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

                       FEDERAL RESERVE BOARD AND
                   TREASURY DEPARTMENT RULE PROPOSAL

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
               FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 2, 2001

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 107-12

                   U.S. GOVERNMENT PRINTING OFFICE
72-396                     WASHINGTON : 2001

_______________________________________________________________________
 For sale by the Superintendent of Documents, U.S. Government Printing 
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice      BARNEY FRANK, Massachusetts
    Chair                            PAUL E. KANJORSKI, Pennsylvania
DOUG BEREUTER, Nebraska              MAXINE WATERS, California
RICHARD H. BAKER, Louisiana          CAROLYN B. MALONEY, New York
SPENCER BACHUS, Alabama              LUIS V. GUTIERREZ, Illinois
MICHAEL N. CASTLE, Delaware          NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York              MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California          GARY L. ACKERMAN, New York
FRANK D. LUCAS, Oklahoma             KEN BENTSEN, Texas
ROBERT W. NEY, Ohio                  JAMES H. MALONEY, Connecticut
BOB BARR, Georgia                    DARLENE HOOLEY, Oregon
SUE W. KELLY, New York               JULIA CARSON, Indiana
RON PAUL, Texas                      BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio                MAX SANDLIN, Texas
CHRISTOPHER COX, California          GREGORY W. MEEKS, New York
DAVE WELDON, Florida                 BARBARA LEE, California
JIM RYUN, Kansas                     FRANK MASCARA, Pennsylvania
BOB RILEY, Alabama                   JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio           JANICE D. SCHAKOWSKY, Illinois
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina      CHARLES A. GONZALEZ, Texas
DOUG OSE, California                 STEPHANIE TUBBS JONES, Ohio
JUDY BIGGERT, Illinois               MICHAEL E. CAPUANO, Massachusetts
MARK GREEN, Wisconsin                HAROLD E. FORD Jr., Tennessee
PATRICK J. TOOMEY, Pennsylvania      RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut       KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona             RONNIE SHOWS, Mississippi
VITO FOSSELLA, New York              JOSEPH CROWLEY, New York
GARY G. MILLER, California           WILLIAM LACY CLAY, Missouri
ERIC CANTOR, Virginia                STEVE ISRAEL, New York
FELIX J. GRUCCI, Jr., New York       MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania         
SHELLEY MOORE CAPITO, West Virginia  BERNARD SANDERS, Vermont
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio

             Terry Haines, Chief Counsel and Staff Director
       Subcommittee on Financial Institutions and Consumer Credit

                   SPENCER BACHUS, Alabama, Chairman

DAVE WELDON, Florida, Vice Chairman  MAXINE WATERS, California
MARGE ROUKEMA, New Jersey            CAROLYN B. MALONEY, New York
DOUG BEREUTER, Nebraska              MELVIN L. WATT, North Carolina
RICHARD H. BAKER, Louisiana          GARY L. ACKERMAN, New York
MICHAEL N. CASTLE, Delaware          KEN BENTSEN, Texas
EDWARD R. ROYCE, California          BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             MAX SANDLIN, Texas
BOB BARR, Georgia                    GREGORY W. MEEKS, New York
SUE W. KELLY, New York               LUIS V. GUTIERREZ, Illinois
PAUL E. GILLMOR, Ohio                FRANK MASCARA, Pennsylvania
JIM RYUN, Kansas                     DENNIS MOORE, Kansas
BOB RILEY, Alabama                   CHARLES A. GONZALEZ, Texas
STEVEN C. LaTOURETTE, Ohio           PAUL E. KANJORSKI, Pennsylvania
DONALD A. MANZULLO, Illinois         JAMES H. MALONEY, Connecticut
WALTER B. JONES, North Carolina      DARLENE HOOLEY, Oregon
JUDY BIGGERT, Illinois               JULIA CARSON, Indiana
PATRICK J. TOOMEY, Pennsylvania      BARBARA LEE, California
ERIC CANTOR, Virginia                HAROLD E. FORD, Jr., Tennessee
FELIX J. GRUCCI, Jr, New York        RUBEN HINOJOSA, Texas
MELISSA A. HART, Pennsylvania        KEN LUCAS, Kentucky
SHELLEY MOORE CAPITO, West Virginia  RONNIE SHOWS, Mississippi
MIKE FERGUSON, New Jersey            JOSEPH CROWLEY, New York
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 2, 2001..................................................     1
Appendix:
    May 2, 2001..................................................    55

                               WITNESSES
                         Wednesday, May 2, 2001

Burns, Philip M., Chairman and CEO, Farmers & Merchants National 
  Bank, West Point, NE, on behalf of the American Bankers 
  Association....................................................    36
Hammond, Hon. Donald V., Acting Under Secretary for Domestic 
  Finance, Department of the Treasury............................     9
Mendenhall, Richard A., President, National Association of 
  Realtors.......................................................    33
Meyer, Hon. Laurence H., Member, Board of Governors, Federal 
  Reserve System.................................................     7
Nielsen, Robert, President, Shelter Properties, on behalf of the 
  National 
  Association of Home Builders...................................    37
Parsons, Richard J., Executive Vice President, Bank of America 
  Corporation, on behalf of The Financial Services Roundtable....    43
Roebuck, John, CAI, AARE, Chairman of the Board, National 
  Auctioneers Association........................................    41
Torres, Frank, Legislative Counsel, Consumers Union..............    39

                                APPENDIX

Prepared statements:
    Bachus, Hon. Spencer.........................................    56
    Oxley, Hon. Michael G........................................    61
    Kanjorski, Hon. Paul E.......................................    59
    Kelly, Hon. Sue W............................................    60
    Roukema, Hon. Marge..........................................    63
    Burns, Philip M..............................................    99
    Hammond, Hon. Donald V.......................................    74
    Mendenhall, Richard A........................................    78
    Meyer, Hon. Laurence H.......................................    64
    Nielsen, Robert..............................................   121
    Parsons, Richard J. (with attachments).......................   136
    Roebuck, John................................................   134
    Torres, Frank................................................   126

              Additional Material Submitted for the Record

Sherman, Hon. Brad:
    Section 103, Paragraph 4, Gramm-Leach-Bliley Act.............   175
Mendenhall, Richard A.:
    Written response to questions from Hon. Spencer Bachus.......    96
Conference of State Bank Supervisors, prepared statement (with 
  attachment)....................................................   179

