then we would
only need four or five banks, but they'd have to be extremely
large because on one side of the bank, you are going to have to
have a livestock holding company and a grain elevator, and on
the other side, you are going to have to hold farm machinery,
boats, campers, and every car that is sold in the State of
South Dakota, too. But maybe I could get involved in that land
sale.
We like separation. We like the separation in government.
We like the idea that we have 535 people out here that can make
a decision on whether something should be done that is in the
best interest of the people.
Senator Johnson. My time is expired, but Mr. Smith, just a
brief observation on your part about financial versus
commercial transactions.
Mr. Smith. Well, I personally have a farm and I personally
own cattle. But I own it. That is a product. And so, I
personally buy and sell the cattle myself.
So that is a product, much like hardware items, shoes, or
clothes. That is a completely different situation than the real
estate agents acting as a third party in the transaction of
buying and selling a home.
Mr. Hanna. And I will say that for 96 percent of the
American public, the largest single asset they buy or sell is
their own home.
I think, as a statistic, 93 or 94 percent of the American
families finance that purchase. So, I am not sure it is the
same example as the cattle, but it is an example.
Senator Johnson. My time has expired. Senator Bennett, any
questions?
Senator Bennett. Yes, I would like to make just a few
observations here.
My number-one concern here, I think of all the Members of
the Subcommittee, is for the consumer. It is the buyer of the
home.
We want to structure a circumstance where the buyer of the
home gets the best deal, gets the best service, and is
protected,
Mr. Taylor, from the predatory activity that you have
described. And we have had hearings on that activity here in
the Banking Committee.
I am sympathetic to the idea of real estate agents liking
the way things are. But if things can get better for the
consumer by having a change, the way our dynamic capitalist
economy works is that people who do not keep up with that have
got to find something else to do, or start keeping up with
that.
As I say, the agent that I have described, I think she will
thrive no matter what kind of a structure we have put here
because she has the skills for which people will pay.
But if there are marginal agents that the present
circumstance is keeping in place who will get hurt, Champater
called it, the creative destruction of capitalism? And we all
have to go through it.
I have certainly lost plenty of jobs in my life. I may lose
this one for the comments I am making. I do not know.
[Laughter.]
But the bottom line should be, what is the best deal for
the consumer?
Mr. Smith, tell us why the consumer would be better off as
the proposal that we have from the Fed and the Treasury goes
into place.
And Mr. Murphy, you tell us why the consumer would be
damaged if this goes.
Now I will warn you in advance, I do not think the
predatory example you gave us is a legitimate example of what
might happen because my experience is, if you have, just to
pick some names, Welles Fargo or Bank of America, you will have
a higher level of ethical procedure than you would have in the
independent mortgage lender whom you talked about who doesn't
want anybody looking at him.
Whereas, the CEO of a very large national company will say,
our reputation is our corporate crown jewels and we will not
jeopardize our reputation for this kind of market.
Now, obviously, I was wrong in that assumption as far as
Arthur Anderson is concerned, but, generally that is the case.
Mr. Taylor. Or J.P. Morgan or Merrill Lynch.
Senator Bennett. Well, J.P. Morgan has an interesting
history.
But, generally, you do get a higher level of ethical
behavior when you are dealing with a company that has a higher
reputation than if you have a company that is kind of a fly-by-
night outfit put together in the local community.
Mr. Taylor. So are you going to limit this to those high-
end, big companies? Is that what you are talking about?
Senator Bennett. It is going to be limited to Federally
chartered banks.
Okay, Mr. Smith, and then Mr. Taylor.
Mr. Smith. Senator Bennett, I alluded to the fact that in
my community we have a Re/Max agency, and there are other real
estate agents in town. And I think if you eliminate banks from
having the opportunity to partner with those other real estate
agents, maybe the mom-and-pop real estate agent, you will be
eliminating choices for that consumer.
If that small real estate agency, the mom-and-pop agency,
doesn't have the capital or the technology to compete with the
Re/Maxes of the world, they may look to a bank to partner in
order to have the capital, in order to have the technology to
stay in business.
And I think keeping those people in business will obviously
provide more choices for people wanting to purchase houses. And
I think the banking industry can bring the capital and the
technology resources to the table and partner with those real
estate agencies in order to continue to provide the products
and services to the community, which would mean many more
options for the consumer.
Mr. Taylor. Senator Bennett, I agree. I think, for the most
part, large financial institutions really do care about their
reputation.
In fact, in some ways, that probably influences them as
much as some of the fair-lending laws that reputation risks.
So, I do not believe that there isn't some truth to that.
Of course, this law wouldn't limit it to those institutions. In
fact, some of the institutions that are subprime lenders and,
indeed, do predatory lending, would also have access to being
able to offer these brokered services.
But one thing we should look at is, as these institutions
have become bigger and bigger, what is interesting for the
consumer is that the fees have gone up--ATM fees, check-cashing
fees, basic banking fees.
The Federal Reserve just did a study on this, looking at
some of the largest institutions and what has happened to the
consumer as they have gotten bigger and bigger and their
reputations have grown and so on, is that the consumer is
paying more and more for basic financial services.
I know that my colleague, Mr. Hanna, talks about how RESPA
would limit any steering toward a particular financing
institution by a broker. But the truth is, if you are directly
affiliated with a financial institution in such a way that that
financial institution is steering mortgages or prospective
borrowers to you because of the nature of their business and
their customers say, ``you know, I think it is time to
refinance or to buy a house or whatever--well, here, call your
friend.'' What did you call the professional? A hot prospect.
Senator Bennett. Never mind.
[Laughter.]
Mr. Taylor. But, in other words, that person, if I were
she, if that bank was feeding me a line of business regularly,
I would go out of my way to make sure that whatever opportunity
I had to make sure that the people who were coming to me
looking for houses, that I exposed them to that financial
institution in a very positive way.
I think that that will limit consumer choice. And again, I
think the bottom line is, is the consumer being ill-served by
the brokerage industry?
I do not think so. I, like you, this year I have refinanced
and paid that second title insurance fee. By the way, we will
talk about that at another hearing.
Senator Bennett. I agree with you about title insurance.
Let's make the record very clear on that one.
Mr. Taylor. But I was happy to deal with an independent
broker who was able to bring me to a lot of different
institutions and a lot of different products and gave me the
best deal, and it really worked well.
So that would be my comment, sir.
Senator Bennett. Thank you.
Anyone else? Any comment on what is best for the consumer?
Mr. Hanna. Somehow, this conversation has gone that we will
not have independent brokers any more. If you look at the
example of GMAC, they have all independent brokers and they
have been in the business for a number of years. GMAC is, I
consider it a
financial institution that owns real estate companies.
And clearly, they are an example of someone in the
business, a conglomerate financial group that has independent
REALTORS' and they have a mortgage company also, and
if they had their figures here, they have those same great
independent REALTORS' who are making recommendations
to the best mortgage products and the best other closing
products possible in the marketplace.
The financial conglomerates and State-chartered banks that
have entered the real estate business over the years have not
converted the sales force of independent contractors into
salaried employees.
I haven't seen this trend that Mr. Taylor alluded to, or
Mr.
Murphy. If banks come into the business and hire salaried
people right off the get-go and change the industry model, they
will not be in the business very long.
Mr. Murphy. The problem with that is that GMAC, they are
not banks. There is the difference.
Mr. Hanna. Metropolitan Financial Corporation, which owned
Edina Real Estate in the Minneapolis-St. Paul area for years
before it merged into First Bank System, was a Federally
insured sav-
ings and loan. It kept Edina's sales force of independent
contrac-
tors intact.
Senator Bennett. Mr. Chairman, my time is up and we will
leave the hearing and allow these four to continue their
debate.
[Laughter.]
Mr. Murphy. Which we will continue.
Senator Johnson. Thank you, Senator Bennett.
I want to thank the members of the panel. I think this has
been a very constructive, very positive contribution to the
issues that we are wrestling with here in the Banking
Committee, and I thank you for your contribution.
With that, the hearing is adjourned.
Mr. Hanna. Thank you, Mr. Chairman.
Mr. Murphy. Thank you.
Mr. Taylor. Thank you.
Mr. Smith. Thank you, Mr. Chairman.
[Whereupon, at 11:50 a.m., the hearing was adjourned.]
[Prepared statements, response to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT SENATOR JACK REED
Thank you Mr. Chairman, and I appreciate the timeliness of the
hearing, coming so closely after the National Association of
REALTORS' engaged in some Capitol Hill visits last week.
This is certainly an issue eliciting a lot of comment and
excitement, and I am glad we have the opportunity this morning to delve
further into the details of what this regulation would mean for the
banking and real estate industries, and most importantly, for the
consumer.
Both sides in this issue continue to make compelling arguments,and
I look forward to a further enlightening discussion this morning.
Certainly the National Association of REALTORS' should be
commended for their efforts in this debate, and I want to congratulate
them for garnering so many cosponsors for their legislation in the
House. Now I understand that their focus has shifted to the Senate.
As a Member of the Conference Subcommittee on the Gramm-Leach-
Bliley Act a few years ago, I recall the many discussions we had in the
context of banking and commerce. Obviously there are many varied views
on the subject, and I made my position clear with regard to the unitary
thrift ``loophole,'' for which I believed there were enough safeguards
in place to allow for limited mixing of banking and commercial
activities.
The situation before us at this hearing presents a much more
nuanced part of that argument, and I am certainly mindful of the effect
it could have on my constituents that are part of the real estate
industry, as well as consumers in general.
Mr. Chairman, thank you again for the opportunity to have this open
and frank discussion on such a relevant and important issue.
----------
PREPARED STATEMENT OF TOM MURPHY
President, Association of REALTORS', Sioux Falls, South
Dakota
REALTOR', Chell REALTORS'
representing The National Association of REALTORS'
May 23, 2002
Chairman Johnson, Senator Bennett, and Members of the Subcommittee,
my name is Tom Murphy. I am a REALTOR' with Chell
REALTORS'--a small residential real estate firm in Sioux
Falls, South Dakota. I am also President of the South Dakota
Association of REALTORS'. Our State association membership
of over 1,400 REALTORS' are engaged in helping people buy,
sell, and manage real estate every day.
I am here on behalf of the National Association of
REALTORS', which represents more than 800,000 members
engaged in all aspects of commercial and residential real estate. I
want to thank you for the opportunity to testify today on this critical
issue.
It is important for all of us to take a good look at how the
economy and consumers would fare if banks are allowed into the real
estate business. That is one reason why I am glad we have the views of
consumer groups represented on this panel.
Mr. Chairman, you and your Subcommittee Members are to be commended
for examining all perspectives on this proposed regulation--those of
the little guy, as well as those of the big guy.
As I mentioned, my business is a small, one-office real estate
firm, just like nearly 80 percent of REALTOR' firms. My
colleague from Pennsylvania here represents a large regional,
multioffice firm. Obviously, we come here today to present different
perspectives of this Nation's dynamic and diverse real estate market.
The fact that some of our members can differ on an issue, while
respecting and supporting each other on most, is a great example of the
vitality of the National Association of REALTORS'. It is a
sign of the hearty competition of the real estate business today.
My comments today represent the overwhelming majority of NAR's
members. Ninety-six percent of our members support the position of the
National Association of REALTORS' to oppose this rule.
Eighty-two percent of large broker/owners support this position, while
81 percent of our members believe we should be doing even more to stop
the banks from unfairly entering our business.
We firmly believe that redefining real estate brokerage, leasing,
and property management as financial in nature is totally unacceptable
because it mixes banking and commerce. If the Nation's most aggressive
megabanks are allowed to add real estate to their long list of approved
activities, you can be sure that consumer choices in real estate
services will shrink.
The Nation's bankers, who petitioned the Federal Reserve and
Treasury for this proposed rule, should not gain by regulation what
they failed to gain by legislation. In 1999, Congress clearly went on
record supporting the separation of banking and commerce.
Oddly enough, the American Bankers Association strongly supported
an amendment you offered, Mr. Chairman, during the Gramm-Leach-Bliley
debate to bar unitary thrift holding companies from engaging in
commercial activities like real estate brokerage. It now appears that
members of the ABA would like to corner the market on commercial
businesses like real estate brokerage, leasing, and management.
Currently, we have a balanced marketplace for commerce, banking and
financial services. Let me direct your attention to the two charts I
have enclosed.
The first chart shows how the commercial and banking industries
compete in the ``financial services'' arena. REALTORS' do
not engage in banking. They do not take deposits or run ATM's.
Again, REALTORS' are not engaged in banking. Banks do
not sell real estate. Banking and commerce are separate. It is that
simple. Otherwise, why shouldn't banks sell cars or appliances?
The second chart shows that in the arena where banks and
REALTORS' do compete on mortgage originations, banks are
already the winners. REALTOR'-affiliated mortgage lending
companies only originate about 5 percent of mortgages, while the large
banks handle 44 percent.
Today's competition occurs in the financial services arena where it
belongs. Consumers benefit from this arrangement because the direct
competition for financial services between commercial companies and
banks results in greater consumer choice and customer service. When
banks say they want ``one-stop shopping'' what they are really saying
is they want ``one-bank shopping.''
The reality is that the entry of Federally chartered banks into the
real estate brokerage business would tilt this balanced marketplace
toward the Nation's mega-
banks. It would pit Government subsidized banking companies against
privately funded real estate enterprises. It would put taxpayer money
at risk.
Mr. Chairman, the National Association of REALTORS'
believes this issue is just too big to be decided by the regulators.
The decision belongs with the Nation's lawmakers. That is why we have
called on Congress to enact The Community Choice in Real Estate Act, S.
1839, and H.R. 3424, a companion bill in the House, to clarify
Congressional intent.
REALTORS' from all over the country have sent more than
100,000 letters to their Congressional representatives urging support
for this bill. We have sent more than 40,000 letters to the Federal
Reserve and the Treasury expressing our opposition to the proposed
regulation. And we have sent more than 50,000 letters to President Bush
urging his support.
So far, H.R. 3424 has generated tremendous support in the House,
with more than 230 cosponsors. So far, a dozen Senators have
cosponsored S. 1839. Last month, Treasury Secretary O'Neill announced
that he plans to postpone making a decision on this issue until next
year. The ball is back in your court. It is time for Congress to
resolve this issue.
Mr. Chairman, REALTORS' are not alone on this issue. A
diverse group of trade associations and consumer groups stand with us
on this one.
Passage of The Community Choice in Real Estate Act will set the
record straight. At the same time, it will ensure more balanced
competition and more consumer choice.
This legislation will help to keep local entrepreneurs and
businesses operating in our communities. It will help to keep some of
our best community leaders and volunteers in place.
REALTORS' are more than business people. We are
community leaders. Look in countless cities and townships across
America and you will find it is a REALTOR' serving as a den
mother; a REALTOR' who is leading the city-wide clean up; a
REALTOR' who is hosting the candidate meet-and-greet; and a
REALTOR' who is coaching Little League. REALTORS'
are linked to their communities in more ways than simply through their
businesses. REALTORS' have a stake in the same neighborhoods
where their clients live or want to live.
Finally, this proposal just does not make sense. Banks have it
backwards. Real estate brokerage is not incidental to a financial
activity. It is the mortgage that is, in fact, incidental to buying a
home. Twenty percent of all the homes sold in America involve no lender
financing at all.
America's system of homeownership is the envy of the world.
Homeownership is at an all time high. Five out of six homebuyers and
home sellers are satisfied with their real estate agent and they would
use him or her again. Let us not destabilize this pillar of our economy
and relationship that works in communities throughout America.
Well over a year ago, the Federal Reserve and the Treasury
Department issued a proposed rule that would allow financial holding
companies (FHC's) and financial subsidiaries of national banks to
engage in real estate brokerage, leasing, and property management
activities. The National Association of REALTORS' (NAR)
strongly opposed this regulation on the grounds that real estate
brokerage and property management are neither financial activities, nor
are they incidental to finance, and approval of the proposed rule would
thus effect a mixing of banking and commerce. This regulation would not
only result in negative market and consumer consequences. An
affirmative decision by the Federal Reserve and Treasury on this
proposal would also violate Congressional intent, evident in several
key banking laws which make it very clear that Congress specifically
intended to maintain the separation of banking and commerce.
Congress adopted the Gramm-Leach-Bliley Act in 1999, which
established a legal and regulatory framework for financial subsidiaries
of banks and financial holding companies to engage in designated
financial activities under the new law. The Act created a new entity,
the financial holding company that would compete in the financial
services area offering services that were prohibited to bank holding
companies. By distinguishing the permissible activities of bank holding
companies from financial holding companies, the Act also reaffirmed the
longstanding national policy that separated banking from commerce
because of the unique powers and advantages granted to banking
institutions by their Federal charters.
NAR-supported legislation was introduced in both the U.S. House of
Representatives and the U.S. Senate (H.R. 3424 and S. 1839) that will
clarify Congressional
intent that real estate brokerage and management are not incidental or
complimentary to a financial activity. The proposed legislation, The
Community Choice in Real Estate Act, will maintain the status quo
regarding FHC's ability to expand into real estate brokerage and
property management activities through regulation. The Community Choice
in Real Estate Act returns the issue back to its proper forum--the U.S.
Congress.
The National Association of REALTORS'-supported
legislation and its position on this issue is based primarily on two
strong beliefs:
f The Congress, not the Board of Governors of the Federal Reserve or
the Secretary of the Treasury, is the proper judge of what is
commerce and what is banking or financial services. The 535 elected
Congressional representatives, not the seven Federal Reserve Board
Governors or the Secretary of the Treasury, should be responsible
for any changes in current law that would result in a dramatic
restructuring of the real estate industry. Real estate brokerage
and property man-
agement are clearly commercial activities. This view was central
throughout the 25-year debate on the Glass-Steagall Act and the
passage of the Gramm-Leach-Bliley Act of 1999, and clearly is
reflected in historical and present Congressional intent.
f Permitting financial holding companies and national bank subsidiaries
to enter the real estate brokerage and management industry would
have wide-ranging, adverse market effects. Industry concentration
would increase, competition would decline, and consumer choice
would be limited with no real benefits from economies of scale or
scope. The unprecedented expansion of banking powers into the real
estate brokerage/management industry would clearly expose the
financial holding companies' and their banking subsidiaries'
inherent conflicts of interest in selling financial services
(banking products) rather than serving customers in the brokering
of real estate property.
NAR's position was eloquently stated by 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
the American economy and an abandonment of the traditional role
of banks as impartial providers of credit, while exposing the
taxpayer to liabilities on a scale far exceeding the savings
and loan bailout. At issue with financial services
modernization is increased competition. At issue with mixing
commerce and banking is economic conglomeration, the
concentration of ownership of corporate America.
Financial holding companies, their representative associations and
other groups, including some large real estate brokerage companies,
argue against the National Association of REALTORS'
position. They claim that the Association is being ``protectionist,''
and that the entry of banks into real estate would encourage more open
competition in the real estate marketplace. On the contrary, the
National Association of REALTORS' position promotes open and
fair competition. Indeed, its members would welcome FHC's as
competitors if FHC's truly competed in a free market without the
advantages of their bank subsidiaries' Federal charters and without
creating the risks outlined by Chairman Leach.
Currently we have a balanced marketplace for commerce, banking, and
financial services. Real estate brokerage firms do not engage in
banking. Financial holding companies do not engage in commercial
activities, such as real estate brokerage and property management.
Banking and commerce are separate. The arena of financial services
allows competition from both financial holding companies and commercial
firms. Both real estate brokerages and financial holding companies
(banks) have diversified their business lines into financial services
that have served as a buffer between commerce and banking activities.
This was the intent of Congress throughout its deliberations on
financial modernization.