 
      FEDERAL RESERVE BOARD AND TREASURY DEPARTMENT RULE PROPOSAL

                              ----------                              

                         WEDNESDAY, MAY 2, 2001

             U.S. House of Representatives,
            Subcommittee on Financial Institutions 
                               and Consumer Credit,
                           Committee on Financial Services,
                                                    Washington, DC.
    The subcommittee met, pursuant to call, at 9:39 a.m., in 
room 2128, Rayburn House Office Building, Hon. Spencer Bachus, 
[chairman of the subcommittee], presiding.
    Present: Chairman Bachus; Representatives Oxley, Weldon, 
Roukema, Baker, Castle, LaFalce, Royce, Lucas, Barr, Kelly, 
Riley, Toomey, Cantor, Grucci, Hart, Capito, Tiberi, Waters, C. 
Maloney of New York, Watt, Bentsen, Sherman, Sandlin, Moore, 
Gonzalez, Kanjorski, Hooley, Carson, Lee, Hinojosa, Lucas, 
Shows and Crowley.
    Chairman Bachus. The hearing will come to order. This is 
the Subcommittee on Financial Institutions and Consumer Credit. 
Without objection, Ms. Velazquez will be deemed to be a Member 
of the subcommittee to rank immediately after Mr. Kanjorski for 
this hearing and subsequent hearings until her election is 
ratified by the full committee. And without objection, it is so 
ordered.
    The first order of business is opening statements. Without 
objection, all Members' opening statements will be made a part 
of the record. At this time, I'll recognize myself for an 
opening statement.
    The subcommittee meets today to continue the important work 
of overseeing implementation of the historic Gramm-Leach-Bliley 
financial modernization legislation enacted during the last 
Congress.
    Last month, in collaboration with the Capital Markets 
Subcommittee, we reviewed rules promulgated by the Federal 
financial regulators governing merchant banking operations 
authorized by Gramm-Leach-Bliley.
    This morning, we will consider a recent proposal by the 
Federal Reserve Board and the Treasury to permit financial 
holding companies and financial subsidiaries of national banks 
to offer real estate brokerage and real estate management 
services.
    Title I of Gramm-Leach-Bliley allows financial holding 
companies and banks through financial subsidiaries to engage in 
a broad range of activities that are considered, quote, 
``financial in nature'', end quote, or incidental or 
complementary to such financial activities. Among those 
financial activities specifically enumerated in the statue are 
banking, insurance and securities.
    Title I also authorizes the Federal Reserve and the 
Treasury Department to define additional activities that they 
deem to be financial in nature or incidental to such activities 
and therefore permissible for financial holding companies and 
financial subsidiaries. And in that regard, we mention changes 
in the marketplace or changes in the delivery of financial 
services.
    On January 3 of this year, the Federal Reserve and the 
Treasury published in the Federal Register a proposed rule that 
would add real estate brokerage and real estate management to 
the list of activities considered financial in nature or 
incidental to financial activity.
    The proposal established a March 2nd, 2001 deadline for 
public comment. This proposal in no way changes the prohibition 
in Gramm-Leach-Bliley against banks or bank holding companies 
making real estate investments or being involved in real estate 
development. So we don't need to confuse those two activities. 
We're dealing here with brokerage.
    Out of a belief that 2 months was simply not enough time 
for considered review of a proposal with potentially far-
reaching consequences for consumers and providers of real 
estate services, I wrote to the regulators on February 1 urging 
them to extend the period for public comment.
    On February 21, the Federal Reserve and the Treasury 
announced a 2-month extension of the comment period until May 
1. With the expiration of the public comment period yesterday, 
the regulators must now begin the laborious task of reviewing 
and analyzing what I have been told has been a heavy volume of 
written comments to determine how to proceed with their 
proposal.
    My hope is that by holding today's hearing, this 
subcommittee can play a constructive role in the deliberative 
process in which the regulators are currently engaged. In 
addition to giving Members an opportunity to make the 
regulators aware of Congressional concerns with the proposal, 
the hearing will provide a forum to a broad cross-section of 
affected industry and consumer groups, some of whom strongly 
support the proposed rule and others which are just as 
adamantly opposed to it.
    My own reservations about the proposed rule are twofold. 
First I believe the wholesale entry of banks into the real 
estate business, while not in and of itself undermining safety 
and soundness, may serve to erode the long-standing separation 
between banking and commerce that Congress most recently 
reaffirmed in Gramm-Leach-Bliley.
    Second, I have concerns about whether the statutory 
criteria that are supposed to guide the regulators' 
determination of what activities are financial in nature or 
incidental to such activities have been properly applied in 
this instance.
    And I think part of our questioning today will be a 
determination about what is financial, what is commercial, and 
what we do when there's a mix of those two.
    I recognize, however, that there are strong views on both 
sides of the issue. Legitimate arguments can be made for 
permitting banks to offer real estate-related services. 
Certainly the fact that some depository institutions, including 
federally-chartered credit unions and thrifts, as well as 
State-chartered banks in a number of jurisdictions, are 
authorized to engage in real estate activities while others are 
legally barred from doing so raises issues of competitive 
equity that should be addressed, must be addressed.
    In this connection, I would say that if we continue down 
the road we're going, State charters look better and better, 
national charters have more and more disadvantages, and we 
could find ourselves with a national banking system that is 
inadequate.
    Before recognizing the Ranking Member for an opening 
statement, I want to welcome our witnesses to today's hearing 
and remind both them and the Members that because another 
hearing is scheduled for 2 o'clock in this room, we're going to 
try to strictly go by the 5-minute rule on oral testimony and 
on Members' questioning.
    Finally, let me conclude by saying both the banking 
industry and the real estate industry have served us well, and 
we need to keep that in mind as we conduct this hearing and try 
to fashion our concerns in an effort to continue their good 
service to consumers.
    Ms. Waters, you are recognized.
    [The prepared statement of Hon. Spencer Bachus can be found 
on page 56 in the appendix.]
    Ms. Waters. Thank you very much, Chairman Bachus, for 
holding this hearing. I look forward to hearing the testimony 
of the witnesses. And in the interest of time, I will keep my 
remarks to a minimum.
    As the Ranking Member of the Financial Institutions 
Subcommittee, I believe we have a duty to oversee the 
regulations' implementing provisions of the financial 
modernization legislation that became law last Congress.
    I also believe that it is important for us to monitor the 
expansion of banking activities in general to ensure that the 
regulations are appropriate to carry out the intent of Gramm-
Leach-Bliley Act, and that the expansion of these activities 
falls within the purview of the Congressional intent.
    We are here today to discuss the proposed rule that would 
permit financial institutions to engage in real estate 
management and brokerage. These activities would be deemed 
financial in nature under the Gramm-Leach-Bliley Act.
    I have to say that during the many times that various 
financial modernization proposals were considered over the last 
decade, I've never advocated for the mixing of banking and 
commerce.
    It is interesting that on this issue both Congressman 
Bachus and I have signed a letter expressing strong concerns 
with the proposed rule. I've also sent a similar letter in 
which I was joined by a number of my colleagues from California 
allowing banks into the real estate business would be a true 
breach of the division between banking and commerce.
    During consideration of financial modernization, we 
considered this issue, and Congress decided to maintain the 
separation. We decided the interests of consumers would not be 
served by allowing Microsoft-NationsBank-Gap conglomerate to 
exist. We certainly did not want to model our banking policy 
after the Japanese system, which serves as an example to all of 
what can happen when the separation between banking and 
commerce is breached.
    I am very concerned that the Fed and Treasury would be 
embarking on a slippery slope if real estate brokerage activity 
is considered a financial activity. Where would it end? Would 
appliances, cars, and anything purchased with a credit card be 
deemed financial in nature?
    With that in mind, I look forward to hearing the views of 
the witnesses, and I thank you in advance for your testimony. I 
yield back the balance of my time.
    Chairman Bachus. Thank you.
    At this time, I recognize the Chairman of the Full 
Committee, the gentleman from Ohio.
    Mr. Oxley. Thank you, Mr. Chairman. And good morning and 
welcome to Governor Meyer and Under Secretary Hammond and our 
other witnesses.
    As Chairman Bachus indicated in his statement, the Fed and 
the Treasury have acted deliberately and thoroughly in their 
handling of this proposal, and I commend Chairman Bachus for 
holding this hearing and giving this subcommittee an 
opportunity for the Fed and the Treasury to discuss further the 
issues raised in their proposal.
    This issue, like so many others, must be viewed in the 
context of the Gramm-Leach-Bliley debates that have led to this 
hearing. These debates, while contentious, resulted in a law 
that passed Congress by an overwhelming margin and with strong 
bipartisan support.
    As I consider this proposal, I ask myself two basic 
questions. First, is it consistent with the Gramm-Leach-Bliley 
Act? And second, does it promote fair competition within the 
financial services industry? Generally corporations may engage 
in any lawful activity. However, financial holding companies 
and financial affiliates of national banks may engage only in 
activities authorized under the Gramm-Leach-Bliley Act.
    GLB significantly expands the activities of financial 
holding companies beyond the activities permissible at that 
time for bank holding companies. When we wrote the list of 
activities that are financial in nature into the statute, we 
tried to incorporate all existing activities of the banking, 
securities and insurance industries without authorizing the 
complete mixing of banking and commerce or indeed try to 
provide a definitive list.
    At the same time, we recognize there might be activities we 
failed to include. To address this possibility and the need for 
the industry to evolve over time, we created a specific process 
to allow the Fed and the Treasury to periodically update the 
list of activities that are financial in nature or incidental 
to such activities.
    This proposal represents the first significant application 
of the process we created. Striking a balance between the 
separation of banking and commerce and the promotion of 
competition is never an easy task. For years I watched the 
insurance, securities and banking industries battle each other 
to protect themselves from competition. Those efforts continue 
to this day, most recently by opposition to the repeal of the 
70-year-old ban on the payment of interest on business checking 
accounts.
    But there continues to be broad agreement in Congress that 
our financial services laws must be updated on a regular basis 
to account for changes in the marketplace and to foster full 
and fair competition.
    It takes courage for an industry to adapt to a new 
regulatory structure, particularly when that structure creates 
many new competitive opportunities. Competition, however, 
ultimately makes the industry stronger, because it forces the 
industry to meet new challenges and to provide more and better 
services for consumers. I have seen the positive impact of the 
competition between these former adversaries has had for both 
consumers and the overall safety and soundness of the financial 
services industry.
    At the same time, competition must be fair, with adequate 
consumer protections against tying or other coercive practices. 
I agree with the Treasury Department that in moving forward on 
this proposal, the regulators must work closely together to 
ensure that this and other rulemaking under the financial-in-
nature authority are consistent with the criteria and legal 
process Congress prescribed and the public interest.
    And I might add, Mr. Chairman, that indeed the legislative 
record will have a significant impact I trust on the 
decisionmaking process by Treasury and the Fed.
    I have full confidence that the Fed and Treasury will 
discharge the duties entrusted to them by Congress in the 
Gramm-Leach-Bliley Act and look forward to a spirited 
discussion of their proposal this morning.
    Mr. Chairman, thank you. And I yield back the balance of my 
time.
    [The prepared statement of Hon. Michael G. Oxley can be 
found on page 61 in the appendix.]
    Chairman Bachus. Thank you.
    Other Members of the subcommittee will now be recognized 
for 3 minutes for opening statements. I have Mr. Sherman, Mr. 
Weldon, Mrs. Roukema and Ms. Kelly. If there are other Members 
who wish to making opening statements, if you'd advise us. And 
at this time, I'll go to Mr. Sherman.
    Mr. Sherman. Thank you, Mr. Chairman. I'd like to pick up 
on some of the earlier opening statements. My colleague from 
Los Angeles points out that we shouldn't call a transaction a 
financial transaction simply because it's financed with a 
credit card. When I bought this tie, I used a credit card. I 
didn't think I was engaging in a financial transaction.
    The Chairman of the full Committee correctly points out 
that we gave to the regulatory agencies the right to update the 
list as changes occurred. And yet this proposal was made less 
than a year after Gramm-Leach-Bliley was enacted into law and 
does not seem to arise from any change between late 1999 and 
late 2000 in the nature of real estate or banking, but rather a 
desire to amend and to add to Gramm-Leach-Bliley that which 
Congress did not put there.
    I do want to thank you, Mr. Chairman, for holding these 
hearings. You and I and many others asked Chairman Greenspan 
and the Secretary of the Treasury, Mr. O'Neill, to delay these 
regulatory proposals until May. I would like to put Gramm-
Leach-Bliley Section 103 Paragraph 4, into the record here.
    [The information referred to can be found on page 175 in 
the appendix.]
    I don't have time to read it. But it lists all of the areas 
that exemplify financial transactions. And one thing is clear 
from looking at that list. It involves intangible property, 
choses in action, investments, situations where you get a 
certificate of deposit or an insurance policy, a piece of 
paper. The law is very clear, and I have to confess to being a 
lawyer. There's a difference between intangible property and 
real estate, which is the most real, the most tangible 
property.
    And if we are going to say that real estate is to be put in 
the same category as intangible assets and what the old law 
called choses in action, then we really have gone to the 
Japanese system that my colleague from Los Angeles pointed out.
    That may or may not be in good public policy, but it's not 
public policy that should be made by regulatory agencies. If we 
are going to dramatically expand Gramm-Leach-Bliley, it ought 
to be done here in this Committee, and there shouldn't be a end 
run around the authority of Congress where we are told that 
less than a year after we pass a bill it needs to be updated by 
putting something into it that many of us who supported the 
bill never intended. Thank you.
    Chairman Bachus. I thank the gentleman.
    Mr. Weldon.
    Mr. Weldon. Thank you, Mr. Chairman. I want to thank you 
for calling this hearing. I share some of the concerns you 
stated about this proposed rule. Unfortunately, I have another 
important hearing I have to go to.
    I just wanted to share with the witnesses that I will be 
reviewing your testimonies and monitoring the actions taken by 
the Fed on this issue very closely. And I yield back.
    Chairman Bachus. Thank you.
    Mr. Kanjorski.
    Mr. Kanjorski. Thank you, Mr. Chairman. In the interest of 
time, I have submitted my statement for the record.
    I want to support my colleagues who have indicated to the 
regulators that it was not the intention of Congress, or at 
least in our interpretation, to break down the firewalls 
between banking and commerce. Some of us were very specific 
about maintaining those firewalls, and we interpret this 
regulation as doing exactly the opposite.
    It is unfortunate that this is the first regulatory 
interpretation of Gramm-Leach-Bliley that attempts to make this 
unusual expansion. I urge the regulators to listen carefully to 
the 40,000 critics of their regulatory rule, particularly the 
critics on this subcommittee and this Congress.
    It would be unfortunate if we have to modify or further 
examine this law, because of regulatory interpretations 
expanding what authority was intended and, in fact, granted by 
the Congress. Thank you.
    [The prepared statement of Hon. Paul Kanjorski can be found 
on page 59 in the appendix.]
    Chairman Bachus. Thank you, Mr. Kanjorski.
    Mrs. Roukema.
    Mrs. Roukema. Thank you, Mr. Chairman. And again, in the 
interest of time, I would ask that my full statement be 
included in the record.
    But I do want to specifically associate myself with the 
issues you raised, Mr. Chairman, in your opening statement, and 
very specifically, the concerns regarding safety and soundness 
in the separation of finances and commercial activity.
    And as the Chair of the Subcommittee on Housing, we will be 
looking at the Real Estate Settlement Procedures Act, the 
RESPA. And there are reforms that we are going to be looking at 
this year with respect to RESPA. But the implications here I 
think are specific, and we will be looking at that measure as 
well. And I thank the Chairman.
    Chairman Bachus. Thank you.
    At this time, Ms. Kelly, unless there's a Member of the 
Minority. Ms. Kelly.
    Ms. Kelly. Thank you, Mr. Chairman. I will submit my 
statement for the record. I just want to say that in the Gramm-
Leach-Bliley, when we gave the discretion to the Fed and 
Treasury to determine what kind of activities are financial in 
nature, I think some of us were a little surprised that this 
proposal to allow the financial subsidiaries of banks to engage 
in real estate activities came out in January.
    I think the proposal raises a number of questions about how 
an activity is determined to be financial in nature and I think 
we have a number of questions--I certainly do--for the Fed and 
the Treasury about this proposal.
    I thank you very much, and I look forward to the testimony.
    [The prepared statement of Hon. Sue W. Kelly can be found 
on page xx in the appendix.]
    Chairman Bachus. Thank you. That concludes the opening 
statements of the Members. Am I correct?
    At this time I will introduce the first panel. Laurence J. 
Meyer, Governor Meyer, Member of the Board of Governors, 
Federal Reserve System, and Under Secretary Donald V. Hammond, 
who is the Acting Under Secretary for Domestic Finance, 
Department of the Treasury.
    We welcome you two gentlemen, and at this time, without 
objection, your written statements will be made a part of the 
record and you will each be recognized for a 5-minute 
summarization of your remarks. And at this time, Governor 
Meyer.

     STATEMENT OF HON. LAURENCE J. MEYER, MEMBER, BOARD OF 
               GOVERNORS, FEDERAL RESERVE SYSTEM

    Mr. Meyer. Thank you. Chairman Bachus, Chairman Oxley, 
Congresswoman Waters and other Members of the subcommittee, 
thank you for the opportunity to testify on behalf of the 
Federal Reserve Board with respect to the joint invitation by 
the Board and the Secretary of the Treasury for public comment 
on whether real estate brokerage and real estate management are 
activities that are financial in nature or incidental to a 
financial activity, and hence permissible for financial holding 
companies and financial subsidiaries of national banks. The 
agencies published the request for comment on January 3, 2001. 
Because of the significant public interest in the proposal, we 
extended the public comment period through May 1, 2001.
    The recently enacted Gramm-Leach-Bliley Act allows a 
financial holding company to engage in, and affiliate with 
companies engaged in a broad range of financial activities. The 
activities specifically authorized by statue include lending; 
insurance underwriting and agency; providing financial advice; 
securities brokerage; underwriting and dealing; and merchant 
banking activities.
    In addition, the GLB Act permits financial holding 
companies to engage in other activities that the Board 
determines in consultation with the Secretary of the Treasury, 
to be ``financial in nature or incidental to a financial 
activity.'' The GLB Act includes this flexibility as a result 
of Congress's recognition of the practical difficulties of 
comprehensively defining in legislation a complex concept like 
``financial activities'' for a marketplace that is continuously 
evolving.
    With the real estate and other recent proposals, the Board 
and the Treasury are exploring this new standard. The GLB Act 
establishes certain factors that the Board and Treasury must 
consider. But otherwise, it leaves to the agencies significant 
discretion and very little guidance regarding what is and what 
is not a financial activity.
    The factors that the agencies must consider are very broad. 
For example, the agencies must consider whether the proposed 
activity is necessary or appropriate to allow a financial 
holding company to compete effectively with any company seeking 
to provide financial services in the United States, efficiently 
deliver financial information and services through the use of 
technological means, or offer customers any available or 
emerging technological means for using financial services. In 
addition, the agencies must consider changes or reasonably 
expected changes in the marketplace in which financial holding 
companies compete, as well as changes or reasonably expected 
changes in the technology for delivering financial services.
    One thing that is clear is that Congress intended the 
``financial-in-nature'' test to be broader than the previous 
test for authorizing new activities for bank holding companies 
under the Bank Holding Company Act. Before passage of the GLB 
Act, bank holding companies were permitted to engage only in 
activities that the Board determined were ``closely related to 
banking.'' The closely related to banking test was tied to the 
activities of banks.
    The GLB Act neither specifically authorizes nor 
specifically forbids financial holding companies or financial 
subsidiaries of national banks to engage in real estate 
brokerage and management activities.
    Soon after the passage of the GLB Act, three trade 
associations asked the Board and the Treasury to determine that 
real estate brokerage activities are financial in nature and 
one asked the agencies to define real estate management 
activities as financial in nature.
    The Board and Treasury responded to these requests by 
seeking public comment. We have found the public comment 
process to be a useful means of gathering information from 
experts, practitioners and analysts with an understanding of 
the relevant issues and activities. Our final rules often 
include significant modifications as a result of the comments 
we received on the proposed rules.
    As I indicated earlier, the comment period on the proposal 
was open for approximately 120 days. The speakers on the next 
panel, which include members of the trade associations that 
represent various parts of the banking, real estate and housing 
industries, will detail their positions for and against the 
proposal. Their remarks will give you a good sense of the 
comments that we are receiving and reviewing.
    These are difficult issues, and both sides feel very 
strongly about their position. While we do not relish being in 
the middle, we believe that a debate on these matters is the 
best way to allow the agencies to identify and sort through the 
issues and to reach an informed decision, and is precisely the 
type of the debate envisioned in the GLB Act.
    Thank you.
    [The prepared statement of Hon. Laurence J. Meyer can be 
found on page 64 in the appendix.]
    Chairman Bachus. Thank you.
    At this time, Mr. Hammond.