The reality is that the entry of Federally chartered banks or
financial holding companies into the real estate brokerage business
would tilt this balanced marketplace toward the FHC's. It would pit
Government-subsidized banking companies (putting taxpayer money at
risk) against privately funded real estate enterprises. Furthermore, if
FHC's are permitted to enter the real estate business,
REALTORS' and builders would be placed in the awkward
position of having to go to banks which are subsidiaries of FHC's--
their direct competitors--for loans and financial services.
Why REALTORS' Support The Community Choice in Real Estate
Act
The Community Choice in Real Estate Act of 2001 was introduced by
Congressmen Ken Calvert of California and Paul Kanjorski of
Pennsylvania. The Act, H.R. 3424 was introduced with more than 30
original cosponsors and today has more than 225 cosponsors. The
legislation, along with its companion bill in the Senate, S. 1839, is
designed to address concerns expressed by both real estate
professionals and consumers if financial holding companies and
subsidiaries of national banks (FHC's) are permitted to engage in real
estate brokerage and property management activities.
In brief, The Community Choice in Real Estate Act stipulates that
Federal regulators prohibit these financial institutions from engaging
in real estate brokerage and management activities. More specifically,
H.R. 3424 and S. 1839 specify that the Federal Reserve Board and the
Secretary of the Treasury may not determine that real estate brokerage
or real estate management activities are financial in nature,
incidental to any financial activity, or complementary to a financial
activity.
The Community Choice in Real Estate Act Returns the Issue to
the Proper Forum--the U.S. Congress
The National Association of REALTORS' position on banks
entering the real estate business aligns with both historical and
current Congressional intent. The legislative history of banking laws
demonstrates that real estate brokerage has been consistently
interpreted as a commercial, not a financial activity. Although the
Gramm-Leach-
Bliley Act of 1999 (GLB) made specific reforms in the Nation's banking
and financial services laws, the separation of banking from commerce
remains a tenet of national policy. While the Federal Reserve and the
Treasury Secretary are authorized by Gramm-Leach-Bliley to expand the
list of financial activities, Congress has clearly indicated its intent
to maintain the separation of banking and commerce.
Financial modernization--the term that advocates used to
characterize the legal changes that allowed banks, securities firms,
and insurance companies to enter each other's businesses--has been
interpreted by some as removing all barriers to banks entering
nonbanking businesses. But in its deliberations on the Gramm-Leach-
Bliley Act, Congress stopped short of mixing banking and commerce. The
GLB Act was quite specific from the outset in describing what a
financial activity may be. The current activities of banks and
financial holding companies principally relate to financial
instruments: loans, checking accounts, mortgages, etc. While these
represent value between two parties (usually a bank and a depositor or
borrower), they are not tangible goods and rarely take any physical
form.
Commercial activities, such as real estate brokerage and property
management, offer to consumers something that is tangible--a house, an
appliance, a car, for example. Although banks argue that real estate
has financial attributes, even the Federal Reserve Board and the
Secretary of the Treasury in the proposed real estate regulation
observed that bank-ascribed financial attributes might not be enough to
treat real estate as a financial asset.\1\ And while purchasing
tangible assets, such as a car, computer, or a home, may entail the use
of financial instruments--usually cash or loans--this does not mean
that commerce is ``financial in nature'' or ``incidental to a financial
activity.'' Rather, it can be argued that financial activity is
incidental to the real estate transaction.
---------------------------------------------------------------------------
\1\ See Federal Register, Vol. 66, No. 2, Wednesday, January 3,
2001, p. 310.
---------------------------------------------------------------------------
In the GLB Act, Congress enumerated those activities that it deemed
to be financial in nature, but specifically omitted real estate
brokerage and management. (For specifics, see 12 U.S.C. 1843 (k)(4)).
\2\ Congress did make provisions to expand the list of financial
activities. It devised specific criteria that such activities must
meet, based on new technological developments to deliver financial
products to consumers and how the marketplace itself evolved. Congress
also authorized the Federal Reserve Board and the Treasury Department
to agree on such new financial activities.
---------------------------------------------------------------------------
\2\ Further evidence of Congressional intent regarding holding
company expansion into non-financial areas can be discerned by the vote
in the House of Representives in 1998 in which an effort to permit
banks to engage in commerce--up to 5 percent of their annual net
revenue and five percent of their total assets--was defeated by a vote
of 229 to 193.
---------------------------------------------------------------------------
However, Congress did not anticipate nor intend for that list of
financial activities to include commercial ones. There has been no
significant change in the relevant technology, or in the business of
real estate brokerage or management, since enactment of the GLB Act in
late 1999. The businesses of real estate brokerage and management
remain, for all practical intents and purposes, the same today as they
were on the date of enactment: the transfer of real property and such
commercial activities related to such transactions. The very purpose of
the regulation proposed by the Federal Reserve and the Treasury
Department is to overturn the long-held understanding that real estate
is commerce by redesignating it as a financial activity for purposes of
the Gramm-Leach-Bliley Act. The proposal from the Federal Reserve and
the Secretary of the Treasury runs counter to Congressional intent.
The proposal to redefine real estate brokerage as a financial
activity has met opposition from a full spectrum of consumer and
industry groups. In support of that opposition, Congress is reasserting
its authority in the arena by introducing The Community Choice in Real
Estate Act. This bill amends the Bank Holding Company Act to preclude
any such action by the Federal Reserve or Treasury, and clarifies
Congressional intent by prohibiting banks and financial holding
companies from entering real estate brokerage or property management.
The bill's intent is to maintain the status quo; it does not seek to
preclude any current activities that banks and their affiliated
businesses are authorized to do. It reasserts Congressional intent in
maintaining the separation of banking and commerce.
Members of Congress overwhelmingly are signaling their support for
retaining the commercial distinction of real estate activities and
their intention to maintain the separation of banking and commerce. In
fewer than five months after The Community Choice in Real Estate Act
was introduced in Congress, more than 225 Members of the House of
Representatives and at least 10 Members of the Senate signed on as
cosponsors of the bills.
The Act Supports A Diversified Real Estate Services Marketplace
During the past two decades, the financial services marketplace has
grown substantially due, in part, to the entry of both commercial firms
and banking companies. Commercial firms that are involved in the
selling and/or brokering of durable goods (such as refrigerators,
automobiles, and homes) have naturally expanded into financial services
to facilitate the transaction by offering consumer financing that is
complementary to their primary service--the brokering/selling of a
tangible product. Similarly, banking companies that are involved in the
selling of banking services (such as consumer loans and commercial and
industrial loans) have also expanded into financial services so that
they can capture a greater market share by offering their customers
financial services that complement their primary service--banking.
However, unlike a commercial firm, which risks its own capital
funds, a bank's ability to expand its powers and diversify into
financial activities has historically been constrained by Congressional
oversight. Because of the ``special nature'' of banks and the many
Federal subsidies that flow through a bank (that is, deposit insurance,
privileged access to credit), Congress has continually repeated its
intent to separate banking activities from commerce activities in an
effort to avoid conflicts of interest, adverse market outcomes, and
fairness issues that can be caused by a bank's special privileges.
The Gramm-Leach-Bliley Act provided an opportunity for financial
holding companies to expand their product/service lines into financial
activities and activities that are incidental to finance. It is very
clear that the GLB Act set the foundation for a shared competitive
playing field for both commercial firms and banks--the financial
services marketplace. Commercial firms that have subsidiaries involved
in financial activities compete head on with bank-owned financial
subsidiaries. This competition was not ``created'' by the GLB Act; it
already existed because bank-affiliated mortgage lenders already
existed and, in fact, dominated--and still dominate--mortgage
originations. (In 1999, commercial banks and subsidiaries of commercial
banks accounted for the largest market share--44 percent--of mortgage
originations, according to the Home Mortgage Disclosure Act. The top 25
diversified real estate brokerage firms accounted for only 0.8 percent
of mortgage originations.) For example, the General Motors Acceptance
Corporation (GMAC)--a financial services subsidiary of General Motors
competes against Wells Fargo and other banks to sell financing services
to customers purchasing a General Motors automobile. Similarly, Circuit
City competes directly with Bank of America to sell financing services
to customers purchasing Circuit City-electronic products.
In the real estate marketplace, companies like John Doe,
REALTOR', compete directly with banks, like Bank of America,
in the financial services marketplace by providing real estate--related
financial services--principally mortgage brokering services and title
insurance--to customers purchasing a home that was brokered/sold by
John Doe, REALTOR'. Both the real estate brokerage company
and the bank offer a number of real estate related financial services
to homebuyers and sellers.
In the post-GLB Act marketplace, the real estate brokerage company
does not offer banking services and banks do not offer commercial
services--real estate brokerage and management. The separation of
banking and commercial activities is intact. The competition is in the
financial services arena where it belongs. Consumers benefit from this
arrangement because the direct competition for financial services
between commercial companies and banks results in greater consumer
choice and customer service. Prohibitions against the encroachment of
Federally subsidized banks into the world of commerce limit conflicts
of interest or unfair competition.
The ability of real estate brokerage companies to diversify their
business lines into the financial services marketplace has produced a
number of diversified real estate services companies to better serve
consumers. Even the smaller and less diversified real estate brokerage
companies now look to offer ancillary services to their homebuying and
selling clients. Moreover, there are examples where banks and real
estate brokerage companies have joint ventured in the financial
services marketplace. A prominent example is Prosperity Mortgage, which
couples Wells Fargo Bank and Long & Foster, REALTORS'.
Diversified real estate brokerage companies compete directly
against the large financial holding companies (banks) in the financial
services marketplace each and every day. The competitive dynamics in
this marketplace are no different from the competitive nature of the
automobile and electronics marketplaces. The beneficiaries in all of
these markets are consumers.
The Community Choice in Real Estate Act Will Benefit Consumers and
the Real Estate Industry
The Community Choice in Real Estate Act will help to maintain a
competitive, efficient, and balanced real estate marketplace, providing
the consumer with choice at low cost and with no risk to the U.S.
taxpayers. The entry of Federally insured depository lending
institutions into the real estate brokerage business would tilt the
competitive playing field by pitting Government subsidized financial
holding companies and national bank subsidiaries against privately
funded real estate enterprises. Passage of the Act will help preserve a
fiercely competitive real estate brokerage marketplace.
The real estate brokerage industry as it exists today has large
numbers of independent real estate professionals and brokerages
actively competing for prospective buyers and sellers. Competition is
fierce, efficiencies are high, and there are relatively few barriers to
entry. These characteristics make it highly unlikely that the proposed
regulation would benefit either business or consumer interests.
The residential real estate brokerage industry is a competitive
marketplace, where more than three quarters of a million
REALTORS' \3\ and tens of thousands of real estate
brokerages compete for customers' business each day. The underlying
cost structure of the industry and the relative ease of entry into the
market serve as checks to the concentration of market power. The large
number of industry players ensures homebuyers and sellers access to
service providers who best meet consumers' needs at the lowest price
possible.
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\3\ There are approxiamtely two million people who hold real estate
licenses. However, not all of those are active practitioners. It should
be noted that Realtor', REALTORS', and Realtor-
Associate' are registered collective membership marks that
identify, and may be used only by, real estate professionals who are
members of the National Association of REALTORS' and
subscribe to is strict Code of Ethics.
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Real estate firms tend to compete actively for business in three
different arenas. First, firms compete for the best real estate agents.
Second, firms compete for sellers' listings and homebuyers against
other real estate firms in their market area. Finally, real estate
firms and agents compete against the other homebuying and selling
options, including For Sale by Owner (FSBO's). The result of this
three-pronged competition revenue and cost pressures that limit
profitability for most real estate brokerages. But this competition
also results in excellent service provided efficiently by real estate
firms and agents for both buyers and sellers. The Community Choice in
Real Estate Act would preserve this system.
Mixing Banking and Commerce Will Stifle Competition in the
Real Estate Industry
Today any commercial firm can enter real estate brokerage, but
FHC's have Government-imposed barriers to entry. National banks and
financial holding companies have long been able to own mortgage
companies and engage in joint ventures with real estate firms. They now
claim that real estate brokerage and management are financial
activities, without acknowledging their current competition in this
area through their existing mortgage lending affiliates. Financial
holding companies now want to directly own commercial firms in the form
of real estate firms and compete with other commercial firms using the
Federal subsidies available to their banking subsidiaries. This is not
the competition that Gramm-Leach-Bliley envisioned.
The expansion of banking powers that would permit FHC's to engage
in real estate brokerage activities will have a detrimental effect on
the real estate brokerage industry. The Federal banking charter
provides Federal deposit insurance and privileged access to credit--
advantages not offered to real estate brokerage firms. Most of the
advantages of the bank charter directly add to bank profitability that
would flow up to the financial holding company, thus offering FHC's and
their real estate brokerage subsidiaries a competitive advantage over
commercial firms in the real estate industry.
Allowing FHC's to provide brokerage, funding, and investment
services for real estate would increase the power of these integrated
firms. This power could be used to limit the entry of new real estate
firms and thus limit the competition characterizing the market today in
two distinct ways.
First, FHC's would have the ability to fund new real estate
brokerages with revenues from the banking side of the business, thus
tilting the playing field toward FHC's. Financial holding companies
would be able to use banking fees or even profits from their mortgage
operations both to increase profitability and to subsidize their entry
into insurance and other financial services. Few traditional real
estate brokerages have access to outside income streams to subsidize
the real estate brokerage business. The result could be an increase in
industry concentration as real estate brokerages exit the industry
unable to respond to their well-financed new competitors. The same
dynamic would limit entry of new real estate firms.
Second, FHC's could leverage their privileged access to capital,
access to numerous subsidiaries, and outside income streams to engage
in a sustained period of below-cost pricing designed to eliminate other
firms providing the same service. This could damage any real estate
brokerage firms that do not have the resources to defend themselves
against a well-financed and subsidized FHC. Again, formerly viable real
estate brokerages could be forced to dissolve--not because of an
inability to provide efficient and quality service to consumers, but
because below-cost pricing can unfairly eliminate the competition. The
result could be a smaller number of firms that are less likely to
provide the benefits that competition brings to today's real estate
brokerage market.
Mixing Banking and Commerce Hurts Consumers
The National Association of REALTORS' agrees with the
message sent by the U.S. Congress: mixing commerce and banking will
adversely affect the real estate industry. If big banks are allowed
into the real estate business, the market could soon be dominated by a
smattering of large banking conglomerates whose primary goal is to
cross-sell various financial products, not to put people in homes and
commercial properties. The end result could be fewer choices for
consumers, higher fees and less competition.
In the banking industry a few dominant firms control a significant
share of the total market. FHC's' entry into the real estate brokerage
market would likely increase concentration and introduce unfair
competition because of their Federal subsidies. There is likely to be a
significant decline in the number of firms and the number of small
firms that represent a key segment of the industry. The real estate
brokerage business could change from a localized, highly competitive
industry to one that is dominated by nationwide Federally chartered
firms.
It is unclear what FHC's could bring to the market that would
increase competition. Any additional entry will not necessarily lower
costs. FHC's claim that consumer costs will go down, but those lower
costs can only be realized by introducing economies of scale or scope,
cross-subsidization, or predatory pricing. The latter two reasons are
not permanent benefits for consumers. Only the first--economies of
scale--enhances consumer welfare. Without an increase in efficiency,
there would be no cost savings to pass along to consumers. But there
are limited economies of scale in the real estate brokerage industry.
Even if FHC's were able to reduce real estate brokerage fees
temporarily, any savings to homebuyers would be offset by higher costs
for bank customers. Absent economies of scale, lower real estate
brokerage fees can only come via cross-subsidization from other
business arenas. The higher banking fees are likely to become permanent
features of the banking system, given barriers to entry and
concentration of market power, while reductions in real estate
brokerage fees could be temporary as firms exit the industry.
The expansion of banking powers that would permit financial holding
companies into the real estate brokerage business could also limit
consumer choice in the selection of a real estate professional and
other real estate-related service providers. FHC's have an inherent
conflict of interest in selling financial services (banking products)
rather than serving customers in the brokering of real property. The
parental relationship between FHC's and their subsidiary real estate
brokerage business would likely steer consumers to the FHC's'
subsidiaries. Agents working for an FHC-owned real estate brokerage
firm would have less incentive to find an outside loan provider or
other real estate settlement service vendor that best fits their
customers' needs.
There is also the likelihood that FHC's entering the real estate
brokerage industry would retain their real estate agents as salary-
based employees, rather than as commission-based independent
contractors. As FHC employees, these real estate agents would focus on
the FHC's profits, cross-selling the holding company's other services.
This is contrary to the current real estate market where there is
fierce competition among a large number of firms ensuring that
consumers receive valuable, impartial advice when they most need it.
The Act Benefits Consumers and the Real Estate Industry
In summary, passage of The Community Choice in Real Estate Act will
ensure more competition, and thus more consumer choice. More
competition will maintain the lowest cost real estate brokerage
services as well as lower banking fees. Taxpayers will be protected
from risks associated with commercial endeavors underwritten by
Federally insured depository lending institutions. Consumers will
continue to be served by real estate professionals whose interests are
aligned with theirs.
The Community Choice in Real Estate Act defines real estate
brokerage and management as commercial activities, outside the scope of
a Federal bank charter. The Community Choice in Real Estate Act will
limit banking institutions to activities permitted under their current
charters, and maintain the current environment that provides for an
efficient and competitive real estate brokerage market that benefits
both the real estate industry and America's consumers.
Overwhelming Industry Support for the National Association of
REALTORS' Position
The National Association of REALTORS' represents all of
its members and the real estate industry as a whole. In the last 14
months, the association has spoken for its 800,000 members with one
voice, as The Voice for Real Estate. A unified voice is crucial in
maintaining a competitive and highly efficient real estate industry
that serves America's property owners. It is even more vital on the
issue of allowing financial holding companies and national bank
subsidiaries (FHC's) to engage in real estate brokerage and property
management activities.
Recent research indicates that the National Association of
REALTORS' does speak for an overwhelming majority of its
members who oppose FHC's' entry into the real estate brokerage and
management business. In a recent survey (February 2002), more than 9
out of 10 REALTORS' oppose the pending Federal Reserve and
Treasury Department rule that would allow big banking conglomerates to
enter real estate brokerage and management. Perhaps more importantly,
96 percent support efforts by the National Association of
REALTORS' to prevent FHC's from entering real estate
brokerage management.
The survey found widespread support among broker-owners as well as
sales agents. Some 82 percent of large brokers support NAR's position,
according to the survey. The survey also found that 81 percent of
REALTORS' want NAR to be even more aggressive in its
efforts, and majority of large brokers also want NAR to do more to stop
FHC's from entering the real estate business.
PREPARED STATEMENT OF JAMES E. SMITH
President, American Bankers Association
Chairman and Chief Executive Officer
Citizens Union State Bank and Trust Company, Clinton, Missouri
May 23, 2002
Mr. Chairman, I am James E. Smith, Chairman and CEO of Citizens
Union State Bank and Trust, Clinton, Missouri and the President of the
American Bankers Association. I am pleased to be here today on behalf
of the American Bankers Association (ABA). ABA brings together all
elements of the banking community to best represent the interests of
this rapidly changing industry. Its membership--which includes
community, regional, and money center banks and holding companies, as
well as savings institutions, trust companies, and savings banks--makes
ABA the largest banking trade association in the country.
I want to thank you, Mr. Chairman, for holding this hearing. It
allows all parties to get beyond the heated rhetoric and focus on the
issues. In the debate over allowing banks to engage in real estate
brokerage, we bankers have sometimes been portrayed as somehow working
against real estate agents. We disagree with this characterization. The
reality is that many agents and bankers already work closely with one
another. In fact, I believe that bankers and many in the real estate
industry are much closer aligned on the issue of real estate brokerage
than the rhetoric suggests. We all believe that customers deserve to
have the best possible service, regardless of what company provides it.
We all want customers to have many choices of whom to deal with so they
can seek out that agent or company that they trust. And we all believe
that the provision of any financial service should be done in a safe
and sound manner--including adhering to all licensing, qualification,
sales practices, and continuing education requirements.
If banking institutions offer real estate brokerage and management
services there would be more choices available for everyone. Consumers
would have more choices of real estate firms when buying or selling a
home. Real estate brokers would have more choices of potential
employers. And real estate companies would have more choices of
companies to partner with that could provide new sources of capital and
technology. By prohibiting bank involvement, S. 1839 would do just the
opposite--consumers, real estate agents, and real estate companies
would have fewer choices. We believe a competitive market is the best
way to provide quality real estate brokerage and management services.
As we begin our discussion, it is important to note that combining
real estate 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 Federally insured
depository institutions in this country, including many of the largest
banks and savings institutions, have authority to do it. In fact, my
community bank in Missouri has the authority to do it. The ABA believes
that all banking institutions should have the same opportunity to
provide services that meet the needs of our customers.
This issue of open and fair competition is not new--in fact, it has
been debated in this legislative body for many years. However, the
statutory context within which today's discussion will take place is
quite different. In 1999, Congress took an historic step to modernize
the regulation of the financial services sector by passing the Gramm-
Leach-Bliley Act (GLB Act). In the more than 15 years of debate on the
Act, Congress often found itself in the middle of arguments between
financial services industries about who should do what. The result was
gridlock and an out-of-date financial system that did not reflect
changes in consumer needs or in the use of technology.
To be sure that the procompetitive goals of the GLB Act continued
to be met in a dynamic marketplace, Congress established a flexible,
yet conservative regulatory process that would permit the financial
industry to offer new services without the need for further
legislation. This regulatory system gives the Federal Reserve and
Treasury the flexibility and responsibility to determine what
activities should be approved, including considering what is necessary
to permit financial holding companies and national bank subsidiaries to
``compete effectively with any company seeking to provide financial
services in the United States.'' This authority is consistent with the
Federal Reserve's and Treasury's role to ensure efficient, safe, and
competitive financial markets.
The GLB Act promotes competition, safety and soundness, and enables
Congress to avoid becoming embroiled in every competitive issue. S.
1839 would take out the flexibility built into this new system, and put
Congress back in as referee for future competitive disputes. Simply
put, the bill would reverse the most important long-term provision in
the GLB Act over the very first proposal put forth under it. Having
worked so hard to develop a mechanism to keep our financial system up-
to-date on an ongoing basis, Congress should not reverse itself less
than 3 years later because some group wishes to protect itself from
competition. The system established in the GLB Act should be allowed to
work and S. 1839 should not be enacted.
Banking institutions should be allowed to offer real estate
services for three key reasons:
f It's good for consumers--It means more choices, better service,
competitive prices, and greater convenience.
f It's only fair--Since real estate firms offer banking and insurance
services, it's only fair that banking institutions be allowed to
provide real estate services. This is what the Gramm-Leach-Bliley
Act is all about--promoting free and fair competition by leveling
the playing field.
f It's safe--All consumer protections, including all State licensing,
qualification, sales practices, and continuing education
requirements, plus strict privacy laws and antitying rules, would
apply to bank-affiliated real estate agents. And because brokerage
and management are agency activities, they pose no risk to the
bank.
I will discuss these points in detail in the remainder of my
statement. Before I do, let me assure you that the competitive issues
we are talking about here this morning are important to banks of all
sizes. In fact, the ability to offer real estate brokerage may be more
important for smaller institutions. Rural communities may lack real
estate agents or are served only by branches of brokers in other towns
because there is insufficient business to warrant a local brokerage
office. In such small communities, the bank is perceived as the place
that will have the greatest amount of information on what properties
are for sale, including farmland acreage in agricultural communities. I
believe, as do my fellow colleagues who run small community financial
institutions, that these services would significantly benefit our
customers and our communities.
Competition is Good for Consumers
The benefits of competition are well known. In a free market,
businesses choose to offer new products if they believe they can
provide better services at competitive prices. Obviously, not all
banking organizations will choose to offer real estate services, but
those that do will enter the market because they believe they can meet
or beat the competition. Increasing the number of providers raises the
bar for all the participants, forcing improvements in efficiency,
pricing, and service levels--all to the benefit of homebuyers and
sellers.
Allowing all banking institutions to provide real estate services
expands the choices for everyone: consumers, real estate agents, and
real estate companies. This is not only the opinion of bankers, but
increasingly, it is a view shared by real estate agents and
particularly real estate companies.
More Choices for Consumers, Real Estate Agents, and Realty Companies
If banking institutions were allowed to offer real estate brokerage
and management services there would be more choices for everyone.
f More Choices for Consumers--More players in the real estate business
mean more and better products for consumers. In any competitive
market, new participants bring new, creative ideas to the market--
all designed to provide better service and greater convenience, at
reasonable prices. In fact, businesses can only be successful in
new markets by providing services that meet the needs of customers.
Free competition among a wide variety of providers is the
cornerstone of our economic system.
f More Choices for Real Estate Agents--Real estate agents pride
themselves on being independent contractors, choosing the best
companies to work for. If there are more companies to choose from,
agents' employment opportunities will be much broader. Banks will
only be able to attract good agents by offering competitive
commissions and other incentive-based compensation packages. And
because the real estate business requires expertise, licensing, and
other requirements, banks would seek out experienced real estate
agents. Banks know that converting tellers to real estate agents
would be a poor business strategy.
f More Choices for Real Estate Companies--Forward-looking businesses
are always looking for opportunities to improve their franchise
value--strengthening, expanding, merging, or even selling their
business. Allowing banking institutions to engage in real estate
brokerage and management services gives real estate companies more
options for bringing additional capital and technology to the
table, through joint ventures, for example. Banking institutions
also represent potential buyers if agencies choose to sell their
businesses. Indeed, in some communities, partnering with the local
bank may be the only way for the local real estate broker to
compete with the growing national chains. This is why many real
estate firms also oppose S. 1839. It is interesting to note that
many insurance agencies thought that bank involvement was going to
hurt their business--until they realized that it provided many more
options than they had before. To that end, the Financial Service
Coordinating Council, consisting of the ABA, the American Council
of Life Insurers, the American Insurance Association, and the
Securities Industry Association, supports open competition and is
on record opposing S. 1839.\1\
\1\ The letter, dated January 16, 2002, is attached to this
testimony.
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S. 1839 reduces choices: consumers would have fewer choices of whom
to do business with, agents would have fewer choices of whom to work
for, and businesses would have fewer choices for joint marketing, fewer
potential merger partners, and fewer potential buyers. ABA believes a
competitive market is the best way to provide quality real estate
brokerage and management services--simply put, more competition means
more choices.
Many Real Estate Agents Support Open Competition
Many agents and real estate companies are not concerned by the
prospect of banking organizations offering real estate services. Many
look forward to the opportunity to partner with a local bank.
Independent agents who provide good service today know that they will
be competitive with anyone, whether the competitor is another
independent agent or one affiliated with a bank. The views of these
real estate agents are often lost in the emotional rhetoric of their
trade association. Here are a few examples of comments filed by real
estate agents with the regulators on this proposal:
A broker from California writes: ``Additional competition will be
healthy for the industry. Banks and other financial institutions
have learned how to meet the needs of consumers and to handle their
financial matters. One's home is the biggest financial asset most
consumers will ever deal with. If agents are so special for
consumers, then they have nothing to fear. Maybe we could see
commissions come down!''
A real estate broker in North Carolina writes: ``I am a 38-year
veteran of the real estate industry and do not agree with our
National Association of [REALTORS'] . . . There are
several reasons I feel this way, primarily because our small
family-owned business has always faced stiff competition from large
real estate firms, yet we have been able to earn a good, honest
living. I believe that competition is the American way and if
you're good at what you do, you can survive whether large or
small.''
Another real estate agent notes: ``I would welcome the hopefully more
professional business management that banks would likely bring to
this business. With most real estate being part-time people with
limited training, the real estate business is full of
misinformation, poor service, etc., a situation that could be
improved with bank involvement. Furthermore, the American consumer
deserves more true competition in this business. Bank-owned real
estate agencies may be able to lower transactions costs to
consumers through aggregation of services benefiting the public as
a whole.''
A real estate broker in Wisconsin writes: ``I don't recall the NAR
[National Association of REALTORS'] concerning
themselves with real estate brokers having access to online
companies therefore cutting the independent mortgage banker and
local lender out of the transaction.''
Another real estate agent writes: ``NAR predicted the doom and gloom
many, many years ago when franchise brokerage was in its formative
stages. ERA, Re/Max, Coldwell Banker et al., were all predicted to
end `mom and pop' real estate firms. These franchises have come;
many have gone or merged with others. And yet still, `mom and pop'
brokerage firms continue to survive because of the personal
attention. I welcome the competition, and I will continue to
survive.''
Many Real Estate Companies Also Support Open Competition and Oppose S.
1839
The real estate industry, like banking and most other industries,
is constantly changing. Larger real estate brokerage firms are
increasing their market share every time you turn around. In 1990 there
were 150,000 residential real estate firms. Today there are about half
that many. The large chains are buying up more and more local firms.
Today Cendant--which owns Century 21, Coldwell Banker, and ERA--has 23
percent of the existing home sales market and has been aggressive in
acquiring real estate companies. In some communities a partnership with
the local bank may be the only way to compete with the national chains
and maintain a local presence. The Internet is playing a bigger and
bigger role with customers, allowing them to surf for the perfect home,
at the perfect price, financed with the perfect mortgage loan, and
covered under the perfect insurance policy--24 hours a day, 365 days a
year. More and more real estate services are being combined, including
brokerage, insurance, and mortgage services that are offered as ``one-
stop shopping'' packages, a subject I will speak to at length below.
In this new, competitive environment, bankers and real estate
professionals
have much to offer to each other--and to consumers. Banks like mine
could provide needed capital, crossmarketing opportunities, and
technology to support the growth of local real estate firms. Real
estate professionals could provide the personalized services and
experience that is their strength. Many real estate companies realize
the strengths that both industries bring to the table. They also
realize the severe limitations S. 1839 would impose on their ability to
joint market, merge, be acquired, or even to buy a bank.
In February of this year, The Realty Alliance--comprised of many of
the Nation's largest and most successful independent real estate
companies with a total of 62,000 agents--went on record in opposition
to NAR's position. In its letter to NAR, The Realty Alliance stated,
``Our members favor and support a fair, free-market environment unbound
by legislative restrictions. We find it hypocritical and fundamentally
wrong to ask that national bank subsidiaries be barred from real estate
brokerage activity, while real estate brokerages operate mortgage
banking, insurance and title insurance businesses. . . . We believe, in
fact, that consumers would benefit from the influx of capital that may
result from nationally chartered banks entering this arena. We also
believe that increased competition from companies of size would benefit
consumers by making all of us sharpen our skills and improve the
services we provide. In our view, the role of Government is not to
limit competition, as your legislation would do, but rather to foster a
business environment in which consumers benefit from competition. The
members of The Realty Alliance look forward to working, and prospering,
in such an environment.''
Paul Harrington, President of DeWolfe New England, which is one of
the largest real estate firms in the Northeast, summed it up when he
said, ``We believe that banks should be able to compete with us as long
as there are safeguards to ensure that deposits are not being
improperly invested. It would be hypocritical for us to say otherwise
because we promote the fact that we offer customers convenience through
one-stop shopping.'' \2\
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\2\ The Boston Globe, February 25, 2001.
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Promoting Free and Fair Competition--The Fundamental Tenet of the
Gramm-Leach-Bliley Act
The Gramm-Leach-Bliley Act established a framework for modernizing
our financial system. After working on this for the last 20 years,
Congress recognized the need for flexibility in the face of a rapidly
evolving financial landscape. As Senator Phil Gramm said at the signing
ceremony for this Act, ``The world changes, and Congress and the laws
have to change with it. We have learned that we promote economic growth
and we promote stability by having competition and freedom.''
Providing the same opportunities under the same rules and
regulations is a key to promoting free and fair competition. In today's
real estate market, it is commonplace for real estate companies,
securities firms, and insurance companies to provide end-to-end
services, including brokerage, mortgages, and insurance. Yet not all
financial service players have equal ability to offer these same
services. The Gramm-Leach-Bliley Act was designed to address these
inequalities. To examine this in detail, this section looks at three
key issues: (1) the market reality that real estate firms are already
providing banking and other financial services and that the real estate
industry is more concentrated than the banking industry; (2) the system
established in the Gramm-Leach-Bliley Act to correct disparity in the
provision of financial services among providers and thereby promote
free and fair competition; and (3) the changing real estate and
financial marketplace that demands a flexible regulatory approach to
address the inequities that exist today and may exist in the future.
Combining Real Estate Brokerage and Banking Services is Not a New or
Unusual Activity
As I previously noted at the outset, real estate companies,
securities firms, insurance companies, credit unions, savings
associations and, in half the States, State-chartered banks can offer
real estate services.\3\ Ironically, the National Association of
REALTORS' is now objecting to the very combinations that
their members have undertaken--offering brokerage, mortgage banking,
and, often, insurance under one roof.
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\3\ See attachment developed by the Conference of State Bank
Supervisors (CSBS) for a listing of the authorities for each State.
Regarding credit unions, recently several in Wisconsin jointly
purchased a majority interest in one of the State's larger real estate
brokerage firms.
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Take, for example, two of the biggest real estate companies in the
Washington DC area--Weichert and Long & Foster. Both offer the full
range of financial services. Weichert calls it ``One Stop Gold'' and
Long & Foster calls it ``Real-Edge Services.'' These packages provide
valuable cost, convenience, and service options for customers. These
examples show the importance companies--and their customers--place on
having the option to combine real estate brokerage, mortgage and
insurance services. On the following two pages, I have included several
examples of how real estate companies that offer both banking and
brokerage services characterize--in their words--their services.
All banks should have the same options. In fact, according to NAR's
own survey in 1999 and a recent 2002 survey by Murray Consulting, not
only is one-stop shopping viewed extremely positive by homebuyers, but
banks, mortgage companies,
and real estate companies are all viewed equally as appropriate
providers of these services.
Simply put, if real estate services and other financial products
are already combined by many real estate and other financial firms,
there is no reason why all banking organizations should not be accorded
the same opportunities to provide these products to their customers.
In my opening remarks I made the point that this is an issue for
banks of all sizes, not just large banks, as NAR has suggested. More
than 40 percent of all banks--over 4,000 institutions--have fewer than
25 employees. These are truly small businesses that would like the
opportunity to broaden the financial products they can offer their
customers and to compete with real estate firms offering loans and
homeowners insurance. For the typical community bank, the intent is not
to turn real estate brokerage into a major income-producing center, but
rather to provide high-quality, high-personal-touch services for
customers whose needs the bankers intimately understand and whom they
already serve in other capacities. Generally, this is likely to take
place by a combination with a local real estate firm--often one that
needs the joint effort to complete with the national chains.
It is also a misconception that all national banks are large (see
Chart 1). In fact, over 90 percent of national banks are community
banks. Moreover, of the 10 largest banking firms, four appear to
already have the legal authority to engage in real estate activities.
There certainly has been no market disruption from the fact that well
over half of the insured depository institutions in this country have
the ability to offer real estate brokerage and management services
today.
Banks that already offer real estate services through the trust
department frequently find themselves having to explain to customers
that the bank cannot help them with these services outside the trust
relationship. These customers do not understand why the bank is unable
to do so. Authority to offer real estate services by the banking
organization would bridge this unnecessary gap.
What is ironic about NAR's false assertion about large banks
wanting to dominate the real estate market, is the fact is that the
real estate industry is significantly more concentrated than the
banking industry. Today, a few firms dominate the real estate brokerage
industry (see Chart 2). In fact, the top two firms in the brokerage
business (Cendant and Re/Max) have 33 percent of the market. By
comparison, the top 10 banks have the same 33 percent of the banking
market. Cendant Corporation accounts for one out of every four real
estate agents and alone has a 23 percent market share of existing home
sales.
And because consolidation within the real estate industry is
occurring at breakneck speeds, small realty companies are far more
likely to be bought up by one of the major real estate firms than by a
bank. Many real estate brokers have told the ABA that they would
welcome approval of the proposal because it would provide a potential
local partner to help them compete with the large national chains. In
fact, the local bank can help the small firm, through joint ventures
and capital, to compete with the large national real estate firms.
Thus, the marketplace reality is that real estate firms already
provide end-to-end services and the largest real estate companies have
been increasing their domination over the market.
The GLB Act Was Designed to Allow Flexibility to Adjust to the
Marketplace
In the years immediately preceding passage of the GLB Act, Congress
recognized that the statutory standard for regulatory approval of new
activities for bank holding companies--the ``closely related to
banking'' standard--was woefully inadequate in an economy transformed
by technological progress. Thus, Congress agreed to a new, considerably
broader, standard to enable banks and bank holding companies to remain
competitive no matter in what direction financial services evolved.
That new standard--activities that are financial in nature or
incidental to a financial activity--was intended to provide the
flexibility Congress knew would be necessary. Those activities may be
conducted only in financial holding companies (``FHC'') or financial
subsidiaries meeting certain safety and soundness and community needs
standards enumerated in the statute.
Congress did not give the FRB and the Treasury unfettered
discretion to make the determination that an activity is appropriate
for approval. GLB Act specifically sets forth certain traditional
banking activities that Congress knew were clearly
financial in nature.
In addition to these currently recognized activities, the Act
authorizes activities that the FRB and Treasury determine, by
regulation or order, to be ``financial in nature or incidental to such
financial activity.'' This authority to permit new financial activities
is considerably broader than the FRB's comparable authority before the
GLB Act was enacted, which had only extended to a new activity that was
``so closely related to banking as to be a proper incident thereto.''
One specific aspect of this new authority is that the FRB is
directed to define the extent to which three types of activities are
``financial in nature'': (1) lending, exchanging, and engaging in
certain other transactions with financial assets other than money or
securities; (2) providing any device or instrumentality for
transferring money or other financial assets; or (3) arranging,
effecting, or facilitating financial transactions for the account of
third parties. ABA believes the proposed real estate activities qualify
under the first and third statutory categories. For example, real
estate brokerage is generally the business of negotiating a contract
for the purchase, sale, exchange, lease, or rental of real estate--
which we believe is a financial asset--for others.
The Fed and Treasury, in their request for public comment, note
that many of the essential aspects of real estate brokerage are already
permissible under national bank ``finder'' authority. The regulators
already authorize financial holding companies, as well as national
banks and their subsidiaries, to act as finders in bringing together
buyers and sellers for financial or nonfinancial transactions.
Permissible finder activities include ``identifying potential parties,
making inquiries as to interest, introducing or arranging meetings of
interested parties, and otherwise bringing parties together for a
transaction . . .'' \4\ This description of finders authority is the
essence of every real estate transaction.
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\4\ 12 CFR 7.1002.
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Apart from their authority with respect to these three specified
activities, the Fed and Treasury have broad discretion to determine
that other types of activities are ``financial in nature or incidental
to such activity.'' In making such a determination, the regulators are
directed to consider a number of factors. Among the specific factors to
be considered are:
Changes or reasonably expected changes in the marketplace in which
financial holding companies compete or the technology for
delivering financial services; and
Whether the proposed activity is necessary or appropriate to allow a
financial holding company to--
Compete effectively with any company seeking to provide financial
services;
Efficiently deliver information and services that are financial in
nature through the use of technology, including applications
involving systems for data transmission or financial
transactions; and
Offer customers any available or emerging technological means for
using financial services or for the document imaging of data.