STATEMENT OF HON. DONALD V. HAMMOND, ACTING UNDER SECRETARY FOR 
          DOMESTIC FINANCE, DEPARTMENT OF THE TREASURY

    Mr. Hammond. Thank you, Mr. Chairman. Chairman Bachus, Ms. 
Waters, and Members of the subcommittee, I appreciate the 
opportunity to appear today to discuss the Joint Federal 
Reserve-Treasury Rule Proposal on whether to permit financial 
holding companies and financial subsidiaries of national banks 
to engage in real estate brokerage and real estate management 
under the Gramm-Leach-Bliley Act.
    The 4-month public comment period for this proposal ended 
yesterday. And based on the substantial number of comment 
letters that we have received, there clearly is wide public 
interest in this proposal. We received comments from several of 
the Members of this subcommittee and witnesses as well at 
today's hearing, and I note that the hearing transcript will be 
made part of our rulemaking record.
    Because the rulemaking is pending, I will not be able to 
discuss the Treasury's views on substantive issues involved in 
making a final decision about the proposed rule. Instead, my 
remarks will briefly describe the process and factors we 
considered in making the proposal and where it stands today.
    The Gramm-Leach-Bliley Act permits financial subsidiaries 
to engage in a broad range of specific activities as well as 
other activities the Treasury determines in consultation with 
the Federal Reserve Board to be financial in nature or 
incidental to a financial activity. We and the Board are 
working cooperatively in making these determinations as the 
Joint Proposal clearly demonstrates.
    In making determinations, the Act requires us to take into 
account among other factors the Act's purposes, changes in the 
marketplace in which banks compete, changes in the technology 
for delivering financial services, and whether the activity is 
necessary or appropriate to allow a bank and its subsidiaries 
to compete effectively with any company seeking to provide 
financial services in the United States.
    The current process started informally more than a year ago 
when the Treasury and the Board received requests from the 
American Bankers Association, the Financial Services 
Roundtable, and the New York Clearinghouse Association asking 
that we determine that real estate brokerage and real estate 
management activities are financial in nature or incidental to 
a financial activity.
    In March of 2000, Treasury issued an interim final rule 
setting forth specific procedures for requesting determinations 
under the Act, and we invited the ABA and the Financial 
Services Roundtable to resubmit their requests to conform to 
these procedures.
    The American Bankers Association did so in July, and a 
month later, Freemont National Bank submitted a request as 
well.
    After due consideration of the requests and consultation 
with the Federal Reserve Board and its staff, in December we 
agreed with the Board to issue a Joint Notice of Proposed 
Rulemaking with a 60-day comment period. That proposal was 
published on January 3rd.
    Because of wide public interest and requests for an 
extension, we jointly decided to extend the comment period 
another 60 days to give the public ample opportunity to 
consider the proposal and comment on it.
    Since the comment period is now closed, we are beginning 
the comment review phase. We are in the process of reading and 
analyzing the comment letters, and we will give serious 
consideration to all the views expressed.
    Mr. Chairman, let me highlight just a few points about the 
proposal itself. In assessing the requests we received, we 
concluded that a threshold case can be made that direct 
competition exists between real estate brokers and banking 
organizations. According to information provided by the 
Conference of State Banking Supervisors, 26 States appear to 
permit their State-chartered banks or subsidiaries to act as 
general real estate brokers.
    In addition, banks and bank holding companies participate 
in most aspects of the typical real estate transaction other 
than brokerage.
    Banks and bank holding companies also engage in a variety 
of activities that at first glance seem functionally and 
operationally similar to real estate brokerage, including 
finder activities and securities and insurance brokerage. 
Buyers and sellers of real estate increasingly may look to a 
single company to provide all their real estate-related needs.
    The proposal also notes that existing Federal and State 
laws should operate to mitigate any potential adverse effects 
of combining banking and real estate brokerage.
    In addition, because the proposed real estate brokerage 
services are activities conducted as agent with no principal 
risk involved, the proposed brokerage activity does not appear 
to present significant financial risks to banking organizations 
or their depository institution affiliates.
    We expressed some doubts in the proposal as to whether all 
aspects of real estate management are financial in nature or 
incidental. For example, our proposal would preclude a 
financial subsidiary or financial holding company that provides 
real estate management services from itself repairing or 
maintaining the required real estate.
    In conclusion, Mr. Chairman, we intend to carefully 
consider the issues raised by all the commentors, including the 
views expressed at this morning's hearing. As we move forward, 
the Treasury will work closely with the Federal Reserve to 
ensure that this and other rulemakings under the financial-in-
nature authority are consistent with the criteria Congress 
prescribed, the legal process and the public interest.
    Thank you very much. I'll be happy to answer any questions.
    [The prepared statement of Hon. Donald V. Hammond can be 
found on page 74 in the appendix.]
    Chairman Bachus. Thank you.
    Let me ask both panelists this question. Have you 
considered the consumer and the benefit to the consumer by this 
proposal and if any protections are going to be necessary as 
part of the proposal?
    Governor Meyer.
    Mr. Meyer. Well, certainly we've considered the benefits of 
the consumer in the form that when there's increased 
competition for financial services----
    Chairman Bachus. Would you pull the mike a little closer?
    Mr. Meyer. When there is increased competition for 
financial services, consumers typically benefit. That's one 
aspect.
    Second, there is an evolving system where consumers often 
prefer to have one-stop shopping. And so there are synergies 
between activities. And that's another potential benefit that 
consumers might obtain if they were able to do real estate 
brokerage as well as all the other real estate-related 
transactions at banks, as they are allowed to do in some other 
places.
    In terms of protections, of course there are a lot of 
protections that are already in place through State licensing 
laws and qualifications, as well as Federal anti-tying laws, 
and we have certainly taken those into consideration.
    Chairman Bachus. Have you come up with any concrete 
proposals on what protections may be necessary for the consumer 
other than what's already in the law?
    Mr. Meyer. No. We haven't come up with any proposals of 
additional protections that we thought jointly would be 
necessary with this proposal.
    Mr. Hammond. I think it's important to note as we look at 
the proposal that what we've put forward is a threshold test 
for public comment.
    What we've done is we've ascertained, based on the requests 
received, that certain evidences of activity incidental to 
financial services are evident in real estate brokerage. What 
we haven't done is fully considered the entire record. That's 
what the public comment period is all about.
    We have obviously looked at some of the provisions, such as 
anti-tying laws, other consumer protections, were factored in 
to meeting the threshold test. But as we are all aware, that 
this is a proposal and not a final rulemaking at this point in 
time.
    Chairman Bachus. What makes the sale of a house financial 
as opposed to commercial?
    Mr. Meyer. That's what this whole process is all about. 
That's what we're trying to sort through. And it's very 
important, because this is our first attempt really to draw 
that line. So I can't fully answer that question, because 
that's what we have to sort out in finally reaching this 
decision.
    But I would point out two considerations. One, sometimes we 
want to approach this from the standpoint of a philosophical 
dividing line. And one of the Members of the subcommittee noted 
that a financial asset is an intangible asset, and real estate 
is a tangible asset. That would be a philosophical drawing 
line.
    Now you could have written that into the Gramm-Leach-Bliley 
Act and said it's very simple; that's what it is, period. But 
you didn't. You wrote a much more subtle, much more flexible, 
much more nuanced piece of legislation. And you told us to 
consider as well such aspects as the competitive nature of the 
financial services industry.
    So in particular, and Mr. Chairman, your statement at the 
outset was very balanced, as we are trying to be with the 
proposal that is outstanding. And you yourself noted that we 
also have to take into consideration whether these activities 
are appropriate or necessary in order to allow banks to compete 
effectively in the financial services industries when other 
depository institutions have authority to do this, when other 
non-bank financial institutions have the opportunity to offer 
these services.
    So both those competitive issues on the one hand, and the 
philosophical issues on the other, have to be weighed.
    Chairman Bachus. My final question is the broker often 
represents the seller as opposed to the buyer. In fact, they 
normally sign a form saying they're representing the seller. 
The bank at the same time is going to be representing the 
seller in getting the highest price they can get. But then 
they're hoping to represent the buyer in getting a loan for the 
buyer. So they're trying to get the buyer the best price, but 
they're trying to get the seller the most value.
    Is there a conflict of interest or potential conflict of 
interest in that they are financing the arrangement for the 
buyer, but they are actually acting on behalf of the seller and 
trying to get the highest price? And it is to their advantage 
to actually get the very best value for----
    Mr. Meyer. This is a very good example of issues on the 
other side that had been brought up that there might be some 
adverse consequences to consumers of allowing banks to offer 
real estate brokerage, and specifically these conflicts of 
interests. And those are some of the issues that we will have 
to take up as we consider this fully.
    Chairman Bachus. Mr. Hammond.
    Mr. Hammond. I think that kind of conflict or apparent 
conflict is an interesting question as well, because you can 
also look at it from the standpoint of the financial 
institution being interested in the seller's interest and the 
buyer being able to obtain financing. So you run into the 
inherent question of do they in fact apply the appropriate 
standards in underwriting the loan as you go forward.
    So it is not clear to me, as in many aspects of this 
proposal, there is a lot of gray area that needs to be 
carefully considered. That's why the comment period I think is 
so welcome in this regard.
    Chairman Bachus. There was a similar argument in Gramm-
Leach-Bliley. I argued unsuccessfully that financial 
institutions shouldn't be allowed to write insurance, title 
insurance insuring their own portfolios. In fact, they were 
insuring themselves. I lost that argument. But I saw a conflict 
there.
    At this time I recognize the gentlelady from California.
    Ms. Waters. Thank you very much.
    Let me just start by asking, I understand that you have 
received somewhere between 40 and 45 thousand comments in 
opposition to the proposed change. What role does that play in 
the final decisions to move forward with this? I mean, how do 
you factor in the comments?
    Mr. Meyer. Of course, the comments play a very important 
role. They help to identify the key arguments in favor and 
opposed. But on the other hand, we do not weigh the number of 
responses on either side. We weigh the substance of the 
responses.
    But what this does indicate is that this is a very 
controversial proposal. We should very, very carefully 
deliberate on it, and we should think long and hard about how 
we proceed on it.
    Ms. Waters. As I look at your testimony, Mr. Hammond, Under 
Secretary, Treasury, Acting Under Secretary Donald Hammond, you 
correctly point out that in making determinations, the Gramm-
Leach-Bliley Act requires you to take into account the Act's 
purposes, changes in the marketplace in which banks compete, 
and you kind of talked about the purposes. And you talked about 
the gray areas. And you talked a little bit about what you 
think was intended and the area that gives you the opportunity 
to move in.
    What changes in the marketplace would be applicable to this 
consideration? Are there changes in the marketplace?
    Mr. Hammond. We think that there has, in fact, been an 
evolution in the marketplace that raises some interesting 
questions over time as to the bundling of financial services, 
particularly with regard to real estate transactions.
    As you look at the level playing field from a competitive 
standpoint, one can make an argument that financial 
institutions could be disadvantaged in certain circumstances 
vis-a-vis non-insured financial institutions by virtue of the 
ability to offer real estate brokerage services.
    It was that bundling of services combined with the overall 
competitive landscape which brought us to the first threshold 
test, which was is this something worthy of putting out for 
public comment?
    Ms. Waters. What changes in technology?
    Mr. Hammond. I think what you're seeing--our sense is that 
we are seeing a lot of internet-based financial shopping. We 
are seeing the capability to do one-stop shopping, which 
consumers have expressed interest in, certainly in certain 
environments, and the ability for institutions to enter that 
marketplace is somewhat dependent upon their ability to offer a 
full range of services.
    Ms. Waters. When you talk about one-stop shopping, do you 
have on the record--have you done hearings? Have you done 
something that places on the record this so-called preference 
for what you call one-stop shopping, or is this just kind of 
your basic feeling about it?
    Mr. Hammond. That's a very good question. I think it 
reflects the nature of where we are in the process.
    Ms. Waters. Have you done something that would lead you to 
believe that the real estate industry does not have the ability 
to have the technology that would appeal to its clients or 
customers in some way that the banks would have?
    Mr. Hammond. I'm sorry. I must have confused you in that 
I'm not talking about the inability for the real estate 
industry to take advantage of certain technology. What we're 
looking at based on the requests that we received was, is there 
a legitimate question about the ability of technology and the 
need to bundle financial services going forward to put people 
on a level playing field?
    We are in the comment period at this point in time in the 
process. That is exactly the type of information we hope to get 
out of the comment period is those types of observations as to 
is this really in consumers' best interests? Is there a 
competitive inequality?
    But based on the requests that we received, we felt that 
they met the threshold test for putting this issue out under 
the statute and seeking public comment on it.
    Ms. Waters. Lastly, and I thank you very much, Mr. 
Chairman, this is rather soon after the Act that you are moving 
with this consideration. Don't you think that it's too soon? 
And what caused you to move so rapidly to give consideration to 
this change?
    Mr. Meyer. The timing of the proposal reflects requests 
that were made by three trade associations. So they made the 
request, and we appreciated that we had a difficult job ahead 
of us under Gramm-Leach-Bliley of defining what financial-in-
nature is, setting those boundaries. And this looked like an 
appropriate opportunity for us to begin to work on those 
issues. And that's really what determined entirely the timing 
of it.
    Ms. Waters. Did you at any time consult any of the players 
on both sides of the Act about their feelings about moving at 
this time? And I know that you've gotten requests to extend the 
comment period. But did you consult or talk with anybody about 
whether or not this was too soon? Whether or not we should wait 
to hear from others on the issue before moving with this?
    Mr. Meyer. To my knowledge, we didn't talk to Members of 
Congress about whether or not it was appropriate or not to move 
on requests that we got as to whether activities were financial 
or not. It seems to me that was our responsibility under the 
Act when we get these requests.
    We either have to say, no, we're simply not prepared to 
fulfill our responsibilities under the law to determine whether 
or not this activity is financial, or we have to engage in a 
public comment period to try to sort out the issues.
    Ms. Waters. But then you know that if any of the Members 
here, and particularly any of the Members of the Majority party 
feel that there are areas that need to be clarified, need to be 
made clear, that a simple amendment passed perhaps without a 
hearing anywhere would clear it all up just like within 
minutes?
    Mr. Meyer. Congressional intent is very important here. I 
completely agree that regulators should not overstep the 
boundaries of their authority. We tried to do an exhaustive 
search to try to see whether or not there was clear legislative 
intent.
    There was nothing in the law that either expressly allowed 
or forbid it. And indeed, the law gave clear directions about 
how we were to respond and what standards we were to apply to 
requests. And that's really what we're trying to do here.
    Ms. Waters. Thank you, Mr. Chairman.
    Chairman Bachus. Mr. Baker.
    Mr. Baker. Thank you, Mr. Chairman. I really tried very 
hard to stay out of this, but I unfortunately cannot constrain 
myself any longer.
    [Laughter.]
    Mr. Baker. I was a realtor. I was a homebuilder. I was 
president of a homebuilder's organization when I was rational 
before losing my mind and coming to this occupation.
    My son is now a realtor. So I'm making all these 
confessions in advance of my statement, really no question. I 
think there's a simple solution, Governor Meyer. If you took 
the Fed's original merchant banking rules and applied them to 
the real estate business, everybody would go home happy. You 