The GLB Act standard is a significant expansion of the Fed and
Treasury's capacity to consider the competitive realities of our
Nation's financial marketplace when determining permissible activities
for financial holding companies and financial subsidiaries. It is our
contention that the marketplace, and the technology associated with it,
in the case of real estate brokerage and property management, have
already changed and will continue to change dramatically in ways that
significantly impact the ability of banks to effectively compete with
other companies that provide financial services.
Finally, in addition to the newly authorized financial activities
described above, the Act authorizes financial holding companies to
engage in certain nonfinancial activities. Specifically, a financial
holding company may engage in a nonfinancial activity, or acquire a
company engaged in a nonfinancial activity, if the Fed and Treasury
determine by regulation or order that the activity: (1) is
complementary to a financial activity; and (2) does not pose a
substantial risk to the safety or soundness of depository institutions
or the financial system generally.
The NAR would have this Subcommittee believe that Congress meant to
preclude real estate activities in the GLB Act and that the legislation
accomplished that goal. This is simply untrue, and we have seen no
specific evidence to back up this unfounded charge. There is absolutely
nothing in the legislative history to support this allegation. To the
contrary, the plain language of the statute and the legislative history
show the Treasury and Federal Reserve are following exactly the process
and using the factors Congress intended.
The GLB Act itself demonstrates Congress's knowledge of this issue
in its determination that financial subsidiaries of national banks
should be prohibited only from engaging in real estate development
activities--the riskier aspect of the business in which the banking
organization takes an ownership position. Had Congress intended to
prevent banking organizations from engaging in the agency activities of
real estate brokerage and real estate management, it clearly knew how
to do so. The fact that Congress chose only to prohibit real estate
development leads to the conclusion that Congress did not intend to
restrict agency activities.
Despite comments to the contrary, anyone who paid attention to the
debate over the many years that led up to GLB Act would not have been
surprised to see the current proposal. The ABA negotiated with NAR over
10 years ago the rules under which banks would enter the real estate
brokerage business. This negotiation took place with respect to
criteria in a previous version of the GLB Act which was, in fact, much
more restrictive than the criteria enacted in 1999. Thus, over 10 years
ago, the NAR recognized that even a more restrictive version of
financial modernization could be interpreted as permitting banking
companies to offer real estate brokerage. Furthermore, in 1995, NAR
testified on another forerunner of the GLB Act before the House Banking
Committee. In that testimony, NAR stated unequivocally that the
language must be clarified to exclude brokerage and management. It was
neither clarified then, nor was it in the GLB Act. That 1995 bill, the
Financial Services Competitiveness Act of 1995, contained similar, but
less broad, language to that ultimately enacted in the GLB Act.
Certainly the NAR had every opportunity to raise the issue with
Congress in 1999 and either chose not to or did so without success.
Rather, NAR's simplistic argument is that the proposal involves
``commerce'' and is, therefore, beyond the scope of the GLB Act.
However, the issue is not at all that simple. The language of the
relevant provisions of the GLB Act does not prohibit commercial
activities; rather they set out specific criteria to determine
permissible activities. The authors clearly recognized that there was
no exact or permanent line to define services that should be
permissible. That is why they left the determination of whether or not
a given activity is ``financial in nature'' or ``incidental to a
financial activity'' to the Fed and the Treasury, and why they
developed the specific criteria that are in the statute. To reiterate,
if the Congress had wanted to make such a determination to exclude the
proposed activities, it would have explicitly done so--as it did with
real estate development.
It is worth noting, since NAR has raised the specter of banking and
commerce, that the Fed has, for many years, been the primary opponent
of breaching the wall between banking and commerce. Based on this
record, one would certainly expect the Fed to look very closely at any
question relating to commercial activities.
The Changing Real Estate and Financial Marketplaces Require a
Flexible Regulatory Approach
As noted above, the GLB Act requires that the regulators consider
competitive factors and technological innovations when determining
whether activities are financial in nature. A particularly applicable
statutory phrase to focus on in this context is whether the activity is
``appropriate'' to allow institutions to ``compete effectively with any
company seeking to provide financial services in the United States.''
Other types of insured depository institutions have the authority to
provide--and are providing--real estate brokerage and management
services. We have already demonstrated that real estate brokerage firms
are providing financial services throughout the United States. Clearly,
the fact that real estate brokerage firms are offering mortgages and
other financial services must be part of the regulatory consideration.
Competitive imbalances like this are the very thing that Congress
sought to correct when it enacted the GLB Act, and we believe that the
use of the flexibility granted to the regulators under Section 103(a)
is clearly justified in the case of real estate brokerage and
management authority for banking organizations.
Technological innovations have also had a dramatic impact on real
estate markets. One major change is the development of the secondary
market for mortgage loans and the efficient process that bundles
individual home loans into highly liquid, globally traded securities
(see Chart 3).
The increasing importance of the secondary market has facilitated
the rapid growth of 50 percent mortgage lending outside traditional
banking and savings institutions (see Chart 4).
In fact, securitization has significantly changed the very nature
of mortgage funding, enabling real estate firms to establish their own
mortgage companies and to offer end-to-end real estate transactions--
helping a buyer find a home, finance it, and insure it. The result is
that traditional deposit-based lenders--banks and thrifts--are often
bypassed completely. These are exactly the kinds of technological
changes the GLB Act authorized the Treasury and the Fed to address.
The dominance of the secondary market is clear evidence that this
form of funding for plain vanilla mortgage loans is generally superior
in terms of costs to funding with bank deposits. If banks somehow
enjoyed some special benefit from deposits, or deposit insurance (which
banks pay for through premiums and extensive regulatory costs), banks
would not be selling into the secondary market, and the secondary
market would not control an ever-increasing share of the marketplace.
No amount of deposit insurance can counteract this fundamental
principle of efficient markets. More importantly, access to this
secondary market source of funding is available equally to mortgage and
banking organizations, and is clearly why real estate companies
increasingly are affiliating with mortgage banking companies.
To summarize this section, the GLB Act recognized that achieving
the goal of promoting competition necessarily required regulatory
flexibility. Section 103(a) provides that flexibility by authorizing
the Fed and the Treasury, subject to certain statutory guidelines, to
approve additional activities for banking organizations. The ABA
believes strongly that real estate brokerage and management meet the
criteria. Of course, the Fed and Treasury have not made any
determination on this proposal. Regardless of their ultimate decision,
the Fed and Treasury should be allowed to follow the process Congress
created only two and a half years ago.
All Consumer Protections Are Maintained and Bank Safety and
Soundness Is Protected
If banking organizations offer real estate services, consumers
would actually have more protections under the law than they do today.
All rules applicable to real estate brokers, including all State
licensing, qualification, and sales practices will apply equally to
bank-affiliated real estate agents. NAR has raised the specter of
customers being taken advantage of as a result of conflicts of interest
that may potentially arise when a real estate broker is affiliated with
a lender. The simple fact is that the exact same potential for such
abuse occurs, for example, each time an agent from Century 21, Coldwell
Banker, ERA (all of whom are affiliated with Cendant) GMAC, Long &
Foster, or USAA helps a customer buy or sell a house. And yet, although
these integrated real estate organizations, as well as State banks in
many States, savings institutions, and credit unions, have been selling
real estate and funding mortgages for years, there has been no outcry
about these conflicts of interest. Why?--Because the Real Estate
Settlement Procedures Act (RESPA) \5\ requires REALTORS'
affiliated with lenders to disclose that fact to customers before the
purchase occurs.
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\5\ 12 U.S.C. Sec. 2601 et seq.
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The RESPA disclosure,\6\ which must be on a separate piece of
paper, must state the relationship between the real estate agent and
the lender and provide the estimated charges or range of charges of the
lender. It must also notify the customer that he or she is not required
to use the lender and is free to shop around for a better deal. If the
real estate agent requires the use of its affiliated lender, that agent
violates the kickback and unearned fee provisions of Section 8 of
RESPA. The customer is expected to sign an acknowledgement of the
disclosure.
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\6\ The requirement for affiliated business disclosures is part of
the regulations of the Department of Housing and Urban Development that
implement RESPA. 24 CFR Sec. 3500.15.
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In addition, consumers have even more protections when their real
estate agent is affiliated with a banking organization. This is because
banks and bank holding companies and their subsidiaries and affiliates
are subject to the antitying provisions of the Bank Holding Company
Act.\7\ These restrictions prohibit banks and their affiliates from
conditioning the provision of credit on the purchase of another product
or service.
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\7\ Section 106(b) of the Bank Holding Company Act Amendments of
1970.
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Another false impression put forward by NAR is that somehow bank
involvement is contrary to the spirit of the Community Reinvestment
Act. Nothing could be further from the truth. Approval of the proposal
would help low income and minority communities. Because banks are
subject to CRA, they have every incentive to use the real estate
authorities to enhance their outreach to communities. The bank would
bring real estate services to areas now shortchanged and could use the
combination of real estate and financial services to better serve their
low-income and minority communities. Moreover, if the real estate unit
were a subsidiary of a national bank, that subsidiary would be covered
by CRA.
Bank involvement in real estate brokerage and management services
is also consistent with safe and sound banking. First, providing these
services will help to diversify the income stream of these institutions
and help to improve their financial base. Real estate brokerage and
management services are activities where a bank acts only as an agent
for a third party, but does not take an ownership position
in the property. By their very nature, agency activities pose very
little risk to the safety and soundness of depository institutions.
Second, under the GLB Act, the bank regulators must deem a bank to
be well-capitalized and well-managed before a banking organization can
participate in any of the expanded financial activities permitted under
the GLB Act, including real estate brokerage and property management.
Thus, only financially strong institutions would be authorized to
engage in these activities.
Third, banking organizations are also subject to Sections 23A and
23B of the Federal Reserve Act, which limit the amount of credit and
other forms of support that a bank could provide to a real estate
brokerage affiliate or subsidiary. Such limits ensure that the safety
and soundness of the bank will not be negatively impacted by its
subsidiaries or affiliates.
Fourth, many banking organizations already have years of experience
in providing real estate activities. In fact, the purchase, sale and
management of real estate are frequently significant aspects of
fiduciary asset management in many bank trust departments. Because
banks currently have trust personnel who provide real estate brokerage
and management services on a daily basis to trust customers, providing
the service outside of the trust department would not be a new activity
in which banking organizations lack expertise. Thus, no new safety and
soundness issues would be raised.
Finally, it is important to note that a precedent already exists
for bank involvement in real estate activities. In over half of the
States, State banking regulators have the authority (either explicitly,
through regulatory interpretations, and through wildcard and parity
statutes) to allow State-chartered banking organizations to engage in
real estate activities (see the attached State-by-State listing
developed by the Conference of State Bank Supervisors). Moreover,
savings institutions and credit unions already have brokerage
authority. Allowing banks the same rights and privileges should enhance
the competition for real estate services.
Conclusion
In July, it will be 2 years since the filing of the original
petition requesting a determination that real estate brokerage and
management be deemed financial in nature. It is now certain that this
determination will not be made until 2003, as was indicated in an April
22, 2002 letter from Treasury Secretary Paul H. O'Neill to Congressman
Michael G. Oxley, indicating that, in consultation with the Fed, the
Treasury will not make a final decision on this proposed rule until
next year.
A fundamental purpose of GLB Act was to enable banking institutions
to compete with other financial services providers, and there is ample
evidence demonstrating that the real estate competition is touting the
advantages of one-stop homebuying services. While we as an industry
have always looked at real estate brokerage and management as providing
us with more options to compete in the long term, with each passing
day, real estate firms become more deeply involved in financial
services such as mortgage and insurance, and banks like mine cannot
effectively compete for this business. With each passing day, the case
for allowing banks to offer real estate services only gets stronger.
As an industry we have grave concerns about the broader effects of
this controversy and whether it sets a precedent that could hinder
future approvals of new powers under GLB. The Act was designed to keep
our financial system up-to-date by delegating those decisions to the
Fed and Treasury. This goal is being frustrated by efforts to take the
case for determining what is appropriate back to Congress, placing
Congress in the very role that it delegated to the agencies with the
greatest level of expertise to make these decisions based on specific
statutory criteria.
S. 1839 not only frustrates the GLB Act process, it reduces
consumer choice. Consumers would have fewer choices of whom to do
business with; agents would have fewer choices of whom to work for; and
businesses would have fewer choices for joint marketing, fewer
potential merger partners, and fewer potential buyers. We believe a
competitive market is the best way to provide quality real estate
brokerage and management services. Increased competition clearly
benefits consumers and the economy. It is a catalyst for innovation,
more customer choice, better service, and competitive prices. I have no
doubt that my customers and my community would benefit if my small bank
could offer these services.
Not only would consumers benefit from bank involvement in real
estate services, but also bank involvement is consistent with safe and
sound banking. All consumer protections that apply to independent
REALTORS' would apply to bank-affiliated real estate
agents--plus bank-affiliated agents would be subject to additional
antitying regulations. And because brokerage and management are agency
activities, they pose no financial risk to the safety and soundness of
the banking organization.
Just 2\1/2\ years ago Congress made the decision to leave this type
of determination to the regulators--so that they could keep the
financial structure up-to-date and keep Congress out of the middle of
competitive disputes. NAR now wants to put Congress back in the
uncomfortable position of referee. Congress explicitly gave the Fed and
Treasury the flexibility and authority to make these determinations
based on their expert knowledge of the changes in the financial
services marketplace. Those agencies should be allowed to carry out the
authority that Congress wisely provided to them.
I thank you, Mr. Chairman, for this opportunity to present the
views of the American Bankers Association.
PREPARED STATEMENT OF JOHN TAYLOR
President and Chief Executive Officer
National Community Reinvestment Coalition, Washington, DC
May 23, 2002
Good morning Chairman Johnson, Senator Bennett, and distinguished
Members of the Subcommittee on Financial Institutions. My name is John
Taylor, and I am President and CEO of the National Community
Reinvestment Coalition (NCRC). NCRC is a national trade association
representing more than 700 community-based organizations and local
public agencies who work daily to promote economic justice in America
and to increase fair and equal access to credit, capital, and banking
services to traditionally underserved populations in both urban and
rural areas. NCRC has represented our Nation's communities on the
Federal Reserve Board's Consumer Advisory Council (CAC), Community
Development Financial Institutions (CDFI) Advisory Board, Freddie Mac's
Housing Advisory Council, Fannie Mae's Housing Impact Council and
before the United States Congress.
On behalf NCRC, I thank you for the opportunity to testify before
you here today on an important issue that will impact our Nation's
progress in extending the American Dream of homeownership to minority
and low- and moderate-income families: banks becoming real estate
brokers. NCRC's community organizations are at the helm driving the
reinvestment movement. Today, as a result of fair lending laws like the
Community Reinvestment Act (CRA), which turns 25 this year, poor
neighborhoods have been empowered by bank partnerships with community
organizations to address credit needs and missed market opportunities.
As a result, the number of loans to minority and working class
borrowers over the last decade has increased faster than the number of
loans to more affluent borrowers.\1\ Bank CRA commitments have grown
from a few million dollars a year to over $50 billion annually.\2\
Without these loans and commitments, the economic flow of private
credit and capital into our communities would be extinct and hence,
certain death for disinvested neighborhoods.
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\1\ The Joint Center for Housing Studies, Harvard Univeristy, The
25th Anniversary of the Community Reinvestment Act: Access to Capital
in an Evolving Financial Services System, (March 2002).
\2\ National Community Reinvestment Coalition, CRA Commitments
(2002). Note: The Joint Center for Housing Studies, Harvard Univeristy
used NCRC's database to find that low- and moderate-income communities
received a higher portion of loans in geographical area in which
lenders and community groups negotiated CRA agreements than in areas in
which they did not.
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NCRC is very concerned about the ramifications of financial holding
companies and national banks entering the real estate brokerage
business. As you can imagine from the industries represented here
today, you will hear varying perspectives on banks and real estate for
consideration. I would like to emphasize that my testimony today will
focus on three areas that will be affected if the banking and real
estate industry are allowed to merge: competition, consumer
protections, and serving our communities.
Competition
NCRC has always maintained the position that competition is
beneficial for the revitalization of communities. Healthy competition
provides low-income and working families with more housing and lending
options, and offers them alternatives to high-cost and abusive loans.
However, in our rapidly shifting financial marketplace in which our
largest banks now own subprime lenders and insurance agencies, we
wonder whether product choice is increasing for our communities or
whether financial conglomerates are steering consumers into costly and
unnecessary products, often layering one product on top of another to
maximize their profits.
Over a decade ago, banks had a corner on the mortgage lending
business with an overwhelming 80 percent market share.\3\ Today,
however, is a different story. In 2001, the mortgage broker industry
estimated that their market share has dramatically grown to 65 percent
of all residential mortgage originations.\4\ Does this mean that banks
are hurting for mortgage business? Absolutely not. Instead of relying
on loan officers, banks now depend upon mortgage brokers to make loans
in minority and low- and moderate-income communities. And too often,
banks do not engage in sufficient due diligence or do not require
brokers to follow fair lending safeguards. The situation would
deteriorate if banks now owned a fleet of brokerage companies that
combined lending and real estate services.
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\3\ David Olson, Testimony before the Senate Committee on Banking,
Housing, and Urban Affairs' Hearing, Predatory Mortgage Lending
Practices: Abusive Uses of Yield Spread Premiums (January 8, 2002).
\4\ Ibid.
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The arena of competition has dramatically shifted in the wake of
Gramm-Leach-Bliley (GLB), which blurred the distinction among financial
industries. In March 2000, the Federal Reserve Board issued a list of
the first 117 bank holding companies that elected to become financial
holding companies to take advantage of the opportunities of entering
into the insurance and securities markets. As of April 2002, over 600
bank holding companies have elected to become financial holding
companies in order to diversify their businesses.\5\ Conversely, less
than a dozen nonbank firms have converted to financial holding
companies for the purpose of seeking a banking charter.\6\ Banks are
also taking advantage of an ownership stake (less than a controlling
interest) in a financial subsidiary, meaning they form partnerships
with firms offering a plethora of financial services including:
investment planning, estate planning, asset protection, retirement
planning, income tax planning and preparation, and education planning.
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\5\ Financial Markets Center, Firms Electing to Become Financial
Holding Companies Under the Gramm-Leach-Bliley Act (April 26, 2002).
\6\ Rick Lazio, President and CEO of Financial Services Forum,
Remarks at American Enterprise Institues's Roundtable on the Gramm-
Leach-Bliley Act (November 13, 2001).
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To reiterate, NCRC supports competition in its truest sense--when
parties act independently and offer the most favorable terms to secure
business. But one must wonder if today's financial market upholds the
true meaning of competition when it seems like GLB has allowed all
roads to lead back to the bank. While nonbank lenders own real estate
companies, they have not utilized GLB to amass the market power that
banks now enjoy after their mad rush to become financial holding
companies. Would adding real estate to the menu of businesses that
banks can own level the playing field between banks and nonbanks or
only serve to make banks more powerful to the detriment of real
competition in the financial industry?
NCRC maintains that the addition of real estate to the already
dizzying array of products now offered by ``financial supermarkets''
will lead to even 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.
The bank with the real estate affiliate stops offering loans to
customers of nonaffiliated real estate competitors.
The number of product choices offered to customers of nonaffiliated
real estate businesses decreases, resulting in higher cost loans.
During consideration of GLB, NCRC and other observers worried that
the consolidation afforded under GLB would lead to only higher prices.
That is why GLB commissioned the Department of Treasury to study the
effects of mergers among banks, insurance companies, and securities
firms on access to loan and bank products for low- and moderate-income
communities. Treasury's study in January 2001 concluded that it was too
early to assess the impact on cross-industry mergers.\7\ NCRC urges
Congress and the Federal financial supervisory agencies to delay
allowing banks to enter yet another industry, specifically the real
estate industry, until the Treasury rigorously measures the impacts of
GLB on affordability and accessibility of financial services.
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\7\ Robert E. Litan, Nicholas P. Retsinas, et al. for the
Department of the Treasury, The Community Reinvestment Act After
Financial Modernization: A Final Report (January 2001).
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When considering banks in real estate, policymakers have not
adequately addressed the negative impacts on small real estate
businesses of further industry consolidation. Women- and minority-owned
small businesses have played a significant role in community
revitalization. Many of these real estate entrepreneurs have
established themselves in working class communities and dedicated their
business to helping rebuild formerly redlined neighborhoods through
partnerships with affordable homeownership programs.
According to the most recent Economic Census, over 375,000 small
women- and minority-owned real estate businesses operate in this
country, generating over $41 million in sales annually. The wealth
generated by these new-markets businesses plays a vital role in
building a solid foundation from which veritable community reinvestment
will flourish. Local real estate brokers are more likely than financial
conglomerates to bring wealth back into their community and enter into
business relationships with other neighborhood enterprises. The
financial independence of small businesses in local communities
increases an individual's stake in the economic empowerment of a
community and improves the collective well being of our society.
NCRC strongly takes that position that by allowing banks into the
real estate business, small real estate businesses will be forced out
of the marketplace by the monopolized ``financial supermarkets.'' Gone
will be the days in which an entrepreneur dreams of opening a
specialized financial business to serve his or her neighborhood
customers. Instead, small real estate businesses, insurance businesses,
and small investment companies will be forced to make a decision:
forfeit their ownership and affiliate with a bank or face going under
when a larger ``financial supermarket'' opens next door. Not only will
our Nation's communities hurt, our entire economy will suffer.
Consumer Protection
Existing Problems in the Lending, Insurance, and Real Estate Markets
The next area I would like to address in regards to today's subject
matter is consumer protection. Repeatedly, I have been told by industry
representatives advocating for banks in real estate that cross-
ownership within these markets will benefit the consumer by offering
greater choice, greater convenience, and lower costs. NCRC, as a leader
in fighting predatory lending, takes the issue of ``benefiting the
consumer'' very seriously. Last summer, NCRC testified before the Full
Committee during the 2-day hearings on predatory mortgage lending
practices about the plague of abusive lending and equity stripping from
communities of color. Lenders are not alone at the receiving end of
NCRC criticism. Our membership organizations who are entrenched in the
frontlines of protecting homeowners, also battle insurance redlining
and unscrupulous real estate ``property flippers.'' In testifying
before you today, I must be honest to NCRC's mission of economic
justice and state emphatically that injustice exists in the banking,
insurance, and real estate industries. Until the problems are solved to
protect borrowers and consumers, these markets should not be
commingled.
According to the Department of Housing and Urban Development's
(HUD) just released report Black and White Disparities in Subprime
Mortgage Refinance Lending, subprime refinance mortgages accounted for
36.3 percent of total refinance mortgages in low-income neighborhoods
compared to 23.8 of total refinance lending nationwide in 2000.\8\
Borrowers in prominently African-American low-income neighborhoods were
1.5 times more likely in 2000 to refinance with a subprime lender than
borrowers in all low-income neighborhoods. Borrowers in upper-income
African-American neighborhoods were 2.9 times more likely to refinance
with a subprime lender than borrowers in upper income neighborhoods
overall.
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\8\ Randall M. Scheessel for the Department of Housing and Urban
Development, Black and White Disparities in Subprime Mortgage Refinance
Lending (April 2002).
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NCRC research has found similar disparities. For example, major
subprime and manufactured home lenders made 47 percent of the refinance
loans in predominantly African-American and Hispanic neighborhoods in
the District of Columbia in 2000, a significant increase from 39
percent of the loans in 1999 and 25 percent of the loans in 1994. In
contrast, subprime and manufactured home lenders made less than 4
percent of the loans in predominantly white neighborhoods in the 3
years of the study.
Substantial evidence suggests that subprime borrowers in minority
communities experience price discrimination. Over the last several
years, Home Mortgage Disclosure Act (HMDA) data has indicated that
African-American applicants are denied twice as often as whites. NCRC
believes that it does not necessarily follow that
African-American are twice as likely to have bad credit. And given that
African-Americans are denied twice as often for conventional loans as
whites, it does not follow that minority communities should be five
times as likely to receive subprime loans as documented in an earlier
HUD study.\9\ In some geographical areas, the disparity is much greater
than five to one.
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\9\ Ibid. See also National Anti-Predatory Lending Policy is Good
for America, NCRC Anti-Predatory Lending Toolkit (March 2002).
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The major secondary market institutions have found pricing
inefficiencies in subprime loans. Freddie Mac states that up to 30
percent of subprime borrowers were creditworthy for prime loans. Fannie
Mae's CEO, Franklin Raines, is quoted as saying that half of all
subprime borrowers could have received prime loans.\10\
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\10\ Kathleen Day, ``Fannie Mae Vows More Minority Lending.''
Washington Post, March 16, 2000, E1. Freddie Mac, Automated
Underwriting: Making Mortgage Lending Simpler for America's Families,
Chapter 5 (Spetmeber 1996).
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A study by the Research Institute for Housing America (RIHA)
concludes that
minority borrowers are more likely to receive subprime loans after
controlling for
credit risk factors.\11\ RIHA cautions against a conclusion that price
discrimination alone explains this since minority borrowers may have
different techniques of searching for lenders. However, considering the
totality of the research by NCRC, HUD, Fannie Mae, Freddie Mac, RIHA,
and others, it seems fair to say that the burden of proof lies with
those who assert that discrimination does not occur in the subprime
market.
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\11\ Anthony Pennington-Cross, Anthony Yezer, and Joseph Nichols
for the Research Institue for Housing America, Credit Risk and Mortgage
Lending: Who Uses Subprime and Why? (October 2000).
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The issue of insurance redlining is also a problem, but unlike home
mortgage lending, insurance data is limited to only a handful of
States. Since 1995, California has required insurance companies to file
data indicating the race and gender of policyholders, the number of
policies sold and cancelled, and location of offices and agents, all
sorted by ZIP code. Working with the California Department of
Insurance, consumer advocate Birny Birnbaum of the Center for Economic
Justice (CEJ) obtained data that show disparities between the rate at
which insurance companies write policies in low-income communities and
the rate at which policies are written in middle- to upper-income
communities. For example, in 1995, CEJ reported that approximately 16
percent of California's population lived in underserved communities;
however, the data reported by State Farm revealed the company had only
2.59 percent of its agents in those communities.\12\ CEJ further
concluded that the average insurer wrote only 5.57 percent of its
private passenger automobile liability policies and only 6.62 percent
of its homeowners policies in low-income, minority ZIP codes.
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\12\ Consumer Union Press Release, State Farm Loses on Attempt to
Block Disclosure of Insurance Redlining Data (March 8, 2000).
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State Farm, one of the Nation's largest insurance companies, is
also a Federally chartered thrift. As such, it offers a full range of
banking services, including taking deposits and making various types of
home mortgage, auto and home equity loans, in addition to full range
investment products. Interestingly enough, 1 month ago, State Farm,
California's largest insurer of homes, indicated it has stopped writing
new homeowner policies in the State due to a surge in the amount of
claims over the last two years.\13\ If lawmakers add real estate
services to the roster of State Farm products, would this only increase
the clout of State Farm and other giants? Would conglomerates turn
product flow ``on'' or ``off'' in order to obtain concessions from
regulatory agencies in States dependent upon their services?
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\13\ E. Scott Reckard, ``State Farm Won't Write New Homeowners
Policies.'' LA Times, April 23, 2002.
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As I mentioned, the real estate market is not without its
unscrupulous actors
either. Property flipping involves buying a home at a low price and
then reselling it at fraudulently inflated price within a short time
frame, often after making only cosmetic improvements to the property.
NCRC has seen the following practices employed in property flipping
schemes:
Real estate investors continually buying neglected properties at
sheriff sales and reselling homes at escalated prices to
unsophisticated first-time homebuyers;
Using real estate agents, licensed and nonlicensed individuals, as a
front;
Targeting immigrant communities, particularly nonEnglish speaking
individuals;
Colluding with property appraisers to inflate property value;
Colluding with home inspectors to secure clean reports; and
Tricking homeowners into thinking they are dealing with legitimate
real estate companies.
In 2000, the Department of Housing and Urban Development Inspector
General (IG) testified about the rampant flipping rings the Agency was
combating.\14\ One investigation alone uncovered over 1,200 flipped
loans totaling approximately $160 million. Twenty-five percent of the
loans were in default. The IG indicated that approximately 100
representatives of lending and real estate industries colluded on this
scheme. Another IG flipping investigation involved a HUD employee who
conspired with a real estate agent to carry out a systematic scheme of
selling HUD-owned properties at prices far below HUD's listed price.
The FHA Insurance Fund lost several million dollars as a result of this
scam. If Congress allows banks and real estate firms to combine without
strengthening the consumer protection laws, our communities are more
likely to be victims of scams than beneficiaries of greater product
choice and lower prices.
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\14\ Susan Gaffney, Inspector General, Department of Housing and
Urban Development, Testimony before the Senate Permanent Subcommittee
on Investigations, Committee on Governmental Affairs' Hearing, HUD's
Government Insured Mortgages: The Problem of Proerty ``Flipping'' (June
30, 2000).
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Consumer Choice
As I previously mentioned NCRC was vocal during the consideration
of Gramm-Leach-Bliley about the potential of banks product packing
without regard of true customer needs.\15\ Banks are not shy about
advertising their cross-marketing strategy: targeting an existing
customer is easier and more profitable than acquiring a new one.
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\15\ John Taylor, Testimony before the Senate Committee on Banking,
Housing, and Urban Affairs' Hearing, Financial Services Legislation
(February 25, 1999).
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The Bank Holding Company Act, as amended, prohibits a bank from
extending or varying the consideration for credit on the condition that
the customer obtain any other nonbanking product from the bank holding
company or any other subsidiary of the bank holding company. This
prevents a bank from offering a reduced interest rate on a loan that
may be used only to purchase products made or sold by an affiliate of
the bank. However, the statute provides exceptions and exemptions that
``financial supermarkets'' can take advantage of when cross-selling
their products.
Another problem for unsophisticated banking consumers is the
perception that approval of their loan is contingent on their
purchasing insurance or other products from bank affiliates. NCRC
believes that banks should not force consumers to buy unwanted or
unnecessary products, nor should they offer incentives to induce
borrowers to purchase more products than they can afford.
Last year Citibank sought and received a favorable exemption from
antitying prohibitions to offer incentives to their credit card,
mortgage, or loan customers who maintain a combined minimum balance in
a package of products and services that include annuities, auto,
homeowners, life, and/or long-term care insurance from insurance
affiliates of Citibank.\16\ The incentives would include lower interest
rates and/or other items, such as airline frequent flyer miles or
contributions to accounts maintained by a customer with other Citibank
affiliates.
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\16\ Opinion Letter of J. Virgil Mattingly, General Counsel,
Federal Reserve (May 16, 2001).
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Is it really in the best interest of the consumer to be bombarded
with credit card applications, insurance product brochures, investment
fund prospectuses, and now perhaps real estate marketing materials when
they go to a bank simply to open a checking account? Allowing banks
into yet another industry would only compound the abuses associated
with incentives and inducements to purchasing an array of products.
Where are banks' priorities when there are over 10 million
Americans who do not have checking accounts? \17\ Today, NCRC issues a
challenge to the lenders to open your doors to the unbanked; for every
product package you market to existing customer, dedicate the same
energy to marketing Individual Development Accounts and lifeline and
low-cost accounts to underserved communities.
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\17\ The Federal Reserve Board, Survey of Consumer Finances (1998).
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Finally, on the issue of choice, NCRC is very concerned that if
banks are allowed in the real estate business, consumers using a bank
affiliated real estate agent will be at a disadvantage when attempting
to shop for the best priced loan product, particularly if a bank
employs exclusivity with its affiliate.
Serving Our Communities
The final point that I would like to address is the stake our
Nation's communities have in the decision to expand banking business
lines even further to include real estate. At the start of my
testimony, I mentioned the great success story of how CRA has lead to
the introduction of bank partnerships and commitments in formerly
divested communities. I would briefly like to elaborate how CRA must be
updated to cover all of the activities that financial institutions are
now permitted to undertake.
As you know, CRA only applies to the depository subsidiaries of
financial holding companies. Other parts of the holding companies have
no obligation to serve the entire community in which they do business,
including low- and moderate-income communities. As CRA increasingly
applies to a smaller portion of burgeoning holding companies, the risk
that low- and moderate-income communities will once again become
neglected--after years of steady progress in expanding homeownership
opportunities down the income ladder--increases. Despite the Federal
Reserve Board's findings in its study mandated by GLB that CRA-related
loans are profitable, financial holding companies will become tempted
to overlook low- and moderate-income markets as they enter new lines of
business.
It is a travesty to each and every underserved rural community and
inner city neighborhood in our country that CRA basically ends with
checking products and lending activities. When the Unites States
Congress passed GBL, it missed a tremendous opportunity to extend
community reinvestment requirements to all bank affiliates, insurance
companies and securities firms. Thirty-six Members of the House of
Representatives support our position and have cosponsored the Community
Reinvestment Modernization Act (H.R. 865). As an addendum to my
testimony, I have attached the first few pages of this bill detailing
purposes, findings, and sections covered, and ask for your
consideration of this important measure.
If the banks are allowed into the real estate market NCRC strongly
advocates for CRA coverage to be extended to the real estate affiliates
to ensure these companies have agents in low- and moderate-income
communities to serve minority and working class families. NCRC also
strongly encourages Congress to enact a strong antipredatory law to
prohibit abusive lending and property flipping.
In closing, I leave you with a true story of how a
REALTOR' helped identify a discriminatory, predatory lending
practice and subsequently brought it to the attention of NCRC's Civil
Rights Department for Assistance.
The victims were an elderly minority couple who owned their home in
the Mount Pleasant neighborhood, here in the District of Columbia, for
over 43 years. In order to pay medical expenses, an independent
mortgage company convinced the couple to take out an adjustable rate
mortgage with a prepayment penalty and a loan payment that exceeded the
couple's monthly income. Faced with imminent foreclosure, the couple
was forced to consider a ``short sale'' of their home. The victims
retained a REALTOR' to facilitate the sale of the home, who
quickly identified that the appraisal conducted by the mortgage company
was substantially inflated. Ultimately, a buyer was identified and a
purchase contract placed. Unbeknown to all the parties involved the
victims had prepayment penalty of $13,791.06 included in the note that
stalled the real estate transaction. It was only after victims'
REALTOR' requested NCRC to intervene that the sale took
place.
If the real estate agent had been affiliated with a predatory
lender or any lender for that matter, it is doubtful that the agent
would have acted as an independent watchdog. When we allow additional
industry consolidation without providing stronger community protection
laws, we remove the checks and balances that guard against abuses in
power. Fewer independent businesses with stakes in their communities
exist to protect against the exploitation and plunder of greedy
conglomerates.
I thank you, Mr. Chairman, for this opportunity to testify and
present the views of the National Community Reinvestment Coalition. I
will be happy to answer any questions you may have.
PREPARED STATEMENT OF HOWARD W. HANNA, III
Vice Chairman, The Real Estate Services Providers Council, Inc.
(RESPRO')
Principal and Former Chairman, The Realty Alliance
President and Chief Executive Officer, Howard Hanna Real Estate
Services
Pittsburgh, Pennsylvania
May 23, 2002
Good morning, Mr. Chairman and Members of the Subcommittee. My name
is Howard W. Hanna, III and I am President and CEO of Howard Hanna Real
Estate Services, a family owned and operated full service real estate
brokerage company headquartered in Pittsburgh, Pennsylvania.
Howard Hanna Real Estate Services has 65 residential and commercial
real estate brokerage offices doing real estate sales and leasing in
Pennsylvania, Ohio, West Virginia, and New York State, and a mortgage
banking company. Hanna
Financial Services, which is licensed in those four States and also
Illinois, Maryland, Colorado, Wisconsin, and North Carolina.
Our firm has 1,500 associates and employees, of which 1,128 are
members of the National Association of REALTORS', and I am
proud to be a 32-year member of the REALTORS' Association of
Metropolitan Pittsburgh, the Pennsylvania Association of
REALTORS', and the National Association of
REALTORS'.
I currently serve as Vice Chairman of The Real Estate Services
Providers Council, Inc. (RESPRO') and I am a Member of The
Realty Alliance. I represent both organizations today.
RESPRO' is a national nonprofit trade association of
approximately 200 residential real estate brokerage, mortgage, home
building, title, and other settlement service companies who united in
1992 to promote an environment that enables providers to offer
diversified services for homebuyers and owners (one-stop shopping)
through strategic alliances across industry lines.
Approximately 55 percent of RESPRO''s members engage in
residential real estate brokerage, either directly or as a franchisor.
Most of our real estate broker members are what I will refer to as
``integrated'' real estate brokerage firms, which means that we also
offer mortgage, title, and/or other settlement services to our
customers.
The Realty Alliance is a national organization of 45 regional,
residential real estate brokerage firms that provides its members with
idea sharing venues, industry forecasts and analysis, financial
benchmarking, and technology information.
Together, RESPRO' and The Realty Alliance members who
are in the real estate brokerage business have closed over one million
residential real estate transactions for a sales volume of over $1.8
trillion, utilizing over 300,000 sales associates and over 78,000
employees in over 50,000 offices nationwide.
Position of RESPRO' and The Realty Alliance Position on
Bank-Real Estate Affiliations
Both RESPRO' and The Realty Alliance have formally
decided, on a vote of their respective Boards of Directors, to support
the 2001 proposal by the Federal Reserve Board (Fed) and Treasury
Department to allow financial holding companies and national bank
subsidiaries into the real estate brokerage and related businesses by
declaring these activities to be ``financial in nature'', and to oppose
legislation (S. 1839, H.R. 3424) to block this proposal.
All available evidence shows that homebuyers like one-stop
shopping, and that realty-based one-stop shopping offers potential
consumer benefits such as convenience and lower costs.
RESPRO' and The Realty Alliance believe in free enterprise
and a competitive marketplace that would allow any company to offer
consumers these benefits, regardless of its industry or affiliation.
Today's Realty-Based One-Stop Shopping Programs
According to a 1999 study conducted by the independent consulting
firm of Weston Edwards & Associates, the top 350 real estate brokerage
firms closed $22 billion in mortgage loans in 1998, and realty-based
and builder-based lending accounted for about 10 percent of all
purchase money mortgages that same year.\1\ Edwards estimated that this
amount would double to 20 percent within 3 years.\2\
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\1\ ``Changes in the Way Homes Are and Will Be Bought and Sold'',
By Weston Edwards & Associates, 1999.
\2\ Weston Edwards & Associates is expected to publish 2002
statistics in the area sometime in 2003.
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Edwards also found that 66 to 69 percent of the 250 largest
residential real estate brokerage firms in the country offer mortgages,
31 percent offer title, closing, escrow or personal insurance in
1996.\3\
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\3\ ``One-Stop-Shopping For The Homebuyer: A Rapidly Expanding
Channel of Distribution'', by Weston Edwards & Associates, 1997. The
business structures of these realty-owned one-stop shopping programs
vary. Many of the largest firms have created wholly-owned mortgage
lending or brokerage, title, and/or insurance subsidiaries. Smaller
firms have created joint ventures with local or national mortgage
lenders, financial institutions, or mortgage subsidiaries of financial
holding companies, title underwriters, or title agencies that are
jointly owned (e.g. 50 percent-50 percent) by the partners.