simply couldn't do it at all. And I'm not clear where merchant 
banking rules are applicable to this set of issues.
    But there is one legitimate concern I have as to an 
affiliation, not a subsidiary. I know that direct investment in 
real estate would be prohibited with the subsidiary structure. 
I'm not sure if there was an affiliation under the proposed 
rule with a real estate brokerage firm that chose to get into 
direct investment that it would not open up the holding company 
to exposure of risk of loss where those types of activities. 
That's just a general question. I don't know the answer to it. 
But I wanted to raise it, because I think that's something that 
does deserve legitimate evaluation.
    However, in talking with most realtors, including my son, 
who was the first to call me about your proposed regulation, 
the criticism is that it's big versus little, not merchant 
banking, not commerce and finance. Most folks in the real 
estate business don't get into those discussions.
    It's the ``Bill Gates'' syndrome. When we had it during 
Gramm-Leach-Bliley, it was my word that Bill Gates is going to 
own every bank in America. And that obviously has not 
transpired. But if it is big versus little, and we're worried 
about the aggregation of financial assets in a limited number 
of hands which would then preclude small operators from the 
marketplace, I would point to the real estate industry as a 
prime example.
    There are ten large firms in this country which in 
aggregation were responsible for 800,000 transactions in 1999 
at an aggregate sales volume of $200 billion. One firm was 
responsible for 362,000 transactions for an aggregate sales 
volume of $95 billion.
    Now, if I were a realtor in Louisiana, I would be very 
worried because we didn't have $95 billion worth of sales in 
Louisiana last year and may not for the next decade, given what 
we've been through in the 1980's in the oil patch.
    My point is, is if it's big versus little, we've already 
got that problem. Now if we throw that out the door and we want 
to talk about commerce and finance or banking and finance or 
commerce and banking or whatever the concern might be of a 
particular group, let's analyze what the real estate industry 
is doing today.
    I have advertisements--I just got them off the internet 
this morning--of a couple of really nice firms. I do business 
with them. I think they're probably very professional. They 
have, you know, ``push your button here and if you don't have 
time to look at houses, we'll e-mail you back with floor 
plans.''
    There's even a firm in Southern California that has a 
camera that goes in and does a 360 degree view of the 
neighborhood so you can stand at the front door, look down the 
street, and see what the neighbors look like, look inside the 
house. I mean, it's fabulous technology. All this is available 
today.
    But, if you don't want to deal with all these other folks, 
like lawyers at closings, or insurance agents at the time of 
sale to insure the home, you know, all of that business, firms 
are doing all of that as a real estate brokerage operation. 
Full service. And we don't have the sales volumes on those 
insurance sales or those loan-closing transactions or the legal 
services fees being paid, but I would bet it's pretty 
significant.
    I think I have discovered a public policy crisis. The 
breach has been made between the barrier between commerce and 
finance, and it's happening in the real estate market. 
Civilization is in peril.
    Now I would merely point out that if we are going to wave 
the flag--and I'm a realtor, and I'm in real trouble back home 
with my realtors for this statement--and that's the principal 
reason driving this debate, and all of us being so antsy about 
it. They're doing it. If A can do it to B, B ought to be able 
to do it to A. If you don't like the threat, quit doing it 
yourself. That's the bottom line.
    In talking to the small, independent realtors who do a few 
hundred thousand dollars or a few million dollars in business 
each year, they don't like the big boys doing this either, the 
big realtors that is. They are in jeopardy. And all the mergers 
and acquisitions we thought were going to happen as a result of 
Gramm-Leach-Bliley with financial institutions has happened 
between the big boys. We still have 8,500 banks, the bulk of 
which are small. They're not going to Bunkie, Louisiana and 
getting in the crop loan business. And the big realtors aren't 
going to come to Baton Rouge and gobble up all my small 
realtors.
    A professional organization who delivers a professional 
service will continue to prosper and do quite well in a 
competitive environment.
    Now I don't know how we got on all this banking and finance 
and commerce and finance and all of those concerns. That's not 
the debate. It's whether the big banks are going to come to our 
home towns and gobble up small realtors. If that is the issue, 
big realtors are going to gobble up small realtors. That's the 
more likely aggregation than anything else. And I am concerned 
about that.
    I am very concerned about financial assets of the big 
people in this country, like the Wal-Marts, buying up the 
hardware stores, the linen store, the feed and seed store, and 
exporting the home town payroll to wherever that place is 
located. I think that's bad public policy. So I'm worried about 
big versus little.
    I don't think the rule as proposed has that effect. But I 
have an open mind. Thank you.
    Chairman Bachus. Would you like to answer his question?
    [Laughter.]
    Mr. Meyer. I would point out that these are two issues that 
are relevant and that we have to factor in. One is what is the 
impact on the competition in this industry. And it can be 
fairly subtle in terms of what the impact is going to be.
    And second, as you point out, we have to talk about 
competitiveness in the market for financial services. And that 
isn't just what other banks are doing. It's not just what other 
financial services firms are doing, but what real estate firms 
are doing as full service providers of both real estate 
brokerage, mortgage loans, and so forth.
    Chairman Bachus. Mr. Watt.
    Mr. Watt. Thank you, Mr. Chairman. I'm I guess a little 
confused about what the Fed and the Treasury's role here is. 
And let me see if I can clear that up before I get into any 
substantive questions.
    Mr. Hammond, you indicated that you can't discuss the 
substantive considerations that will lead you to a final rule 
on this or to throw out the rule. That you had the authority to 
make the rule, which I don't argue with. The bankers' groups 
requested that you make this rule. And you found a threshold 
case to make the rule.
    I guess I had always thought that when the Fed and the 
Treasury proposed a rule that they were advocating, there was 
somebody inside your body who advocated for the proposed rule. 
Is that or is that not the case here? Are we engaging in what 
would in effect be a rule promulgated for debate purposes to 
clarify the law, or are you all advocating this rule? I still 
don't know even after hearing your testimony and after hearing 
your responses to the questions that have gone so far.
    Mr. Hammond. I think that's a very good question, because 
it gets to the heart----
    Mr. Watt. Give me a very good answer, then.
    [Laughter.]
    Mr. Hammond. All right. I think it gets to the heart of the 
question of what we are confronting here. This is a very 
different type of rulemaking from my standpoint in that this is 
not a regulatory action in the traditional sense where a 
regulatory agency is looking at a practice and trying to 
determine whether or not it is appropriate within the construct 
of its broader mission, say, safety and soundness.
    As I look at it, this is a rulemaking designed to interpret 
the statute. The statue granted certain authorities. It gave 
the gatekeeper responsibilities for those authorities to the 
Treasury and the Federal Reserve. A request came in----
    Mr. Watt. But it sounds like you all have thrown a rock and 
you're hiding your hand now. And I guess the question I'm 
asking is, is there an advocate inside the Fed or are there 
advocates inside the Fed or the Department of the Treasury for 
this rule, or are you all just putting it out there because you 
think you have to do it in the context of the law?
    Mr. Hammond. We think, at Treasury at least, we think it 
very clearly met a threshold standard, that the request came 
in, met enough of the statutory requirements to put it forward 
as a proposal.
    I will hedge my comments to the extent that since the time 
the Treasury has put out the rulemaking, the Administration has 
changed. And so those that were incumbent upon making the 
initial decisions to put forward the proposed rulemaking, those 
positions are in the process of changing.
    Mr. Watt. But the composition of the Fed really hasn't 
changed, and the Treasury really hadn't changed except for I 
guess the leadership. You're saying that the change in 
Administration is likely to change your position on this? Why 
didn't you withdraw it and start over again after you got a 
feel for what was going to happen here?
    Mr. Hammond. I was trying to answer your question about 
whether or not there is an advocate within the Treasury 
Department, and I think the answer to that question, speaking 
just with regard to the Treasury Department is, is that we went 
through a process leading up to----
    Mr. Watt. The answer is probably yes or no?
    [Laughter.]
    Mr. Hammond. It depends what you mean by ``advocate.'' At 
what level in the organization.
    [Laughter.]
    Mr. Watt. OK.
    Mr. Meyer, maybe we can find out whether there's an 
advocate at the Fed, since we've been so successful in finding 
out whether there is one in Treasury.
    Mr. Meyer. I think in most cases when we put out a proposed 
rule, while it doesn't have to require an advocacy and it only 
has to meet a standard that has to be reasonable enough to put 
it out and get public comment, most of the time it really is 
backed up by some sense of advocacy.
    I think in this case, as this was the first attempt to deal 
with a very difficult issue, there were really more questions.
    It met, as Mr. Hammond noted, that threshold test. There 
were reasonable arguments that could have been made in support 
of it.
    But we also did recognize that this was going to be a 
difficult issue and that we were going to benefit enormously 
from the comment period.
    That's all we needed to do. I can't really talk for my 
colleagues and to say I could pin them down and say that they 
were 100 percent in favor of this proposal or just wanted to 
put it out to get comment.
    At this point, once a proposal is out, the situation 
changes quite a bit, because it's incumbent upon us to become 
very objective and to be very open minded as we receive those 
comments. And that's the reason why I cannot come here and take 
any advocacy position today, because I am open minded, and I am 
going to be reviewing those comment letters on their merits.
    Mr. Watt. Mr. Chairman, I didn't do very well. I still 
don't have a clue of whether this is an academic discussion or 
whether this is a serious rule that somebody is advocating for.
    So if I could just use 30 seconds more, Mr. Chairman, I 
hope you all will pay close attention to the wording of the 
statute, whether an activity is necessary or appropriate to 
allow a financial holding company and the affiliates of a 
financial holding company to compete effectively with any 
company seeking to provide financial services in the United 
States.
    I take that to mean that that's about competition between 
financial services companies, not competition between financial 
services and realtors, unless realtors are providing a 
financial service----
    Mr. Meyer. Mortgages.
    Mr. Watt. Got the point. OK. So unless there is competition 
already between those who can and cannot inside the financial 
services institution or unless real estate companies are 
themselves providing competition, then I think you are treading 
on very thin ice. And so I'm assuming that you all being as 
impartial as you are and not having an opinion on this will 
evaluate this carefully.
    Thank you, Mr. Chairman.
    Chairman Bachus. Thank you.
    Ms. Kelly.
    Ms. Kelly. Thank you, Mr. Chairman.
    I have a concern that involves the affiliates of the banks. 
Given the anti-tying rules as they're written now in Gramm-
Leach-Bliley that would prevent the banks from conditioning 
credit loans on the use of other banking services, if the banks 
were to become brokers, I want to know what would prevent self-
dealing within the bank. That is, if the broker is a part of 
the bank, an affiliate of the bank, what would prevent them 
from offering the bank affiliates REIT, for instance, a 
property? And that's effectively removing the property from the 
full market forces. It's self-dealing, and I want to know if 
there is any--it seems to me that there is a potential here in 
that regard to weaken the market.
    And I also wanted to know if there's any kind of a self-
dealing firewall that you've thought about.
    Mr. Meyer. I think that would come under 23A. I mean, 23A 
requires that those kinds of transactions between a bank and 
affiliate be on market terms and not more favorable than the 
bank could do with a non-affiliated firm.
    So I do believe there are protections already in existing 
statutes to deal with this.
    Ms. Kelly. My concern is that in the brokerage market, a 
property will come on, and we all know that these are very 
often, they aren't done--somebody doesn't just come in and sign 
a contract with a broker. They'll just call up and they'll say, 
I'm thinking about selling this ten-story building and I'm just 
wondering, would you like to come and appraise it? And then 
we'll give--you've got a bank affiliate that's going to get 
that.
    And then what's going to happen is the person who is the 
broker, who plays golf with the friend over at the REIT, is 
going to pick up the phone and say I think I've got a ten-story 
building that's going to come on the market, and maybe you want 
to take a look at this. That's what I'm concerned about. I'm 
concerned that this ten-story building will never get out into 
the market. That has the potential to weaken the market. 
Because some of these things may never get out into the market. 
They may just be passed from one affiliate to the other of a 
major bank.
    Mr. Meyer. The banks cannot own real estate.
    Ms. Kelly. I understand that.
    Mr. Meyer. Except under merchant banking.
    Ms. Kelly. But an REIT can. There are investments there.
    Mr. Meyer. Yes, but banks can't own REITs because they own 
real estate.
    Ms. Kelly. But, the affiliate structures own and invest in 
the REITs. Under securities, no?
    Mr. Meyer. No, they can't. Because they own real estate, 
and banks cannot directly or indirectly do that.
    Ms. Kelly. I'm still--I'm sorry.
    Mr. Baker. Will the gentlelady yield?
    Ms. Kelly. By all means.
    Mr. Baker. Let me ask you a question. What happens when a 
bank repossesses property and they call it REO? Does the bank 
own real estate? I'm just curious about that.
    Chairman Bachus. There is a prohibition in the Act 
against----
    Ms. Kelly. There's a prohibition in the Act----
    Chairman Bachus. ----Investments or development of real 
estate activity.
    Mr. Meyer. That applies to financial subsidiaries. 
Financial subsidiaries are expressly prohibited from engaging 
in real estate development or investment.
    Ms. Kelly. But affiliates are not, sir.
    Mr. Meyer. Not under that particular statute, but it is not 
a permissible activity for banks or affiliates of banks. Banks 
cannot own REITs. They are allowed to advise. They are allowed 
to act as advisers to REITs, but they cannot own them.
    Ms. Kelly. I'm sorry, but I'm still a little confused by 
your answer. I think perhaps this is something that's a little 
more thorny. I would like to see a strong firewall against 
self-dealing if this is going to happen at all.
    I have serious concern that within the larger structure of 
a gigantic banking financial services corporation that there 
could be self-dealing.
    We have written in Gramm-Leach-Bliley the firewall that 
protects the consumer. But in a sense, if there is self-dealing 
with a broker and an REIT, for instance, through affiliates, 
there is nothing written as far as I can find in the Gramm-
Leach-Bliley Act. And I think perhaps we need to look at this, 
because it does have the potential to affect the entire real 
estate market.
    Mr. Meyer. Why don't you allow us to be in contact with you 
and work on this a little bit more closely, make sure we 
understand thoroughly your position, and see if we can provide 
you with information on this?
    Ms. Kelly. Thank you very much. There is one other question 
I have. There was an opinion written in The American Banker by 
William Seidman that expressed concerns permitting banks to 
engage in real estate brokerage and management activities that 
might ultimately lead to the mixing of bank and commerce. And 
that's been a disaster in a couple of areas, in the Asian 
economies in Japan and Thailand. I want to know if you feel 
that that's a legitimate concern here.
    Mr. Meyer. First of all, the issue is whether this 
constitutes a mixing of banking and commerce. That's what this 
rulemaking is all about. But, let's put that aside and talk 
about just the activity itself. Would this be a risky activity?
    I think you have to understand that this is an agency 
activity. This is not owning the real estate and the potential 
losses that could come from changing the value of that real 
estate.
    Now, I was here not too long ago, and we were talking about 
merchant banking activity. Now there's an activity that's 
risky. But the Members of this subcommittee seem to want to 
have fewer restrictions on it, seem to want to have less 
capital than we wanted to propose against it, but we said now 
that's a risky activity. That's subject to significant losses, 
because they hold those assets on their books.
    Now, a real estate agency is a very different activity, and 
I don't think we should confuse what's going on with the 
Japanese banking system with providing banks with an 
opportunity to engage in real estate agency activities.
    Ms. Kelly. It's the potential for changed value that I'm 
exactly addressing with my prior question. Thank you very much.
    Chairman Bachus. Thank you.
    Mr. Bentsen.
    Mr. Bentsen. Thank you, Mr. Chairman.
    Governor Meyer, let me go you one better, though, because 
you're right in bringing up the merchant banking. But as I 
recall over the last several years, it was the Federal Reserve 