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The Potential Consumer Benefits of Realty-Based One-Stop Shopping
Since real estate brokerage firms have entered mortgage and other
financial services businesses, there have been several consumer surveys
and economic studies to assess their impact. All have conclusively
shown that realty-based one-stop shopping programs in today's
marketplace offer many potential benefits to the homebuyer.
The most recent survey of consumer attitudes toward realty-based
one-stop shopping, which is attached to this testimony, was performed
in March of this year.
Harris Interactive, the parent of Harris Poll, surveyed 2,052 recent
and future homebuyers and found:
That 82 percent of homebuyers would ``strongly'' or ``somewhat''
strongly consider using a one-stop shopping service for their home
purchase.
That when a homebuyer is aware that a real estate brokerage firm
offers a full range of services, it positively affects their
selection of a real estate agent 44 percent of the time.
That the three preferred sources of one-stop shopping programs are
mortgage companies, banks and credit unions, and real estate
brokerage firms.
That 64 percent of homebuyers who recently used one-stop shopping
programs had a much better overall experience with their home
purchase transaction.
That over 90 percent of homebuyers who did not use one-stop shopping
programs believed that if they had used one, they would have had a
better overall home purchase experience because:
They would have had just one person to contact,
They would have saved money if the company offered discounted
prices,
It would have sped up the homebuying process,
It would have prevented things from falling through the cracks; and
It would have assured one standard level of brand-named service
from all providers of the home purchase services.\4\
\4\ The survey also asked homebuyers how they felt about financial
institutions entering the real estate brokerage business. Sixty-nine
percent believed it would positively affect the range of services
available through one company, 47 percent believed it would positively
impact the number of choices of companies to conduct their home
purchase transaction, and 46 percent believed it would positively
affect the price they paid for the services needed to conduct the home
purchase transaction.
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The Edwards study I mentioned earlier found that mortgages offered
by realty-based one-stop shopping programs are competitive in both
price and service. It concluded that real estate agents prefer using
outside lenders unless the in-house mortgage service is exceptional,
and that they only recommend the in-house product to the homebuyer when
the loan product is within 1/8th of a percent of the best rate and when
he or she believes the service is superior to outside mortgage
products. The Edwards study also found that 96 percent of realty-owned
mortgage brokerage operations use multilender systems, in order to give
their real estate sales force and their customers a choice of mortgage
lenders.
A 1994 economic study commissioned by RESPRO' and
conducted by Lexecon, Inc., a national economic consulting firm, also
found that realty-based one-stop shopping programs potentially offer
lower costs.\5\ The study compared title and closing costs between
realty-owned title companies and independent title companies in over
1,000 home purchase transactions throughout seven States--Florida,
Minnesota, Tennessee, Wisconsin, Mississippi, Pennsylvania, and
California--and concluded that title and closing costs for realty-owned
title companies were not only competitive with those of independent
title companies, but actually resulted in a 2 percent cost savings.\6\
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\5\ ``Economic Analysis of Restrictions on Diversified Real Estate
Services Providers'', by Lexecon, Inc., January 3, 1995.
\6\ In a 1996 Economic Analysis accompanying a final RESPA
regulation, the Department of Housing and Urban Development (HUD)
offered its independent analysis of both the Lexecon, Inc. study and
the Edwards study. It concluded that ``. . . referral activity among
affiliates might still benefit consumers because of the possibility of
immediate savings in shopping time and hassle and future reductions in
prices due to lower marketing and other costs. Taking these benefits
into account, referrals among affiliated firms are probably neutral and
possibly beneficial to consumers.''
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The bottom line is that every consumer survey and empirical study
to date has shown that homebuyers prefer and potentially benefit from
realty-based one-stop shopping programs.
Integrated Real Estate Brokerage Companies Favor Open Competition
As you know, the banking industry has argued that financial holding
companies and national bank subsidiaries should be able to compete with
integrated real estate firms such as Howard Hanna Real Estate Services,
Long & Foster Real Estate, and other RESPRO' and Realty
Alliance members. In addition, some participants in this debate have
accused the real estate brokerage industry as being ``hypocritical'' by
wanting to be in the financial services business without letting
financial institutions compete with us in the real estate brokerage
business.
I can assure you that the vast majority of RESPRO' and
Realty Alliance members favor open competition and believe that banks
should be able to compete with us in our primary business in the same
way we compete with them in the mortgage and other settlement service
businesses.
Over the last 20 years, a number of financial conglomerates have
entered the real estate brokerage business, with varying degrees of
success: in the 1980's and early 1990's, Sears Roebuck owned Coldwell
Banker, Metropolitan Life owned Century 21, and Merrill Lynch owned
Merrill Lynch Realty. Today, General Motors Acceptance Corporation
(GMAC) owns GMAC Real Estate, Prudential Insurance Company owns
Prudential Realty, Cendant Corporation operates the Century 21, ERA,
and Coldwell Banker franchises, and Warren Buffet's Berkshire Hathaway
owns Home Services of America, Inc.
Initially, these companies appeared to have significant competitive
advantages over traditional real estate brokerage companies, such as
national distribution outlets, consumer marketing lists that made it
easy to reach everyone, valuable data about buying habits, and
tremendous name recognition. Sears even had access to Federally insured
deposits through its affiliate Sears Savings Bank.
Their entry into the business real estate brokerage business
concerned many independent real estate brokerage firms at the time. In
fact, in 1981, the long range planning committee of a national network
of large regional independent brokerage firms issued a report to its
members that stated that Merrill Lynch and Sears were the two greatest
threats to the solvency of real estate brokerage firms ever faced by
the industry.
But this prediction was unfounded. Sears, Merrill Lynch, and
Metropolitan Life have since left the real estate brokerage business.
While Prudential, GMAC, Cendant, and Berkshire Hathaway remain
competitors, their presence in the real estate marketplace has not
changed the basic character of the real estate brokerage business. In
fact, we believe that their entry contributed to the development of a
wider range of services and caused traditional real estate brokerage
firms to become more efficient and more consumer-focused than they were
before.
Federally insured financial institutions also have entered
residential real estate markets over the years. This is not surprising,
since over 50 percent of financial institutions (State-chartered banks
in 26 States, Federal savings associations, and credit unions) can
currently engage in real estate brokerage.
Metropolitan Financial Corporation owned Minneapolis-based Edina
Realty from 1988 to 1995, Sears Savings Bank was affiliated with
Coldwell Banker, and Twin Cities Federal (TCF) and Great Western at one
time owned real estate brokerage firms. Savings institutions or State-
chartered banks have also acquired real estate brokerage firms in
Connecticut, Pennsylvania, Delaware, Texas, New York, and Florida. But
over time, most of these financial institutions sold their real estate
brokerage businesses and retreated from the marketplace.
Finally, it's important to remember that real estate brokerage
firms would have the ability to acquire Federally chartered financial
institutions if the Fed-Treasury rule is finalized. Earlier this month,
a bank in Pittsburgh with 25 offices and assets of $800 million that
Howard Hanna Real Estate Services had a close working relationship with
was sold to another bank. This was a bank that our real estate company
would have been interested in purchasing if we were allowed to do so
under Federal law.
There Should Be A Level Playing Field Between Bank-Owned and
Non-Bank Real Estate Brokerage Firms Under RESPA and State Laws
While RESPRO' and The Realty Alliance support the
ability of financial holding companies and national bank subsidiaries
to enter the real estate brokerage business, we also believe that bank-
owned and nonbank real estate brokerage firms should compete under a
similar Federal and State regulatory environment.
The Real Estate Settlement Procedures Act (RESPA)
At the Federal level, all settlement service providers, including
integrated real estate brokerage firms and our real estate agents, must
comply with the Real Estate Settlement Procedures Act (RESPA), which
requires that a lender give a Good Faith Estimate (GFE) of the closing
costs 3 days after the application and a HUD-1 Settlement Statement at
closing. Section 8 of RESPA also prohibits settlement service providers
from giving or receiving referral fees, or ``kickbacks''.
Integrated real estate brokerage firms also are subject to RESPA's
``affiliated business'' restrictions, which requires us, before we
refer business to our mortgage, title or other settlement service
affiliates, to (1) disclose the nature of the financial relationship;
(2) not require the use of the affiliated settlement service; and (3)
not give or receive any payments (referral fees) that are otherwise
prohibited under RESPA. Under the last requirement, neither the real
estate brokerage firm nor its real estate sales associates can accept
any ``thing of value'' from an affiliated mortgage or other settlement
service provider for referrals of business.\7\
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\7\ In addition, any mortgage, title, or other settlement service
joint venture created by a real estate brokerage firm must comply with
guidelines issued in a 1996 Department of Housing and Urban Development
(HUD) Policy Statement that intended to prevent ``sham'' joint ventures
created primarily as a conduit for violating Section 8 of RESPA. Under
these joint venture guidelines, HUD announced that it will look at a
variety of factors to determine whether a joint venture is a ``sham''
or a legitimate joint venture, including whether both partners invest
capital in the entity, whether the entity performs ``core'' settlement
services, whether the entity has separate management and employees, and
whether the partners' return on their ownership interest is
proportional to the capital they invested in the joint venture entity.
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Financial holding companies and national bank subsidiaries that
enter the real estate brokerage business would be subject to these
RESPA guidelines, which we believe is appropriate.
But in the near future, HUD is expected to issue a proposed RESPA
rule that would exempt providers from Section 8 of RESPA if they
guarantee the lump-sum cost of a settlement service ``package''.
For there to continue to be a level playing field between bank-
owned and nonbank real estate brokerage firms, it is essential that HUD
allow nonmortgage lenders such as real estate brokerage firms to offer
a guaranteed ``package'' to our customers in the same manner as
mortgage lenders. We urge Congress to closely monitor the progress of
this HUD rulemaking proceeding to assure that all providers have the
ability to compete under any new regulatory environment under RESPA,
regardless of their industry or affiliation.
State Laws Affecting Integrated Real Estate Brokerage Firms
Integrated residential real estate brokerage firms also are subject
to a myriad of State laws and regulations that prohibit or restrict
their operations.
In 2001, 37 States had statutes, regulations, or policies that
place percentage limitations on the amount of business a title insurer
or agent can receive from an affiliate, including an affiliated real
estate broker, real estate agent, home builder, mortgage lender, or
financial institution.\8\ Other States have enacted laws that prohibit
a person from receiving a fee as real estate broker or salesperson and
mortgage broker in the same transaction.
---------------------------------------------------------------------------
\8\ ``State Survey of Affiliated Business Laws'', by the Real
Estate Services Providers Council, Inc. (RESPRO'), 2001.
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As you know, the Gramm-Leach-Bliley Act (GLBA) prohibited States
from (1) preventing a depository institution or affiliate from being
affiliated with any entity authorized by the Act; (2) preventing or
significantly interfering with the ability of a depository institution
or affiliate to engage in insurance sales, solicitation or cross-
marketing; or (3) preventing or significantly interfering with the
ability of an insurer or affiliate to become a financial holding
company or to acquire control of a depository institution.
Since GLBA passed Congress, some financial institutions have
successfully exempted themselves from these State restrictions under
GLBA's State preemption provisions. For example, the Kansas Insurance
Department ruled in 2001 that GLBA preempted Kansas financial
institutions only from a Kansas State law that prohibited a title
agency from receiving in excess of 20 percent of its operating revenue
from an affiliate.
As a result, Kansas financial institutions may own a title company
but nonfinancial institutions, including real estate brokerage firms,
may not. If financial holding companies and national bank subsidiaries
are allowed to own real estate brokerage firms, then bank-owned real
estate brokerage firms could own title agencies but nonbank real estate
brokerage firms could not.
RESPRO' and The Realty Alliance members have
consistently opposed these state antiaffiliation laws over the years,
and we support their preemption or repeal for both financial
institutions and nonfinancial institutions. If the Fed and the Treasury
approve a final rule, we urge Congress to assure that State laws apply
equally to all real estate brokerage firms, regardless of their
affiliation. This would better enable all real estate brokerage firms
to offer homebuyers the benefits of one-stop shopping programs,
regardless of whether they are affiliated with a financial institution.
Mr. Chairman, I again thank you for the opportunity to testify, and
I would be glad to answer any questions.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED
FROM TOM MURPHY
Q.1. During the few years before the enactment of Gramm-Leach-
Bliley in 1999, a huge disagreement existed between insurance
agents and brokers, and commercial banks, about whether banks
should be allowed to engage in insurance activities. A
compromise was finally reached which allowed Gramm-Leach-Bliley
to proceed, and opened a new chapter in which banks were able
to affiliate with insurance companies, and to sell insurance.
However, certain State consumer protection laws affecting those
sales were able to stand, or be enacted, if they did not
``significantly interfere'' with a bank's sales of insurance.
A.1. An important point to make is that Congress wrote that new
insurance powers chapter, not the regulators. Even after that
carefully crafted compromise was enacted, there are still
regulatory problems arising from it. As late as April 2002, the
Comptroller of the Currency encouraged preemption of the
Massachusetts Consumer Protection Act. The Comptroller avoided
the ``significantly interfere'' language of the GLBA and
instead utilized a much lower standard that the Consumer
Protection Act ``stands as an obstacle.'' (See attached letter
from Chairman Mike Oxley to Secretary Paul O'Neill) Several
other examples exist of national banks and financial holding
companies seeking preemption of State and local statutes and
regulations due to their national charter. It is very simple
for the regulators to now claim that all existing regulations
will
be followed. But these examples prove their actual conduct is
far different.
Q.2. How is this situation different from the one we are
currently facing between banks and real estate agents and
brokers? I understand that the concern among agents is that
they might ``disappear'' once banks get into their business,
and that people in the community will no longer turn to them
for their services. However, anecdotal evidence in the case of
the insurance agents would suggest differently, showing
essentially that there is still a viable market for the agents
and that people in the community do still turn to them because
they trust them and like using them. Won't that situation hold
out in the case of real estate agents as well?
A.2. Banks maintain that insurance companies and agents are
actually benefiting from banks exercising insurance powers.
There is no doubt that big banks will attempt to capture larger
and larger market share. But what do the statistics say? What
do consumers say? And what do the independent insurance agents
say? In South Dakota, banks entering the real estate business
will reduce the number of independent real estate brokerage
companies and agents.
This situation is quite different from that facing the real
estate industry. The types of problems described above arising
from ``functional regulation'' of insurance products offered by
banks provide further evidence that the time is not ripe to
grant additional powers to banks. Real estate regulation is far
more localized than the insurance industry. Not only are there
Federal and State rules and regulations, but also every local
county, town, and village has individual requirements for the
property located within their jurisdictions. There is no
evidence that the regulators considered this when proposing
their rule. There can be no comparison of real estate and
financial products such as securities and insurance. Those
products are fungible assets that have a value wherever they
may be. A life insurance policy can ``follow'' its insured to
any State or country. A piece of real estate can never move
from where it is first located. It is earth itself. It is the
most locally regulated industry there is, by necessity. The
problem with allowing the huge banking conglomerates into the
real estate industry is that they can dominate a market due to
their size and Federally granted advantages. If we assume they
would seek to build a national brand and marketing plan, we
must also assume they would seek preemption of local and State
regulations that would burden that national approach. Past
experience shows this is the path they would take, along with
their regulators. The result would be weaker consumer
protections, less competition, and a less efficient real estate
marketplace.
Q.3. Opponents of the REALTOR' argument have accused
the REALTORS' of acting uncompetitively in this
situation. In fact, allowing the entrance of banks into the
real estate brokerage and management market will ensure a
healthy and competitive environment for all.
What is your response to those comments? Do you not believe
the assertion that many small and community banks are looking
to these possible activities as a way to remain competitive
with credit unions, as well as REALTORS'?
A.3. We do not believe the assertion that many small and
community banks are looking to these possible activities as a
way to remain competitive. The fact is the petitions to the
Federal Reserve Board and the Treasury Department that lead to
the proposed real estate regulation were at the behest of the
largest diversified financial holding companies and bank
holding companies. The Financial Services Roundtable and the
New York Clearing House represent these huge financial
conglomerates and money center banks, not small community
banks. The American Bankers Association also petitioned the
Agencies for the real estate regulation. But they identified
only one bank--Fremont National Bank and Trust (Fremont,
Nebraska)--that should engage in real estate. Significantly,
the Independent Community Bankers Association was not a
petitioner to the Agencies.
During hearing testimony Mr. Smith stated that he has had
real estate powers since 1984. Although he argued that it is
only in the last 2 to 3 years that he thought he might need to
utilize that authority to compete, he still has not done so. He
has the power to do so and has not. We believe this would hold
true across the country for small community banks. The ABA has
tried to sell this proposal as an aid to small institutions,
but it is the top 5 to 10 largest banking conglomerates that
really want this authority. If it is true that 26 States allow
their State-chartered banks to operate real estate businesses,
why aren't more of them doing it? Only 18 banks in six States
are involved in residential real estate according to our
research (see written testimony). It has been a precept of the
dual banking system since its inception that each charter
offers different advantages and disadvantages. There is no
reason that any bank today could not apply for a State charter
in any of these States and accomplish their goals, other than
that they want to seek preemption of State and local rules
because of their national charter. If small banks want to offer
these services, they can become State chartered, or as
explained below, partner with a real estate broker under
existing rules.
Credit unions account for less than 1 percent of mortgage
originations in this country, and so the competitive argument
is a red herring. Not long before the Gramm-Leach-Bliley Act
was finally adopted by Congress, the banking industry failed to
prevent credit unions' growth through a court challenge. That
effort was overwhelmingly defeated by legislation passed by
Congress. The competition among financial institutions is a
legacy of the Nation's dual banking system and other financial
policy decisions. Congress created these institutions, not the
regulators.
More specifically, how is it that banks entering brokering,
leasing, and managing real estate will make banks more
competitive with credit unions? Credit unions, by Federal law,
can engage in real estate brokerage only through service
organizations and those activities cannot exceed 1 percent of
the contributed assets of
the credit unions. Moreover, there are not more than half a
dozen
credit union service organizations operating residential real
estate brokerages.
Q.4. As part of the ongoing discussion of this issue, some
people have cited the fact that there are numerous real estate
companies and brokerages that conduct services that are
currently defined as traditional banking activities, such as
mortgage lending and title insurance.
Why do you feel this situation is different than one
allowing banks to get into some traditional realty activities,
such as brokerage and management?
In fact, don't some State banks, thrifts, and credit unions
already engage in real estate brokerage activities? How is this
case different than national banks entering into this arena?
A.4. First, real estate companies are not offering traditional
banking products. Mortgage lending and title insurance are
financial products that both traditional banks and commercial
firms such as real estate brokers offer (see chart in
testimony). This ``gray'' area is where many commercial and
banking industries compete. It is where automobile companies
and banks compete for auto financing. It is where retailers and
banks compete on personal loan financing. Real estate firms do
not take deposits and cash checks. Those are traditional
banking activities.
Today, many of the financial services activities performed
by real estate brokers are done in partnership with banking
subsidiaries. Under the affiliated business arrangement rules
of RESPA, a bank owned mortgage company can partner with a real
estate broker to offer mortgage loans. They share in the
profits resulting from that partnership, and operate under
strict consumer protections such as disclosures and
prohibitions against kickbacks. Mr. Smith's bank not only could
offer real estate brokerage directly today as a Missouri trust
company, but he could also partner with an existing real estate
broker to offer mortgage and insurance services through an
affiliated business arrangement. This is exactly what Mr. Smith
claims banks are seeking through this proposed rule. But if
they can do this today, what could be the true reason for
seeking this rule? Could it be to avoid the tough RESPA-
affiliated business arrangement rules by directly operating the
real estate brokerage, or could it be to seek preemption of
State and local regulations as discussed in question one above?
Banks make much of the real estate company affiliation with
mortgage companies and other real estate service providers
giving the impression that ``capture rates'' of clients'
business is automatic and complete, much like what occurs when
a bank customer enters a banking institution. The simple fact
is that real estate clients using real estate company-
affiliated businesses rarely exceed 30 percent annually.
Commercial bank mortgage originations still dwarf all other
competitors.
The difference in allowing huge national banks (that are
the true proponents of this rule) in real estate and those
already in the business is the size of these institutions. The
top two or three national banks and holding companies have more
assets than all of the existing real estate companies combined.
This huge market power, along with Federal advantages, would
allow these megabanks to dominate any market. As you know, once
the market has been won, competitive forces will disappear and
consumers will suffer.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR MILLER
FROM TOM MURPHY
Q.1 As you know Georgia has allowed one State-chartered bank to
offer real estate brokerage and management services. We have
heard anecdotally that the local REALTORS' have
found it useful because the bank has placed its properties on
the multilist and the REALTORS' have more properties
to sell. Don't you think this is a good thing?
A.1 Although we have no research to indicate the Georgia
experience, it is true that the Georgia REALTORS'
and bankers agreed to withhold any further State bank
applications to perform real estate brokerage until it is
decided on the Federal level. This is another reason why
Congress should act on S. 1839, the Community Choice in Real
Estate Act. It can be argued that Georgia State-chartered banks
would be better served if huge national megabanks were not
granted real estate powers. These State-chartered banks have
very good business relationships with local real estate
offices, and would be able to continue that practice under
existing law. Entrance of the banking conglomerates would also
unfairly squeeze the State bank markets.
Q.2. What aspects of the activities that your opponents are
claiming to be ``financial'' or ``incidental to a financial
activity'' do you specifically disagree with?
A.2. Banks claim that real estate brokerage, leasing, and
management are financial activities or are incidental to a
financial activity. The business of brokering, leasing, or
managing real estate does not involve lending. It is financing
the mortgage that facilitates the transfer of real property
that involves lending. More than 20 percent of residential home
purchases involve no lender financing whatsoever. If anything,
the mortgage is incidental to the real estate sale, not the
other way around. Real estate is better compared to a retail
department store that provides consumer products to its
customers. If the department store has a credit card, does that
make the department store a bank because the credit card
involves financing?
Q.3. What is your response to the position that The Realty
Alliance, representing 45 member firms, has taken against your
efforts? [The NAR is roughly 12 times the size of The Realty
Alliance. However the NAR only represents about 40 percent of
all those with a real estate licenses--though not all of the
two million license holders are practicing.]
A.3. The Realty Alliance and the National Association of
REALTORS' are two different associations. The Realty
Alliance is an organization of 45 independent real estate
broker-owners. The Realty Alliance itself has members who do
not share that organization's position. (see attached Op-ed
from Lennox Scott, member of Realty
Alliance)
The National Association of REALTORS' is an
organization of 810,000 members that includes real estate
broker-owners, brokers, and agents. The National Association
also has affiliates that have their own membership that
practice real estate specialties, all of which require a real
estate license. (see written testimony chart on support for NAR
position)
Q.4. How can banks restrict themselves from ``product
packing,'' their clients believing that they must use a bank
for all available services to receive easier credit approval or
lower financing rates? What is to stop FHC salary-based real
estate representatives from tying in other bank products? [Real
estate firms have RESPA requirements which force them to have
clients sign disclosure statements that ensure understanding
that real estate lending partners do not have to be used, and
that the customer is free to shop around for a better deal.]
A.4. It seems inconceivable that banks would restrict
themselves from product packing, despite the existence of
antitying provisions. Even Fed Chairman Alan Greenspan made a
critical point during hearings on Gramm-Leach-Bliley: Firewalls
leak and in today's closely integrated financial institutions
they leak quickly. Chairman Greenspan had the ``Asian
contagion'' fear in mind when making these comments. Given the
failure of the Japanese universal banking system these comments
were well founded. The whole point in banks getting these
additional authorities is to cross sell their proprietary
products. Banks call this ``one-stop'' shopping. We call it
``one-bank'' shopping. Banks do not have an agency relationship
with their customers. Banks necessarily will promote their bank
and financial products to the exclusion of any competitive
products. That is the nature of banking. The business of
banking requires capturing customers for proprietary product
and service sales. Real estate brokers and agents have a
completely different relationship with their clients based on
an agency relationship and the unique nature of selling and
marketing real estate. Their only goal is to assist in the
marketing or purchase of their client's real estate. Although
they may recommend ancillary services, their only compensation
comes from the completion of that transaction. Thus their
motivations are completely different from a banker's. A real
estate agent's sole obligation is to their client.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED
FROM JAMES E. SMITH
Q.1. During consideration of the Gramm-Leach-Bliley Act in
1999, was the banking industry pushing to have real estate
brokerage and management services considered as financial
activities? Although real estate sales and development were
explicitly prohibited by the Act, why do you believe that the
Fed and the Treasury were correct in promulgating rules that
would make brokerage and management activities ``financial in
nature,'' or ``incidental to financial services?''
A.1. There was no attempt to incorporate specific ``financial
in nature'' activities in the statute other than the securities
and insurance activities that are included. Congress recognized
the dynamic nature of the financial services industry and
designed a statute that could evolve with the industry.
Accordingly, the Gramm-Leach-Bliley Act (GLBA) provides a
flexible regulatory framework to make certain that the new
statute would resist obsolescence and adapt to innovations in
the marketplace. That framework grants the Federal Reserve and
Treasury Department the authority to determine whether future
activities are financial in nature. Furthermore, GLBA provides
that financial subsidiaries of national banks should be
prohibited only from engaging in real estate development
activities--the riskier aspect of the business in which the
banking organization takes an ownership position. Had Congress
intended to prevent banking organizations from engaging in the
agency activities of real estate brokerage and real estate
management, it clearly knew how to do so. The fact that
Congress chose only to prohibit real estate development leads
to the conclusion that Congress did not intend to restrict real
estate agency activities.
Q.2. Do you believe, should banks be allowed to enter into
these new activities, that they should be held to a higher
standard? In other words, that the Community Reinvestment Act
should apply to other affiliates of the bank, such as real
estate brokerage and management parts, in addition to the
deposit-taking part of the bank?
A.2. Approval of the proposed rule would actually enhance a
bank's ability to assist low-income and minority communities.
Since banks are subject to the Community Reinvestment Act
(CRA), they have every incentive to use the real estate
authorities to further their outreach to communities. The banks
would provide real estate services to areas that are currently
underserved in this respect and could use the combination of
real estate and bank services to better serve their low-income
and minority communities. Moreover, if the real estate agency
were a subsidiary of a national bank, that subsidiary would be
covered by CRA. On the other hand, nonbank-
affiliated mortgage companies, such as those affiliated with
real estate companies, have no CRA or other obligation to low-
income communities. Moveover, an institution's record of
compliance with CRA already is a consideration pursuant to
GLBA. That is, all insured depository institutions of a holding
company must have a ``satisfactory'' or better CRA rating in
order to engage in new financial activities. With respect to
requiring affiliates of the bank to comply with CRA, we believe
that directly subjecting a real estate affiliate of a bank to
CRA would place them at a competitive disadvantage to
nonaffiliated real estate agencies that are not subject to CRA
requirements.
Q.3. Do you believe that as part of the regulation being
considered by the Fed and the Treasury, there should be a
strict firewall between the deposit-taking part of the bank and
the real estate brokerage part, similar to those State laws
enacted in the context of insurance sales by a bank?
A.3. The proposed rule provides that real estate brokerage
activities must be conducted through a subsidiary or affiliate
and not the bank itself. Furthermore, all State licensing,
qualification, sales practices, and continuing education
requirements would apply to bank-affiliated real estate agents.
Thus, similar to the situation with insurance agency
activities, bank-affiliated agents would be subject to the same
sales practice requirements as those agents not affiliated with
banks. In addition, banks are subject to Sections 23A and 23B
of the Federal Reserve Act, which limit the amount of credit
and other forms of support that a bank could provide to a real
estate brokerage affiliate or subsidiary. Consumers have even
more protections when their real estate agent is affiliated
with a banking organization because banks and bank holding
compamies are subject to the antitying provisions of the Bank
Holding Company Act. These restrictions prohibit banks and
their affiliates from conditioning the provision of credit on
the purchase of another product or service.
Q.4. As part of the ongoing discussion of this issue, some
people have cited the fact that there are numerous real estate
companies and brokerages that conduct services that are
currently defined as traditional banking activities, such as
mortgage lending and title insurance. Why do you feel this
situation is different than one allowing banks to get into some
traditional banking activities, such as brokerage and
management? In fact, don't some State banks, thrifts, and
credit unions already engage in real estate brokerage
activities? How is this case different than national banks
entering into this arena?
A.4. This question recognizes an important point in this
debate: real estate companies, such as Long & Foster, Century
21, and Prudential, provide end-to-end services for the home
purchasing process, including real estate brokerage, mortgage,
and insurance services. It is ironic that the National
Association of REALTORS' is now objecting to the
very combinations that their members have undertaken--offering
brokerage, mortgage banking, and, often, insurance under one
roof. Furthermore, in 26 States, State banking regulators have
the authority to allow State-chartered banking organizations to
engage in real estate brokerage activities. In addition,
savings institutions and credit unions already have brokerage
authority. Restricting national bank subsidiaries and financial
holding companies from offering the same end-to-end combination
of real estate services and mortgage lending places them at a
tremendous competitive disadvantage. We lose not just an
opportunity in the brokerage field, but also the opportunity to
interact with the customer in the first place and to offer one
of the most traditional of banking products--the mortgage loan.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR MILLER
FROM JAMES E. SMITH
Q.1. Aren't there already in place antitying provisions that
would prohibit a bank from offering favorable loan terms to its
real estate affiliate?
A.1. Yes. Sections 23A and 23B of the Federal Reserve Act would
limit the amount of credit and other forms of support that a
bank could provide to a real estate brokerage affiliate or
subsidiary. Consumers have even more protections when their
real estate agent is affiliated with a banking organization
because banks and bank holding companies are subject to the
antitying provisions of the Bank Holding Company Act. These
restrictions prohibit banks and their affiliates from
conditioning the provision of credit on the purchase of another
product or service.
Q.2. Why do you not think banks will have an unfair advantage
after new proposed regulations are enacted? Others claim that
Government subsidies (for example deposit insurance) as well
the ``deep pockets'' of your institutions will allow for an
unfair advantage that would create an opportunity for FHC's to
exploit the market--perhaps going as far as using your
subsidies to provide below-market prices?
A.2. The subject of whether deposit insurance and the Federal
Reserve's discount window provide a competitive advantage to
banks was fully debated during discussions that ultimately led
to the Gramm-Leach-Bliley Act of 1999. Testimony and statements
at that time from Federal banking regulators (Office of the
Comptroller of the Currency (OCC) \1\ and Federal Deposit
Insurance Corporation (FDIC)) \2\ and other experts \3\ support
the conclusion that no subsidy exists in the Government's
provision of services to banks. If a subsidy existed, banks
would be expected to dominate in businesses where they compete
directly with nonbanks. In fact, banks have been losing market
share in terms of both assets and household savings since the
1970's. The mortgage markets provide the most striking example
of how the market has shifted away from depository
institutions. The reason for this shift is the secondary
market--not insured deposits--has become the most cost-
efficient way to fund most mortgages. Investor demand is so
great for mortgage-backed securities that mortgage banks have
access to the lowest-cost funds available in the world.
Traditional deposit-based lenders--who pay for deposit
insurance and face a host of regulatory expenses like higher
capital requirements, exam costs, and CRA--are often bypassed
completely. If banks enjoyed a subsidy, nondepository
institutions would not control an ever-increasing market share.
---------------------------------------------------------------------------
\1\ ``The Competitive Implications of Safety Net-Related
Subsidies,'' Gary Whalen, Economics Working Paper 97-9, OCC, May 1997.
\2\ Testimony by Ricki Helfer, Chairman, FDIC, before the House
Committee on Banking and Financial Services, March 5, 1997.
\3\ ``Federal Subsidies in Banking: The Link to Financial
Modernization,'' Frederick Furlong, Federal Reserve Bank of San
Francisco Economic Letter, number 97-31, October 24, 1997.
``The Battle for Bank Regulatory Supremacy,'' Carter Golembe, The
Golembe Reports, volume 1997-2 (March 1997).
Q.3. Why do you not think banks will have a conflict-of-
interest situation, with either lending favorable loans to
their affiliates, or even going as far as not lending to
---------------------------------------------------------------------------
nonaffiliated firms--essentially to your competitors?
A.3. Banking organizations are subject to Sections 23A and 23B
of the Federal Reserve Act, which limit the amount of credit
and other forms of support that a bank could provide to a real
estate brokerage affiliate or subsidiary. Such limits ensure
that the safety and soundness of the bank will not be
negatively impacted by its subsidiaries or affiliates.
Moreover, the exact same potential for such conflicts exists
today given that a number of real estate firms such as Century
21, Coldwell Banker, ERA, and Long & Foster all offer mortgages
to homebuyers. Although these integrated real estate
organizations, as well as State banks in many States, savings
institutions, and credit unions, have been selling real estate
and funding mortgages for years, conflicts of interest has not
been a problem. The Real Estate Settlement Procedures Act
(RESPA) addresses such conflicts (explained in further detail
below).
Q.4. What aspects of ``banking'' that real estate agencies
currently have access do you think give them an unfair
advantage?
A.4. Real estate companies, such as Long & Foster, Century 21,
and Prudential, provide end-to-end services for the home
purchasing process, including real estate brokerage, mortgage,
and
insurance services. It is ironic that the National Association
of REALTORS' is now objecting to the very
combinations that their members have undertaken--offering
brokerage, mortgage banking, and, often, insurance under one
roof. Such combination of services provides valuable cost,
convenience, and service options for customers. All banks
should have the opportunity to compete in the same manner as
the real estate companies.
Q.5. How can banks restrict themselves from ``product
packing,'' their clients believing that they must use a bank
for all available services to receive easier credit approval or
lower financing rates? What is to stop FHC salary-based real
estate representatives from tying in other bank products?
A.5. First, as explained in the first question, banks and bank-
holding companies are subject to the antitying provisions of
the Bank Holding Company Act. Second, RESPA applies to banks in
the same manner as it applies to real estate firms.
Specifically, RESPA requires REALTORS' affiliated
with lenders to disclose that fact to customers before the
purchase occurs. The RESPA disclosure, which must be on a
separate piece of paper, must state the relationship between
the real estate agent and the lender and provide the estimated
charges or range of charges of the lender. It must also notify
the customer that he or she is not required to use the lender
and is free to shop around for a better deal.
STATEMENT OF THE AMERICAN HOMEOWNERS GRASSROOTS ALLIANCE
The American Homeowners Grassroots Alliance (AHGA) is a national
bipartisan advocacy organization representing the Nation's 70 million
homeowners. AHGA believes that preserving and enhancing homeownership
should be a national policy priority. AHGA believes that homeowners and
homeownership are generally benefited by domestic and international
free market policies.
AHGA has carefully reviewed policy documents and testimony from the
real estate, lending sectors, and other sources on the issue of
allowing banking organizations to be involved in real estate brokerage.
From the consumer perspective there are significant potential benefits
of such a policy. Those benefits clearly outweigh the limited potential
risks. Also, a substantial majority of consumers would like the option
of ``one-stop'' shopping for real estate services. For these reasons
AHGA believes that consumers will benefit if banking organizations are
involved in real estate brokerage and urges Congress to support the
entry of banks into this market.
Opponents argue that because banks lack the invaluable experience
in local real estate markets and the in-depth knowledge of real estate
law, consumers will suffer. While it is true that most banks currently
do not have core real estate brokerage competencies, both experience
and common sense suggest it is unlikely that consumers will suffer.
Companies in the banking and real estate sector have successfully
entered each other's markets without serious problems. Federal savings
institutions, credit unions nationwide, and commercial banks in about
half of the States have had the ability to engage in real estate
brokerage for a number of years. Many real estate companies, including
Long & Foster, Century 21, and Coldwell Banker and many others
currently provide brokerage, mortgage lending, title insurance, and
property insurance. Consumers have substantial protection in the fact
that real estate practice is heavily regulated, and State licensing
requirements establish minimum competencies that all participants must
demonstrate. Rather than build those competencies from scratch, it is
likely that many banks will enter the real estate brokerage market
through partnerships with or the acquisition of small local real estate
agencies that have substantial experience in their real estate markets
and in-depth knowledge of real estate law. Another argument against
permitting banks to enter real estate brokerage is that it will
accelerate the consolidation process currently underway in both the
real estate and lending sectors. This would reduce competition and
increase costs to consumers. This is not a strong argument either.
Other larger economic factors are driving the consolidation that will
almost certainly continue in banking and real estate (and many other
sectors as well), whether or not banks are allowed to enter real estate
brokerage. AHGA believes that any contribution of this new policy to
the consolidation process will be small. If banks are permitted to
enter real estate brokerage the most visible difference will likely be
that banks instead will purchase some of the small real estate
brokerages that would otherwise be purchased by large real estate
brokers. Because there will be more bidders the small independent
brokers will benefit from higher selling prices when they sell their
businesses. Fortunately there are a very large number of existing
competitors in both sectors, so it would take many years before
consolidation reduces the number of competitors in either sector to the
point that any company or small group of companies could override
market forces in determining prices of banking and real estate
services. If and when we ever reach the point that market forces do not
prevail in setting real estate service prices and lending prices and
rates, U.S. antitrust laws are available to stop anticompetitive
behavior.
Last, opponents argue that permitting banks to enter real estate
brokerage creates a conflict of interest in that a lender owning a real
estate brokerage will try to sell follow-on products or services to its
clients its other services, and in many cases those products or
services will not represent the best value for the consumer. Most
consumers recognize that the products or services of only a few
companies in a given industry can represent the very best value for a
particular consumer. They also recognize that the consumer is in the
best position to determine his or her needs and priorities and it is
the consumer's responsibility to sort out which products or services
represent the best value. Cross-selling of follow-on products is a very
common practice in many sectors, and the products and services a
company seeks to cross-sell are no different with respect to their
potential fit to a consumer's needs that the product or service that
attracted the consumer in the first place. AHGA believes that most
consumers are sophisticated enough to recognize that any company's
follow-on products or services also may or may not be the best value
for the consumer and act accordingly. There is therefore no greater
conflict of interest between a consumer and business regarding a
follow-on product or services or the product or service that attracted
the customer in the first place. Most consumers do a lot of research
regarding competing real estate and mortgage lending services before
buying, selling, or financing a home. There is a wealth of free,
inexpensive information that is available to consumers on those
subjects from a wide range of sources, including AHGA's sister
education and research organization, the American Homeowners Foundation
(AmericanHomeowners.org). Almost every source strongly urges consumers
to comparison-shop every major component of real estate services.
There are several arguments in favor of permitting banks to enter
real estate brokerage. Businesses cross-sell because it is more
efficient way to market, for example the costs are lower. In a
competitive marketplace a share of marketing cost savings will
inevitably be passed on to consumers in the form of lower fees and/or
rates. In addition to potentially saving homeowners money, the closer
coordination of home brokerage and lending services under one roof also
potentially reduces the time between purchase and settlement, which can
often be very important to consumers as well. These likely cost and
time savings are a substantial potential consumer benefit. They would
indirectly benefit individual real estate agents, because they will get
their commissions sooner and the reduced costs and time savings will
likely mean more homebuyers and sellers. Consumers are very concerned
about the protection of their financial and other personal data.