that was very adamant about any attempt by this subcommittee or 
any other committee to provide any level of mixing of banking 
and commerce, whether it was a 5 percent rule or a 20 percent 
rule.
    And the argument was always on the basis that--at least 
this was the Chairman's argument, and I don't want to hold you 
to his opinions--but the argument was always on the basis, 
well, if you start at 10 percent, it will be like Section 20, 
and then you'll come back, and once you hit that cap, then the 
institutions will come back and they'll want more.
    And what I see in this proposal is in this I have to say 
rather tenuous argument by the nature of the prohibition in 
Gramm-Leach-Bliley to real estate investment, that somehow that 
meant that we open the door to real estate agency services. I'm 
not sure I recall that as being our intent. But I'm not sure 
any of us recall exactly what we were doing when we were 
writing the bill.
    Mr. Baker, I think, does.
    [Laughter.]
    Mr. Bentsen. And I think that Mr. Baker would go further in 
banking and commerce, and I agreed with him in some of those 
issues.
    But as much as the rule says that you still specifically 
preclude investment, if this were to go forward, how long 
before the institutions are back saying, ``Well, gee, we need 
to go one step further in real estate investment? And, oh, by 
the way, you know, you in Congress or Congress has given us 
merchant banking rules and allowed us in merchant banking and 
affiliates and subsidiaries, and through our affiliates through 
the holding company structure, we can engage at least in some 
real estate underwriting.'' And I don't know exactly what the 
rules are with respect to underwriting REITs or not.
    So I think what my concern is that your proposal and some 
of the comments really are taking us down the road of banking 
and commerce, which is contrary to where the Fed was before.
    And we know that the Treasury--and I won't hold you to 
this, Mr. Hammond, but we know the Treasury has had mixed minds 
on this over the years.
    But I have to say, the argument that because some financial 
institutions have it as provided by law either under the thrift 
charter or under State laws, doesn't necessarily give you 
regulatory fiat to then change the Holding Company Act, in my 
opinion.
    And I appreciate the fact that the gentleman raised the 
issue of REO and creditor issues related to property, but there 
are rules associated with that. And, for instance, banks are 
allowed to hold oil and gas properties that are debtor 
properties. But there is a time limit on the period in which 
those properties can be held.
    And on the issue of engaging in lending and the like, why 
is there a difference between a real estate asset and an 
automobile asset? I mean, banks are lending to automobile 
buyers. They're lending to automobile dealers. They're lending, 
arguably, from time to time, to the automobile manufacturing 
industry. So why is there not a tie there? Why is there not a 
tie to inventory management? Banks lend to widget manufacturers 
for their inventory management. Why would it not at some point 
be appropriate for banks to engage in actual inventory 
management?
    So I think a lot of these arguments are rather tenuous that 
are put forth, and I really have to say that--and this may be 
where we want to go--but I'm not sure that I see where the Fed 
and the Treasury have the authority to expand this far in what 
I think really is going into banking and commerce.
    And again I say I'm one of the Members who was willing to 
explore that. But I think that this is where you may be headed. 
Now it may not be your intent. But I'm curious. You know, why 
is this different than automobiles? And what are you going to 
do if you go through with this when they come back and they 
say, ``Well, we need more authority now to underwrite and we 
need to go back to where the thrifts had authority?''
    Mr. Meyer. I think those are two very, very interesting 
questions. The first is, how could the Federal Reserve, given 
our opposition to the mixing of banking and commerce, even 
consider this proposal? I think the answer to that is, we 
didn't get to consider this on the basis of the bill that we 
would have written. We got to consider it under the bill that 
you wrote.
    And you wrote a very nuanced bill with a lot of 
flexibility. On the one hand, you considered and rejected a 
broad mixing of banking and commerce. But in three ways, you 
provide opportunities for mixing banking and commerce.
    We've talked about merchant banking. And by the way, in 
that case, we were saying we want to differentiate this from 
the broad mixing of banking and commerce. We want restrictions 
on routine management, or you had restrictions on routine 
management. We wanted to put them into the regs. We wanted to 
put into the regs something specific about holding periods, and 
you told us, loosen up. This mixing of bank and commerce, this 
is OK within the merchant banking authority. OK, that's one.
    Number two, you put into the bill something called 
``complementary activities''. What are they? They're non-
financial activities that are related to financial activities. 
You put that in there, clearly a mixing of banking and 
commerce, but in some way related to the synergies and 
strategic direction.
    Mr. Bentsen. Well, if I might interject. And I want to hear 
the rest, but I may interject that as you recall, at least my 
understanding was at the time it was viewed as a compromise to 
deal with the evolving marketplace where technology might cause 
financial institutions and the ability to provide services to 
have to engage in other activities.
    I'm not sure real estate is a new technology that's come 
about.
    Mr. Meyer. OK. And the third is the way in which you set 
out the factors for consideration for an activity to be judged 
financial. It wasn't simply is it an intangible asset as 
opposed to a tangible asset? It was also the nature of the 
competition within the financial services industry. So you gave 
us a difficult task. It really is a difficult task. This is not 
an easy one at all.
    But you gave us the authority and the discretion to try to 
sort out these issues under that language.
    Now the next question you ask, well, where will it all 
lead? Well, we considered this proposal under its own merits. 
Dealing in real estate development and investment is quite a 
different story. That involves the holding of tangible assets, 
the ownership of those tangible assets. That's quite a 
different story than the agency activity that we're considering 
today.
    And then with respect to automobiles, again, the equivalent 
for automobiles would be an agency activity where the bank 
didn't hold automobiles, didn't own the automobiles, but acted 
as an intermediary between buyers and sellers. That would be 
the analogy. Could it go in that direction, and that's a 
legitimate question: Where would you draw the line? But it is 
not at all owning real estate--an automobile dealership. That 
would be clearly forbidden.
    Mr. Bentsen. But--and my time----
    Chairman Bachus. I'm going to----
    Mr. Bentsen. Well, I'll talk to you about it another time.
    Thank you, Mr. Chairman.
    Chairman Bachus. Mr. Riley.
    Mr. Riley. Thanks, Mr. Chairman.
    To follow up on what Mr. Bentsen was saying, I think he 
makes a legitimate point. The one thing that we were adamant 
about in our Gramm-Leach-Bliley bill is that we do not want to 
mix banking and commerce.
    If we start down this slope, which I think is a very, very 
slippery slope, I don't know how you ever crawl back up. You 
can make a legitimate case--and I was in the automobile 
business for a while. And I promise you, there is more 
financial activity in an automobile dealership than there is in 
any real estate brokerage company in this country.
    If you can make a legitimate case that you can have a 
financial instrument, which is another point that I want to 
discuss with you. If I just buy something from you, is there a 
financial transaction, or is that complementary? How that be 
classified? If there was no mortgage? Could a broker do that 
and not mix commerce and banking? I don't think so.
    But to elaborate I guess, if you get to the point that we 
allow any financial transaction to make a determination whether 
or not that is financial in nature, then I think what we've 
done is essentially allow total mixing of banking and commerce.
    When my wife uses a credit card to buy groceries, that 
becomes a financial instrument that the bank has control over, 
and you could even make a case that the bank loans her the 
money to buy her groceries. Well, does that mean that a bank, 
because of this involvement with the credit card company, has 
the option then to go and own a grocery store? Should they be 
able to own an automobile dealership?
    I don't know where you stop. Actually, I think it's harder 
to make a case for real estate brokerage than it is for an 
automobile dealership because there is so much involved in 
insurance and financing and everything that the bank would 
normally be associated with.
    But there are so many things in real estate. If I lease a 
piece of property from you, I don't think that becomes 
financial in nature. If you and I have a transaction between 
ourselves, that is not financial in nature. So if we allowed 
this to happen, I cannot consider--it's hard for me to realize 
any point where any transaction that you did with any other 
business in this country wouldn't be financial in nature.
    Because fully 30 or 40 percent of the real estate 
transactions in this country do not involve mortgages. And if 
that's the case, then should a broker be able to sell directly 
without a mortgage? I don't think so.
    So I think you have a weaker case to make with real estate 
brokerage than you probably would with automobiles, as Mr. 
Bentsen said, with a grocery store, with a Visa card, with 
almost anything.
    We need to go back, and if we need to redefine what we did 
with Gramm-Leach-Bliley, then maybe this subcommittee should do 
it. But again, the one thing that we were adamant about is that 
we do not want to go down the road that Asia went. We do not 
want to mix commerce and banking. And this, to me, would open 
the floodgates for opportunities to consider any transaction 
that a bank might be a participant in to become financial in 
nature, and then you have total mixing of banking and commerce.
    Mr. Meyer. It's the very purpose of this proposal to sort 
out precisely those kinds of issues about where to draw the 
line. And I am completely sympathetic with your view that you 
don't want to get on this slippery slope. You don't want to say 
anything that's financed you can own because it's financed.
    Mr. Riley. Right.
    Mr. Meyer. That's absolutely clearly unacceptable. The 
difference here might be that we're really talking about an 
agency activity that doesn't involve owning the real estate.
    Mr. Riley. So you're saying if there was an automobile 
leasing company or an automobile brokerage company, then that 
would be financial in nature?
    Mr. Meyer. Not leasing, but----
    Mr. Riley. Well, I think that's utterly ridiculous.
    Mr. Meyer. I don't know that anything like that exists. But 
that's what we'd have to consider.
    Mr. Riley. Sure they exist. And if they don't exist, when 
you open this door, they will exist within 6 months. And that's 
why I'm saying, if we need to redefine in this subcommittee 
what we meant, then maybe we should look at it here and give 
you some better direction.
    But I think once we make this kind of breach of what the 
trust in this subcommittee tried to----
    Mr. Meyer. It would be very helpful for us to understand 
better what the subcommittee meant when it said that we should 
take into account what activities are necessary or appropriate 
to allow banks to compete effectively in financial services.
    Mr. Riley. Well, I think what Mr. Bentsen said is right. 
There is evolving technology out there today that is a part of 
and inherent in and a part of a financial holding company. And 
as that develops, we don't want to do anything that would 
hinder that type of technological advantage that that company 
might develop.
    But on the other hand, there was never any question, at 
least in my mind, with other than Mr. Baker, my good friend 
here, about whether or not you should mix commerce and banking. 
And I think this subcommittee was very adamant in our 
opposition to it.
    And if we need to redefine that, I think that is a better 
approach than trying to take each individual, specific item 
that could possibly come up over the next 5 years and have a 
specific ruling dealing with one specific trade group or 
whatever.
    Mr. Hammond. In my mind, if I might add just to that, it 
strikes me that in the course of the discussion, the confusion 
arises over whether there is a bright line standard or a bright 
line principle within Gramm-Leach-Bliley which says that there 
shall be no mixing of banking and commerce.
    Then within the statutory language itself, it is much more 
flexible, much more open to interpretation, and lays out 
standards dealing with competition and competition in financial 
services. So what you have is a bright line principle that is 
in some regards at odds with the construct within the statute.
    Mr. Riley. And I appreciate that. I honestly do. And I know 
you have a difficult task in trying to accomplish and interpret 
what we mean. But it seems to me that the more obvious way to 
handle this is for this subcommittee to come back and revisit 
it and give you specific information on how we would like for 
you to handle it rather than you having to make an 
interpretation on any and every possible thing or contingency 
that might come up over the next 2 or 3 years. Because they're 
going to continue to come. If you make this exception, I 
promise you, you will have 200 other exceptions that will be 
requested within the next year.
    It makes more sense to me for this subcommittee to go back 
and redefine what we did if we need to rather than your 
agencies having to go in and make these kind of determinations.
    Thank you, Mr. Chairman.
    Chairman Bachus. Thank you. We might let the Housing 
Committee take those issues up.
    [Laughter.]
    Chairman Bachus. Mr. Gonzalez.
    Mr. Gonzalez. Thank you, Mr. Chairman.
    My questions are not as interesting as the others, because 
they don't have real case scenarios. But really process and 
policy as you go about this, because we have delegated that 
responsibility to you. So we're looking to you to do your jobs.
    The first, how you perceive the role of Congress in the 
rulemaking process. And this is a good example. We really don't 
know. And I'm not sure where you think we should come in, at 
what point should we be consulted? When should we consult? When 
do we have an active role?
    Question number two really has to do with what you need to 
take into consideration. And this is kind of fundamental, I 
guess, but it's regarding changes in the marketplace, changes 
in technology, and then what's happening out there in the 
marketplace to allow banks to be competitive with other 
entities that somehow are providing some service.
    When we say ``changes'', I've always anticipated that 
that's the reason we passed the Act. As things existed at that 
time in 1999, and then prospectively, what other changes might 
occur. Do you see that if you could not specifically say 
there's been a change in the marketplace, technology or 
anything happening with other entities that provide financial 
services since 1999, that you would not be able to promulgate 
any rules that would allow financial institutions to get 
involved in other activities?
    So I guess I want your timeline. Where do you draw that, if 
any? I assume that you don't. But that was just an assumption. 
But listening to the debate or the discussion, I now have a 
question.
    Another consideration is, as you go about this rulemaking, 
if in fact you determine that wherever the financial 
institution now will have some activity that it could result in 
market domination, undue influence, conflict of interest, does 
that basically kind of trump all the other considerations? Or 
is it going to be a decision that's made and you say, hey, 
that's the marketplace? If that happens, that happens.
    The last part of my question goes back I guess to what the 
other Members have already touched on, and that's conceptually 
I'm thinking. As you determine other areas for financial 
institutions, affiliates, subsidiaries and so on to venture, do 
you then have an ever-expanding universe? In other words, once 
you identify that new activity, then do you have the potential 
for other things to be related complementary to and so on that 
didn't exist before? It will be a nexus, what I'm saying, to 
the next step, which I think some Members have already touched 
on.
    But I'm just thinking again in the way of policy and how 
you go about this, because this is the first question before 
you. But it will set a standard. And we will be looking to you 
as to what precedents you're going to be establishing now as 
you fulfill your duty, which we did delegate to you.
    Mr. Hammond. I think it's very clear as we look at applying 
the statutory construction that in whatever final outcome we 
reach, we have to clearly delineate how we address those very 
important issues.
    It's important for us to be clear on what those standards 
are and how they're being applied, and it's important for us to 
explain the rational basis for any decision going forward.
    It's my understanding with regard to your first question 
with regard to the timing that the statute does not speak to in 
terms of from Gramm-Leach-Bliley going forward, but in fact 
talks about changes in the marketplace in a more general 
construct. That's certainly been the way we've been looking at 
it at this point in time.
    With regard to the competitive questions, I think that's 
something that we very much want to look at. Competition is an 
important element in this rulemaking process. How we look at 
those competitive standards and what that means is going to be 
a key part of the deliberative process going forward.
    With regard to your third question regarding add-ons or 
supplemental activities, if I understand it, kind of a domino 
effect or chaining of activities, once again, I think you have 
to look back to the underlying construct of the statute: Are 
they, in and of themselves, related to--incidental to the 
financial activities of the bank?
    And so, you have to make sure that you maintain a 
discipline in how you look at and evaluate each of those 
proposals. But I don't doubt that that's an incredibly 
difficult continuum as time goes on as you look at more and 
more issues and their various relationships.
    Mr. Gonzalez. Where do we come in as far as Members of 
Congress and this subcommittee in the rulemaking process, in 
your mind?
    Mr. Hammond. I think that's always--agencies always look to 
Congressional intent in implementing any statutory delegation 
of authority. Obviously with new delegations, there's more 
consultation involved in the process to try to divine the 
intent and to make sure that it's consistent with the 
underlying purposes of the statute.
    I think obviously when you're dealing with something that 
is brand new, you have probably a higher obligation than you do 
in a situation where you have existing statute for some period 
of time.
    Mr. Gonzalez. Time's up. Thank you very much.
    Chairman Bachus. Let me say this for the record. I think 
it's important because of some of the questions.
    At the present time, with the Gramm-Leach-Bliley, you are 
charged with continuing to look at whether or not our national 
banks are competitive, and coming to us with proposals when 
they're disadvantaged.
    So the fact that there's some resistance to this particular 
proposal, I hope won't have a chilling effect on your statutory 
charge to continue to bring to us other issues that might be 
more receptive.
    I hope you're following what I'm saying, because we very 
much are anxious to have a strong national banking system. And 
part of Gramm-Leach-Bliley was to allow banks to be competitive 
with other financial institutions, and I think we all agreed 
that they were at a disadvantage, at least as passed, we did, 
and we charged you all with continuing to look and make 
proposals.
    And the fact that there's some resistance, it's still a 
charge that you have.
    Mr. Barr.
    Mr. Barr. Thank you, Mr. Chairman.
    I share a little bit of the confusion I think that's been 
indicated by some of the other Members. I think Mr. Watt, for 
example. And I'm a little bit curious as to why the Board and 
the Department are jumping into this with both feet right now, 
so early in the process. That process being Gramm-Leach-Bliley 
is still a very new animal.
    We have been asked, for example, to look at going back and 
taking another look at the privacy regulations, the privacy 
aspects, and a lot of us feel that the best course of action is 
to just give Gramm-Leach-Bliley a little bit of time to sort of 
settle in and filter out, and then come back and take a look at 
it. Let's let it work itself out a little bit.
    There's nothing in the statute, despite the very broad 
power, to make the determinations that you all are considering 
that's given to the Department and to the Board that requires 
either the Board or the Fed to initiate these proposed rules, 
is there?
    Governor Meyer. No. But what we have done here is to 
respond to a request. Now we could have said, it's just too 
early, and although we have authority and responsibility to 
entertain requests for new authorities, we're not going to 
fulfill that responsibility because the bill is new.
    That didn't seem to me appropriate.
    Mr. Barr. Well, I think the way you've cast that sort of 
colors it a little bit. It's not that you're telling people 
we're not going to follow our responsibility. Certainly the 
only response to that will be well of course you have to follow 
your responsibility. So I think your characterization of it 
presupposes the answer you'd like to have, which is 
justification for putting the proposed rule out.
    The Board and the Treasury could simply say, we're not 
abrogating our responsibility to make a determination of the 
statute; we just think it's premature. That wouldn't be 
abrogating any responsibility, would it?
    Governor Meyer. No. But I think that in this case, we 
recognized that these choices were going to be difficult, these 
were going to be nuanced decisions.
    Mr. Barr. Why rush into it then?
    Governor Meyer. Nothing is a rush. We're taking our time 
and at some point we have to begin to sort out these issues and 
these requests.
    Mr. Barr. Well why would you choose as the starting point 
for sorting out these issues, two proposed rules that 
presuppose that the services that the banks are requesting are 
indeed proper financial services related to or are incidental 
to.
    Because that's the way the rules are cast, the proposed 
rules are cast, they presuppose that. And I suppose you all 
could have come out with a more neutral proposal or a proposal 
on the other side.
    Why did you cast them this way if your intent was simply to 
get information to begin sorting out the process?
    Governor Meyer. Well, I think it would have been unusual to 
put out a proposal to say that we don't think these are 
permissible activities.
    Mr. Barr. With a new animal here, why would that be any 
more unusual than this?
    Governor Meyer. This seemed like the appropriate way. There 
was a threshold case that could be made. There were reasonable 
arguments that could be made.
    We put it out in this form to get the discussion going, to 
get the feedback from practitioners, from market participants 
from both sides to help us sort out the issues and hopefully 
make a very informed decision, and also begin to draw the line 
that we're going to have to draw on what constitutes 
financial----
    Mr. Barr. Why are you going to have to? I thought there was 
nothing in the statute that requires?
    Governor Meyer. It says that we are supposed to rule on new 
activities. If we get new requests, it seems to me, we're 
supposed to consider them.
    Mr. Barr. So you do read into the statute an obligation?
    Governor Meyer. Not an obligation to put out a proposal in 
any case, but to consider those requests.
    Mr. Barr. But there's no requirement in the statute to 
propose a rule simply because you get a request?
    Governor Meyer. No.
    Mr. Barr. OK.
    Under Gramm-Leach-Bliley Section 103, it looks like it says 
that the ``Board shall not determine that any activity is 
financial in nature or incidental,'' and so forth, ``if the 
Secretary of the Treasury notifies the Board that the Secretary 
of the Treasury believes that the activity is not financial in 
nature or incidental,'' and so forth.
    Treasury did not communicate that to you, is that correct? 
I mean, Treasury never made that determination, did they?
    Governor Meyer. That's correct.
    Mr. Barr. OK.
    The next paragraph then says ``The Secretary of the 
Treasury may recommend that the Board find an activity to be 
financial in nature and incidental to a financial activity.''
    Did Treasury do that?
    Mr. Hammond. Reach a final conclusion with that regard? No.
    Mr. Barr. Under that language there, Treasury 
recommendation, which is under the paragraph entitled 
``Proposals Raised By the Treasury,'' it says, ``The Secretary 
of the Treasury may, at any time, recommend in writing that the 
Board find an activity to be financial in nature or incidental 
to a financial activity.''
    Did the Secretary of the Treasury do that?
    Mr. Hammond. I don't believe we reached that point in the 
process, no.
    Mr. Baker. [Presiding.] Mr. Barr, you've expired your time 
and since we've got a vote pending, may I move on to another 
Member now?
    Mr. Barr. I beg your pardon?
    Mr. Baker. I said your time has expired, and since we have 
a vote pending, I'd like to move on to another Member to try to 
get more Members in before the vote.
    Mr. Barr. OK, could I just get a definitive answer on that? 
So the answer is no, the Secretary did not make that 
recommendation?
    Mr. Hammond. No, we did not. Correct.
    Mr. Baker. Thank you, Mr. Barr.
    Mr. Kanjorski.
    Mr. Kanjorski. Thank you, Mr. Chairman.
    I think some of the previous questions from Members of this 
subcommittee indicate that we have done several things. Maybe 
the Congress made a gross error in delegating legislative 
authority to the regulator and to the Secretary. I am probably 
predisposed to believe that we shouldn't have done that. And 
maybe it would be right that you send back this law and, I 
think, make that determination.
    Let me ask this question. Did you make a determination 
whether or not there was an unconstitutional delegation of 
authority by the Congress to the regulators or the Federal 
Reserve or the Treasury?
    In fact, listening to your answer, Mr. Hammond, I sort of 
thought that you felt you had an obligation to start 
legislating here.
    Mr. Hammond. No, we have certainly not looked at the 
constitutional question that I'm aware of.
    Mr. Kanjorski. Well, should you not maybe look at that? 
With the predisposition of the Supreme Court today being more 
conservative regarding what the Executive Branch and 
independent agencies can do, maybe you should sit down and say, 
look, it is up to the Congress, not the regulators to define 
what is commerce and what is financial services.
    Mr. Hammond. Well, I think we----
    Mr. Kanjorski. And by forcing you to do that in the Act, we 
have delegated that legislative authority to you.
    Now, putting that question aside, I think you could 
understand the intent of the Act from the committee hearings 
and conference reports where the issue of commerce and 
financial services was addressed.
    It was not like we did not address that issue. And, as I 
recall at that conference, although I was ill at the time, I 
think we agreed to absolutely maintain that firewall.
    So the question seems to pose itself, and I think Mr. Barr 
and Mr. Gonzalez addressed that. What happened that suddenly 
what we all presupposed, at least on the side that wanted to 
maintain the firewall, that somehow this moved from a commerce 
to a financial services problem.
    Now, having said all those things, I approach this issue in 
an entirely different direction. I think we want 
competitiveness in the banking system. We want to level the 
playing field. But in some of your comments earlier, I got the 
indication that you are driving toward the least common 
denominator.
    You are saying because 26 States allow some of this 
activity to go on, we are going to have to allow all the States 
to do it under the Act.
    If that is the case, we are going down that slippery slope 
anyway. I am sure I could find some State legislature or 
regulator in this Union willing to allow banks to sell 
automobiles and finance them out of the bank.
    So we are going into that business. And if we can persuade 
any one of the 50 States to approve something else, then you 
are going to say this is now competition, and you have to 
approve it?
    Why not look at the other side? You are not talking to us 
about the interests of the consumer. As you know, the banks can 
pretty much take care of themselves, and so can the realtors. 
But, there are more than just California consumers, and there 
are more than just New York City consumers.
    There are consumers in Pennsylvania. Where we have gone in 
the last 10 or 15 years in this country? In fact, we have wiped 
out most small bankers. Well, we said that was necessary, so we 
accepted it. We have also wiped out most independent insurance 
agents, or soon will wipe them out. Now we are going to wipe 
out the realtors. I think you could extend this thinking to the 
legal profession, too. I am sure there are so many financial 
transactions that banks can buy legal firms and run them. I 
have no doubt about that.
    What is going to be left in our local communities for 
leadership? Everybody is going to be working for three or four 
huge, gigantic institutions that are 100, 500 or 1000 miles 
away from their community.
    Aren't the consumers the people that live in these 
communities? I have personal experience from it. I know when I 
entered Congress, we had 40 or 50 community bankers in my 
district; today, we have five or six.
    I know when we would have a United Way fund drive, we could 
call on the insurance agencies, call on the lawyers, and call 
on the realtors. They are, however, starting to disappear, 
because of, as Mr. Baker pointed out, larger institutions.
    Now we can not change the march of progress and time, but 
we do not have to rush down that road with the conviction that 
we are going to homogenize this country to such an extent, and 
the communities that are made up of the consumers be damned. 
That is what you are doing with this proposal.
    Mr. Baker. Mr. Kanjorski, if I may, you've exceeded your 
time. Mr. Hinojosa is the last Member to be heard. We might be 
able to wrap this up if we get Mr. Hinojosa in here real quick. 
We've got about 9 minutes left till the vote, and then we'll 
recess.
    Thank you, Mr. Kanjorski.
    Mr. Hinojosa. Thank you, Mr. Chairman.
    I want to identify with and agree with Chairman Baker on 
the interesting challenge before us here in our Financial 
Services Committee.
    I have an open mind on this proposal before us on the 
proposed rule.
    As I looked at Under Secretary Hammond's remarks, you say 
that in making determinations, the 1 year old Gramm-Leach-
Bliley Act requires us to take into account, among other 
factors, the third bullet: changes in the technology for 
delivering financial services, and fourth, whether the activity 
is necessary or appropriate to allow a bank and its 
subsidiaries to compete effectively.
    And I like competition, and so I want to keep an open mind 
before I make a decision.
    I was one of the ones who said that I wanted to think out 
of the box at a time where technology facilitated internet 
shopping, and has made it popular, at a time when one-stop 
capital shops are being sought out by homebuyers, at a time 
where homes have sold for more than what the asking price for 
the home started out.
    An example is that I've been renting a townhouse and very 
near two blocks from my home here on the Hill, a refurbished 
home went on the market, and within 10 days it sold for not the 
asking price of $300,000, but for $340,000.
    There were bids taken, and by the time it was over, it sold 
for more.
    So times are changing, as Chairman Baker pointed out, and 
those of us who have very close relationships with realtors, 
like I do with my son, who is a realtor, I find it difficult to 
just simply say that we have to continue to do business as in 
the past.
    So I repeat, I like the competition, but what and how do 
you feel about taking care of the low-income and the middle-
income families who, in many cases, are not the customers that 
the big banks are going to seek.
    How are we going to take a look at the Community 
Reinvestment Act so that big banks can put back into the 
business the moneys that they are taking from everybody in that 
community, so that if this proposed rule should get 51 percent 
of the votes out of this subcommittee and move forward, that 
they too can benefit from this competition.
    What are your feelings about that?
    Mr. Hammond. I think that, in general, competition benefits 
all consumers, and to the extent that you foster an environment 
of fair and open competition, everyone stands to benefit in the 
marketplace.
    With regard to your specific questions, I think those are 
issues of addressing the low- and moderate-income communities, 
those are issues that are addressed in other aspects of the 
legislation and other existing statutes.
    And they factor into any decisionmaking as they would 
factor into the competition questions.
    But specifically, the standards with regard to those 
communities are addressed in different statutory requirements.
    Mr. Hinojosa. Time is running out. We need to go vote. I 
want to be sure that there is specificity, that there is 
specificity that says, just like in the Community Reinvestment 
Act, that all banks are going to put back into their community. 
And so I want to be sure that I'm vocal, that if I am to 
support this, that we look at how banks are going to make sure 
that they welcome the low- and the middle-income families into 
being served.
    Mr. Baker. Mr. Hinojosa, we're down to about 4, 3 minutes, 
30 seconds.
    Mr. Hinojosa. Thank you, Mr. Chairman, I appreciate the 
opportunity to say what I had on my mind.
    Mr. Baker. Thank you, sir.
    I wish to thank both the gentlemen for their tolerant 
participation this morning.
    Just a couple of comments for the record. And I should 
state, not on Chairman Bachus' behalf, but clearly on my own. 
If we're going to clear this up, we need to look at credit 
unions who, through service organizations, can have brokerage 
operations today under current law.
    I don't know that the subcommittee is aware of the credit 
unions' violation of common sense.
    Second, if we're going to be risk adverse, we need to look 
at the 25 percent equity position a bank may take under current 
law in a private corporation, or worse yet, the 40 percent 
position it can take in a foreign corporation, which certainly 
is going to be suspect.
    Finally, we need to understand that, in the history of this 
subcommittee, we not only voted for a commercial basket in 
which a bank could own part of a commercial firm with certain 
permissible activities--obviously a breach of commerce and 
finance--which was inexcusable. But, we also passed on this 
Committee, although it did not become law, a reverse basket 
where commercial enterprises could own banks. Now that was 
absolute heresy which never made it to the floor.
    We have a lot of equalizing we need to do in this seriously 
flawed marketplace. If we're not going to pursue the rule which 
the Fed is proposing today, then this subcommittee needs to be 
instructed to correct the errors of the past.
    With that comment, I'd like to call this subcommittee 
hearing to recess, and we will return, and Chairman Bachus will 
return momentarily.
    [Recess.]
    Chairman Bachus. The Subcommittee on Financial Institutions 
and Consumer Credit hearing on Federal Reserve and Treasury 
rulemaking will now come to order.
    Let me introduce members of the second panel. I appreciate 
your attendance and your patience.
    Our first panelist, going from your right, is Mr. Richard 
A. Mendenhall, President of the National Association of 
Realtors.
    The second panelist is Mr. Phillip M. Burns, Chairman and 
Chief Executive Officer of Farmers & Merchants National Bank of 
West Point, Nebraska on behalf of the American Bankers 
Association.
    The third witness is Mr. Robert F. Nielsen, President, 
Shelter Properties, Inc., of Reno, Nevada, on behalf of the 
National Association of Home Builders.
    Mr. Frank Torres, Legislative Counsel for Consumers Union.
    Mr. John Roebuck, Chairman of the Board, National 
Auctioneers Association.
    Mr. Richard J. Parsons, Executive Vice President, Bank of 
America, testifying on behalf of the Financial Services 
Roundtable.
    We appreciate your attendance.
    Mr. Mendenhall, if you will lead off.