Currently RESPA requires that all real estate companies and banks
provide disclosure notice to the customer of multiple services offered
by affiliated firms. In addition banks are currently subject to greater
privacy regulation than real estate companies. The current regulatory
proposal to allow banks to enter the real estate brokerage requires
real estate brokers to provide greater protection to the privacy of
consumer data. Consumers support this requirement and will benefit from
greater protection. One-stop shopping is by itself a substantial
benefit to many time-starved consumers. Many homebuyers are couples
with two demanding jobs and often more demanding children. We believe
many of those homebuyers consciously and intentionally trade
convenience for economy in many decisions. They make that choice with
full awareness that they will likely be forgoing a better offer if they
took the time to shop around.
From a policy standpoint the question is whether Federal
legislators should deny consumers this freedom of choice, and if so,
what is the appropriate alternative. While AHGA strongly encourages
consumers to take the time to shop competitively for all real estate
and financing services, AHGA also believes consumers have the right to
make their own choice. In addition, recent home sellers favor allowing
banks to offer real estate brokerage by a 2 to 1 margin according to a
2001 survey.
For this reason AHGA urges Members of Congress to oppose S. 1839
and H.R. 3424. If Congress concludes that the risks of permitting
banking organizations to be involved in real estate brokerage
outweighed the benefits, then consistency would require that Federal
savings institutions, credit unions nationwide, and commercial banks in
several States that engage in real estate brokerage to divest
themselves of their real estate businesses. Since the primary arguments
against the bank's market expansion go to core competencies and
potential conflicts of interest, then conversely the many real estate
companies that currently provide mortgage lending should also be
required to divest themselves of their real estate lending businesses.
While these steps would apply the principles contained in S. 1839 and
H.R. 3424 on a consistent basis, it would deny many consumers what they
want--one-stop shopping. If Congress truly believes action is necessary
to protect consumers it would be more effective to require consumers to
meet some minimum level of due diligence before entering a real estate
or lending transaction (for example demonstrating that they have
interviewed three real estate agents before listing a home, looked at
three houses before making an offer to buy a house, or considered three
lenders before applying for a loan). However as previously stated AHGA
believes this would be too much of a restriction of personal choice. In
deciding whether to support real estate companies or bankers on this
contentious issue, AHGA recommends that Congress choose the side
consumers. Congress can best serve consumers by supporting the
implementation of regulations to permit banking organizations to be
involved in real estate brokerage.
The American Homeowners Grassroots Alliance (AHGA) is a national
bipartisan advocacy organization representing the Nation's 70 million
homeowners. AHGA believes that policies that encourage and protect
homeownership are in our national best interest. Those policies
encourage and sustain the maintenance of a strong and broad middle
class, build a sense of community and responsibility, and facilitate
investment in homes, which are the largest, most universal savings/
equity-building vehicle for most Americans. AHGA's positions and more
information about the organization are available at
www.AmericanHomeowners.org. The American Homeowners Foundation's
section of the website also contains free educational materials to help
homeowners and future homeowners buy, sell, remodel, and finance their
homes.
STATEMENT* OF THE FINANCIAL SERVICES ROUNDTABLE
May 23, 2002
The Financial Services Roundtable (``Roundtable'') appreciates the
opportunity to submit testimony on the proposal by the Federal Reserve
Board (``Board'') and Treasury to allow greater competition in the real
estate brokerage industry by permitting financial holding companies and
national bank subsidiaries to enter the business. The Roundtable
represents 100 of the largest integrated financial services companies
providing banking, insurance, and investment products and services to
the American consumer. Member companies participate through the chief
executive officer and other senior executives nominated by the CEO.
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* Due to size and quality of attachments, they will be held in
Senate Banking Committee files.
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Roundtable member companies provide fuel for America's economic
engine, accounting directly for $12.4 trillion in managed assets, $561
billion in revenue, and 1.8 million jobs.
The Roundtable strongly opposes the Community Choice in Real Estate
Act (S. 1839 and H.R. 3424). Despite its name, the Act would limit the
ability of consumers to choose the real estate agent or broker of their
choice, and would artificially restrain competition in the brokerage
industry. As a result, the Act would harm both consumers and the
financial services industry.
S. 1839 would prohibit the Board and the Treasury from completing
the administrative rulemaking process required by the Gramm-Leach-
Bliley Act. (the GLB Act) and from ruling--if the statutory factors are
met--that real estate brokerage and real estate management are
``financial in nature'' and therefore permissible for financial holding
companies and national bank subsidiaries.
The Roundtable believes that the Board and the Treasury should be
allowed to complete the rulemaking process. In addition, the Roundtable
believes that the Board and Treasury should ultimately rule that real
estate brokerage is a permissible activity, for several reasons. First,
permitting financial holding companies to enter the real estate
brokerage business is good for consumers. Second, it is good for the
financial services industry. Third, real estate brokerage is a
financial activity consistent with the Gramm-Leach-Bliley Act.
Consumers Will Benefit From the Proposed Rule
The Roundtable strongly believes that consumers will be the real
winners if the proposed regulation is adopted. Adoption of the rule
will increase competition in the brokerage industry. More competition
means more consumer choice, lower prices, and better customer service.
Adoption of the regulation is necessary to meet the demands of
consumers for one-stop shopping for all their homebuying needs. In
1999, a study of recent homebuyers was conducted on behalf of the
National Association of REALTORS' (NAR). (See Attachment A).
According to this NAR study, 76 percent of homebuyers said that getting
all or some of their homebuying services handled through one company
was appealing. Eighty-one percent supported the idea of one-stop
shopping for all of their homebuying services and were evenly split on
whether the best provider of such services would be a bank, a
REALTOR', or a mortgage company, although a slight majority
stated they would prefer a bank as the one-stop shopping provider. The
NAR study concluded that 77 percent would consider using a bank for
those one-stop shopping services in future transactions.
If the proposed regulation is adopted, consumers will be able to
receive in one location all the services necessary to buy a home:
preapproval for a mortgage loan; assistance in finding a home; a
mortgage loan after a contract to purchase a home has been signed; and
insurance for the property (including title insurance, property
insurance, and private mortgage insurance) prior to closing. The
consumer's life will be simplified and services will be expedited. Many
traditional real estate brokers already have responded to consumer
demand for one-stop shopping and are offering mortgage and, insurance
services in addition to real estate brokerage services.
Proponents of the Community Choice in Real Estate Act oppose
letting financial holding companies compete in the real estate
brokerage business. They argue that consumers are worried about their
privacy when purchasing a home, and that letting financial holding
companies compete would hurt consumer privacy. Concluding that
brokerage is a financial activity in fact greatly enhances consumer
privacy. While customers of financial holding companies and national
banks are entitled to the GLB Act's far-reaching privacy protections,
customers of real estate brokers currently have no Federal privacy
protections.
If adopted, the Board/Treasury regulation will afford brokerage
customers the same Federal privacy protections now afforded to bank
customers: real estate brokers will have to disclose their privacy
policies to homebuyers and will be prohibited from sharing certain
nonpublic information about the homebuyer with any nonaffiliated third
parties unless the homebuyer has been given notice and the opportunity
to opt-out of such information sharing. Ironically, enactment of S.
1839 would in effect harm consumers by depriving them of the Federal
privacy protections currently afforded the consumers in other sensitive
financial transactions.
Proponents of S. 1839 also argue that allowing financial holding
companies to offer real estate brokerage services could result in
harmful tying and other coercive practices. This argument is easily
refuted by the fact that many brokerages are already affiliated with
mortgage lenders, insurers, thrifts, credit unions, and State banks,
and there is no evidence of these harmful practices occurring.
Moreover, existing banking laws are more than adequate to preclude
these types of practices within a financial holding company. Sections
23A and 23B of the Federal Reserve Act prohibit a bank from making
below-market loans to any affiliates or subsidiaries, including those
that would be engaged in real estate brokerage, and severely restrict a
bank's ability to provide equity contributions and other support to the
real estate brokerage affiliate.\1\ Furthermore, Section 8 of the Real
Estate Settlement Procedures Act \2\ and the antitying provisions of
Section 106 of the Bank Holding Company Act Amendments of 1970 \3\
preclude any coercive practices against the bank's (or brokerage's)
customers. In fact, a customer dealing with a brokerage affiliated with
a bank will enjoy far greater consumer protection than if he or she
were dealing with a real estate brokerage firm not affiliated with a
bank.
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\1\ See 12 U.S.C. Sec. Sec. 371c, 371c-1 and 1828(j).
\2\ 12 U.S.C. Sec. 2607.
\3\ 12 U.S.C. Sec. 1971, et seq.
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The Financial Services Industry Will Benefit From the Proposed Rule
Adoption of the regulation is prudent for the financial services
industry. Traditional real estate brokers are now actively competing
with banks and financial holding companies by offering financial
services--in particular, loans and insurance. Of the 10 leading real
estate brokers cited by REALTOR' magazine, nine provide
financial services and compete with financial holding companies by
offering loans or insurance. According to the ``1999 National
Association of REALTORS' Profile of Real Estate Firms,'' 56
percent of its residential real estate brokerage firms with more than
50 agents are involved in mortgage lending. (See Attachment B).
Additionally, Federal thrifts \4\ and credit unions,\5\ as well as
State-chartered banks in 26 States, are permitted to act as real estate
brokers. (See Attachment C for data on the States). In fact, the only
financial institutions that uniformly cannot engage in real estate
brokerage are financial holding companies and national banks. The
Roundtable asks only that more competition be allowed by permitting
financial holding companies and national bank subsidiaries to offer
these services as well.
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\4\ See 12 CFR Sec. Sec. 559.4(e)(3) (thrift service corporations),
584.2-1(b)(8) (thrift affiliates).
\5\ See 12 CFR Sec. 712.5(g) and (p).
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NAR argues that permitting financial holding companies to engage in
real estate brokerage would create an unlevel playing field due to
alleged ``Federally chartered advantages.'' NAR contends, without
support, that Federal deposit insurance and access to the Federal
Reserve system, for example, creates ``Federal subsidies'' enjoyed by
depository institutions which give banks an unfair advantage. NAR
further alleges that the proposed regulation would result in an unsafe
and unsound banking system.
Brokerage poses very little risk to the banking system. A real
estate brokerage company does not act ``as principal,'' but rather acts
in an ``agency'' capacity by being an intermediary in a transaction
between a buyer and a seller. Banks have historically been permitted to
conduct ``agency'' activities either directly or through affiliates.
Financial holding companies are currently permitted to provide their
customers with a wide array of agency services, including travel,
securities, commodities, and insurance brokerage.
Any Federal subsidy is far outweighed by the heightened regulatory
burden and cost of supervision borne by depository institutions. The
proposed regulation would permit real estate brokerage only in nonbank
affiliates and financial subsidiaries--entities which, by law, are
firewalled away from their affiliated depository institutions and
therefore cannot enjoy any such alleged ``Federal subsidy.'' In any
event, NAR's contention that the proposal would result in an unsafe and
unsound banking system has not been evidenced in the 26 States that
currently permit real estate brokerage by banks, or by the thrift, or
credit union industries.
There is no evidence that consumers have been hurt in any way by
the current involvement of these depository institutions in the real
estate brokerage industry, and there is no evidence that depository
institutions in these markets dominate the brokerage industry or enjoy
significant market power. Prohibiting real estate brokers from
affiliating with financial holding companies seems to be out of step
with the current marketplace. The most vocal proponent of the Act--
NAR--does not speak for the entire real estate industry. The Realty
Alliance, a real estate brokerage trade organization with over 62,000
members (most of whom are also members of NAR), publicly opposes NAR's
efforts. (See Attachment D for a copy of a White Paper delivered by The
Realty Alliance to the NAR). The Realty Alliance, like the financial
services industry, welcomes increased competition and recognizes the
potential benefits to consumers that the regulation could bring.
Real Estate Brokerage is a Financial Transaction Consistent with the
Gramm-Leach-Bliley Act
Finally, the Roundtable believes that the proposed regulation is
entirely consistent with the GLB Act which was designed to modernize
and expand the financial services marketplace. The specific purpose of
financial modernization, as stated in the preamble to the GLB Act, was
to ``enhance competition in the financial services industry by
providing a prudent framework for the affiliation of banks, securities
firms, insurance companies, and other financial service providers, and
for other purposes.'' [emphasis added].
Title I of the GLB Act created the ``financial holding company''
structure and permitted financial holding companies to conduct a much
broader range of financial activities than was historically permissible
for bank holding companies. The GLB Act permits financial holding
companies to engage in all activities that have been determined by the
Federal Reserve Board to be ``financial in nature,'' or incidental or
complementary to a financial activity.\6\ Given the historical
experience of the Glass-Steagall Act and the practical limitations of
creating a rigid regulatory structure, the GLB Act established a
flexible framework that allows regulators to respond to changes in
technology, the marketplace, and consumer demand. The GLB Act provides
the Board, in consultation with Treasury, the authority to expand the
statutory list of financial activities.\7\
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\6\ See Bank Holding Company Act Sec. 4(k)(1)(A), (B) (12 U.S.C.
Sec. 1843(k)(1)(A), (B)).
\7\ See Bank Holding Company Act Sec. 4(k) (12 U.S.C.
Sec. 1843(k)).
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Consistent with Congress' directive and following the request of
the American Bankers Association, the Roundtable, and others, the Board
and Treasury issued a joint notice of proposed rulemaking in December
2000 to determine that real estate brokerage and real estate management
activities are ``financial in nature'' or ``incidental to a financial
activity'' and, consequently, permissible for financial holding
companies and national bank subsidiaries. By issuing this proposal, the
agencies were simply fulfilling their obligation under the GLB Act to
ensure that financial holding companies and national banks have the
ability to compete with other financial service providers. In doing so,
the Board and Treasury have followed the objective rulemaking process
contemplated by the GLB Act and have sought public comments on the
rule. We ask that the Board and Treasury be allowed to continue their
deliberative process.
The broader scope of the ``financial in nature'' standard for
nonbank activities of financial holding companies is reflected in both
the legislative history of the GLB Act and the diverse range of
activities that financial holding companies are currently permitted to
conduct. First, the Conference Report to the GLB Act states that
``[p]ermitting banks to affiliate with firms engaged in financial
activities represents a significant expansion from the current
requirement that bank affiliates may engage only in activities that are
closely related to banking.'' \8\ Second, financial holding companies
are currently permitted to conduct a broad range of activities that
bank holding companies are prohibited from conducting, such as
unrestricted securities underwriting, merchant banking, unrestricted
insurance underwriting, unrestricted insurance agency, travel agency,
and acting as finder.\9\ The financial services marketplace has changed
dramatically in the past 30 years, and what may have been inappropriate
for bank holding companies in the early 1970's may be entirely
appropriate for the diversified financial holding companies of the
early 21st century.
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\8\ H.R. Conference Report No. 106-434, at 153 (November 2, 1999).
\9\ See BHCA Sec. 4(k)(4) (12 U.S.C. Sec. 1843(k)(4)); 12 CFR
Sec. 225.86(d)(1) (finder activities).
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With respect to the permissibility of real estate brokerage under
the GLB Act, the GLB Act permits the Board to define certain activities
as ``financial in nature,'' including ``transferring . . . for others
financial assets other than money or securities.'' The Roundtable
believes that real estate brokerage is exactly that type of activity.
Real estate is the largest financial asset owned by most consumers and
is the most widely used source of collateral for consumers seeking
credit. The purchase of real estate is the largest financial
transaction for most consumers. For many, real estate is the largest
source of individual wealth; the decision to purchase, sell, and
finance real estate plays a significant part in retirement planning.
Real estate is conferred special status under Federal and State tax
laws, distinguishing real estate from other large-ticket items. For
these reasons, we believe that real estate is a ``financial asset'' and
that brokerage is ``financial in nature.''
In addition, the GLB Act defines as ``financial in nature'' all
activities that involve ``arranging, effecting, or facilitating
financial transactions'' for others.\10\ Real estate brokerage is part
of the overall financial activity of helping a consumer receive
preapproval for a mortgage loan, find a home, appraise the property,
receive final approval for the mortgage loan, close the transaction,
and insure the home with property insurance, title insurance, and, in
certain cases, private mortgage insurance. Each of the services and
products offered as part of the overall financial transaction are
integrated with one another. Such integration is reflected in several
ways. First, consumers frequently enlist the services of a real estate
broker at
the same time that they seek the products of a mortgage lender and an
insurance
agency. Second, consumers generally pay the loan fees, the
REALTOR''s commission, and the initial insurance premiums
together at the closing. Third, the documents that consumers sign with
respect to the mortgage loan, real estate brokerage, and the insurance
generally cross-reference and are conditioned upon each other.
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\10\ See Bank Holding Company Act Sec. 4(k)(5)(B)(iii) (12 U.S.C.
Sec. 1843(k)(5)(B)(iii)).
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In determining whether an activity is ``financial in nature,'' the
GLB Act also requires the Fed to consider ``changes in the marketplace
in which financial holding companies compete'' and whether such
activity is ``necessary or appropriate'' to allow a financial holding
company or its affiliates to ``compete effectively with any company
seeking to provide financial services in the United States.'' \11\ As
highlighted earlier, approval of the regulation is both necessary and
appropriate to allow financial holding companies to compete effectively
with real estate brokerage companies, as well as with Federal thrifts,
credit unions, and State banks in 26 States.
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\11\ Section 103(a), new Bank Holding Company Act (BHCA) section
4(k)(3)(A)&(D)(i).
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As a result, the Roundtable firmly believes that real estate
brokerage is ``financial in nature,'' consistent with the GLB Act. At
the very least, the Board and Treasury should find that it is
``incidental to a financial activity.'' Banks and financial holding
companies are involved in virtually every other aspect of residential
and commercial real estate transactions, ranging from rendering advice;
acting as a finder; appraising the property; issuing abstracts of title
and performing title searches; selling and underwriting hazard, title,
and mortgage guaranty insurance; arranging or providing financing;
providing loan closing, settlement, and escrow services; and
securitizing mortgage loans or underwriting and selling mortgage backed
securities. Clearly, acting as a real estate broker is incidental to
the performance of these other real estate related services that are
already considered to be ``closely related to banking'' or ``financial
in nature.''
In sum, assertions that the Board and Treasury may not rule on real
estate brokerage are without basis under the GLB Act. Such an
interpretation of the GLB Act would chill future proposals for
activities to be considered ``financial in nature'' and would
effectively turn the clock back on financial modernization.
Conclusion
In conclusion, the Roundtable strongly supports the proposed
regulation and believes that its adoption would be a win-win
proposition for consumers and the financial services industry. The
regulation would allow financial services companies to build alliances
with real estate brokerages, creating tremendous benefits for
consumers, including one-stop shopping, lower prices, more choice, and
increased competition. The Community Choice in Real Estate Act is
nothing but an attempt to derail the deliberative rulemaking process--
thereby preserving artificial barriers to entry in the brokerage market
for the purpose of preserving market share and reducing threatened
competition. While NAR wants to compete in the financial services
markets by making loans and selling insurance, NAR wants Congress to
protect them from competition in their own backyard. For the foregoing
reasons, the Roundtable opposes S. 1839 and supports the rulemaking
process commenced by the Board and the Treasury in December 2000. This
rulemaking process is an appropriate delegation of authority to the
regulators, who have expertise and experience in this area and are
fully equipped to consider all the substantive issues and make an
objective ruling in the best interests of both the consumers and the
industry.
Thank you for the opportunity to submit our views.