    STATEMENT OF RICHARD A. MENDENHALL, PRESIDENT, NATIONAL 
                    ASSOCIATION OF REALTORS

    Mr. Mendenhall. Thank you, Mr. Chairman.
    Good morning. I'm Richard Mendenhall, President of the 
National Association of Realtors. I am from Columbia, Missouri, 
where I own three real estate firms specializing in single 
family and commercial brokerage and property management.
    I've been a realtor for over 25 years and I'm the fifth 
generation in my family in the real estate business.
    I'm pleased to represent the nearly 760,000 members of the 
National Association of Realtors who participate in all aspects 
of the residential and commercial real estate market.
    First, let me thank you sincerely for holding this hearing 
today. The issue before us is an extremely important issue and 
raises many concerns as it affects not only the banking and 
real estate industry, but more importantly, consumers.
    As you know, over 175 of your colleagues in the House of 
Representatives have written letters to the Federal Reserve and 
Treasury expressing their concern about their proposal to 
classify real estate brokerage and property management as 
financial activities, and therefore permissible for financial--
--
    Chairman Bachus. Mr. Mendenhall, would you pull the mike a 
little closer. And let me ask all the gentlemen to do that.
    Mr. Mendenhall. Be glad to.
    As you know, reclassifying real estate leverage and 
management as financial activities therefore makes them 
permissible activities for financial holding companies and 
financial subsidiaries of national banks.
    The National Association of Realtors opposes this proposal. 
We oppose it because it violates congressional intent. At no 
time during the debate of the Gramm-Leach-Bliley Act did 
Congress, nor the banking industry, for that matter, suggest 
that real estate brokerage and property management were 
financial in nature, or should be included in the newly defined 
activities.
    It was clear that the issue at hand was to permit banks to 
engage in securities and insurance activities. Also clear was 
congressional intent to maintain the separation of banking and 
commerce.
    In fact, on at least three occasions, Congress debated and 
voted decisively to keep them separate. Real estate brokerage, 
as a commercial activity, was considered off the table.
    The Gramm-Leach-Bliley Act is perfectly clear. As you can 
see from the chart to my right, a chart of permissible 
activities, real estate brokerage and property management are 
conspicuously absent.
    Furthermore, since 1972, the Federal Reserve has maintained 
that real estate brokerage and property management activities 
are not closely related to banking.
    Banking industry representatives say that because a home is 
financed, real estate brokerage is incidental to banking.
    To apply this standard to all activities deemed attractive 
business opportunities for banks will most certainly lead to 
banks entering all other commercial activities.
    Will bankers soon be selling cars, boats, washing machines, 
and other tangible products that involve financing?
    The act of financing real estate or any other tangible 
asset or durable goods simply does not transform that asset 
into a financial instrument. Banks have it backward. It is the 
mortgage that is in fact incidental to buying real estate.
    Let me put this in perspective. There are two parties to 
every real estate transaction; a buyer and a seller. The seller 
requires no financing for his part of the transaction. 
Therefore, right off the bat, 50 percent of the transacting 
parties handled by real estate firms involve only the marketing 
and selling of the property.
    These sellers are not shopping for a loan or any other 
lender services.
    The other 50 percent represent the buying side. You might 
assume that these buyers require a mortgage. However, according 
to the 1999 American Housing Survey, approximately 20 percent 
of home purchases are made without financing.
    This means that if this proposal is adopted, it places the 
Federal Reserve in the embarrassing position of permitting 
financial holding companies to engage in a commercial activity 
where 70 percent of the consumers involved in the transaction 
require no financing.
    I'd like to repeat that again. Seventy percent of the 
consumers involved in the transaction would require no 
financing.
    Some say that the real estate industry is afraid of 
competition. On the contrary, we welcome competition as long as 
the rules are fair. I would point out to you that a financial 
holding company and national banks already have at their 
disposal Federal advantages and subsidies, as listed on our 
second chart. Pitting federally-subsidized, highly advantaged 
entities with a high barrier to entry against unsubsidized, 
less-advantaged real estate firms with a relatively low barrier 
to entry is a recipe for trouble.
    Cash-rich banks could use profits from taxpayer insured 
operations to subsidize real estate functions, freeing more 
resources to consolidate market power.
    Some real estate firms would be forced to close their 
doors. With less competition, consumers would be at risk and 
disadvantaged. Consumers will be hurt by this proposal in a 
number of ways, including limited choice, unfair treatment, and 
possible increase in cost.
    However, the concern that resonates most when asked is the 
treatment of their financial and personal information under a 
bank-owned brokerage scenario.
    In conclusion, I've identified some of the reasons we 
oppose the proposal before us today.
    We hope that the Treasury Department and Federal Reserve 
will agree with us and deny the petitions to define real estate 
brokerage and property management as financial activities.
    We also encourage Congress to reaffirm its commitment to 
maintain the separation between banking and commerce. This is 
not only necessary, but essential if we are to ensure that the 
real estate market, one of the largest sectors of the economy, 
remains fair and competitive.
    We must protect consumers and their rights to the greatest 
selection of providers in buying or selling of their property.
    I would like to thank the subcommittee for your time and 
attention to this critical issue.
    [The prepared statement of Richard A. Mendenhall can be 
found on page 78 in the appendix.]
    Chairman Bachus. Mr. Burns.

   STATEMENT OF PHILIP M. BURNS, CHAIRMAN AND CEO, FARMERS & 
   MERCHANTS NATIONAL BANK, WEST POINT, NE, ON BEHALF OF THE 
                  AMERICAN BANKERS ASSOCIATION

    Mr. Burns. Thank you.
    Mr. Chairman, first I would like to thank you for holding 
this hearing.
    The issues we are here to discuss are not new, in fact, 
they have been debated in this legislative body for years.
    What is new is that in 1999, Congress enacted the Gramm-
Leach-Bliley Act. The fundamental tenets of that Act are to 
promote competition among providers of financial and related 
services and to ensure that financial services holding 
companies can adjust to the marketplace.
    Congress recognized that regulatory flexibility was vital 
in a dynamic marketplace. Congress expressly left it to the Fed 
and the Treasury to determine what additional services could be 
offered by banking organizations.
    In putting forth the proposal on real estate brokerage and 
management, the Fed and the Treasury are following exactly the 
process Congress created when it passed Gramm-Leach-Bliley only 
18 months ago.
    In my small town in Nebraska, I would like to offer my 
customers the same services as our competitors, and that 
includes real estate brokerage and management. In fact, the 
ability to offer real estate services may be more important for 
smaller banks like mine in rural areas.
    In these communities, the bank is perceived as having the 
best information on properties offered for sale, including 
farmland acreage. Small banks would likely partner with 
existing real estate brokers in order to provide these 
services.
    In my statement today, I would like to make three key 
points:
    One, competition will be enhanced by bank involvement in 
real estate brokerage;
    Two, consumer protections would be even greater with bank 
involvement; and
    Three, the regulatory process should be allowed to work as 
Congress intended when it passed Gramm-Leach-Bliley.
    And I would like to briefly touch on each point.
    The benefits of competition are well known. Competition 
improves efficiency, pricing and service levels, all to the 
benefit of homebuyers. Not all banking organizations will 
choose to offer real estate services, but those that do will 
enter the market because they believe they can do a better job 
serving customers.
    While realtor opponents of competition try to block bank 
participation, many realtor firms offer both real estate and 
banking services.
    Congressman Baker, earlier in his comments, made reference 
to looking up ads by realty firms this morning on the internet, 
and today I have brought a sample of such an ad, which is to my 
right.
    The ad on display here, from Long & Foster, this area's 
largest brokerage firm, makes no bones about providing end-to-
end services. This ad touts Long & Foster as being more than a 
great real estate company, but also a great mortgage, title, 
and insurance company too.
    The ad goes on to say, ``Imagine the convenience of buying 
a home, securing the mortgage, arranging the title work, and 
getting homeowners' insurance all in one place.''
    And Long & Foster is not an isolated example. Century 21, 
Caldwell Bankers, GMAC, Prudential, and many others all combine 
financial services like loans and insurance with real estate 
brokerage.
    This is exactly the type of marketplace change that Gramm-
Leach-Bliley was designed to have the regulators address. In 
that regard, I note that credit unions can and do offer real 
estate brokerage.
    Importantly, bank involvement is consistent with safe and 
sound banking. All consumer protections that apply to 
independent realtors would also apply to bank affiliated real 
estate agents, including all State licensing, sales practices 
and continuing education requirements.
    Banks already must meet tough privacy requirements and are 
subject to anti-tying regulations. And because brokerage and 
management are agency activities, they pose no risk to the 
soundness of the bank.
    After more than 20 years of debate, Congress recognized the 
importance of regulatory flexibility when it enacted Gramm-
Leach-Bliley. Congress could have excluded real estate 
brokerage and management explicitly, as it did for real estate 
development, but it did not.
    Rather, Congress left that decision to the Fed and the 
Treasury. Thus, the National Association of Realtors is now 
asking Congress to intervene in the very process Congress 
created only a year-and-a-half ago.
    The Fed and the Treasury should be allowed to follow the 
process that Congress created.
    In conclusion, increased competition benefits customers. It 
is a catalyst for innovation, more customer choice, better 
service and competitive prices. My customers would certainly 
benefit if my small bank could offer real estate services.
    Again, Mr. Chairman, I'd like to thank you for this 
opportunity to testify.
    [The prepared statement of Philip M. Burns can be found on 
page 99 in the appendix.]
    Chairman Bachus. Thank you.
    Mr. Nielsen.

  STATEMENT OF ROBERT NIELSEN, PRESIDENT, SHELTER PROPERTIES, 
  INC., ON BEHALF OF THE NATIONAL ASSOCIATION OF HOME BUILDERS

    Mr. Nielsen. Chairman Bachus and Members of the 
subcommittee, my name is Bob Nielsen, and I'm President of 
Shelter Properties, Incorporated, a company which builds and 
manages multi-family properties.
    I'm also Chairman of the National Association of Home 
Builders Housing Finance Committee, and past chair of the 
Federal Government Affairs Committee.
    I'm here on behalf of the 203,000 members of the National 
Association of Home Builders to express our views on this 
proposal.
    We oppose the proposal and believe that real estate 
brokerage and property management are inherently in nature, 
anti-competitive, and would adversely effect consumers.
    For these reasons the proposal arguably violates both the 
letter and the spirit of the law.
    First, I'd like to speak to the proposal as it relates to 
financial holding companies and national banks engaging in real 
estate management services.
    The term ``real estate management'' encompasses numerous 
activities. As a property management company owner, we perform 
such functions as preparing and overseeing marketing plans, 
finding tenants, negotiating leases and renewals, developing 
operating and capital budgets, preparing maintenance and repair 
schedules, purchasing equipment, materials, and supplies, 
supervising employees or contractors that perform repair, 
maintenance, and landscaping work, collecting rents, and 
holding security deposits.
    I submit that these functions are intrinsic to the day-to-
day operation of a commercial enterprise. Classification of 
these activities as financial, or incidental to financial 
activity, blurs the line between banking and commerce so as to 
render it non-existent.
    If this proposal is allowed to go forward, it would be 
difficult to predict what activities would not fall under such 
a heading.
    Allowing financial holding companies and national bank 
subsidiaries to engage in real estate management would also 
create an unfair competitive environment for real estate 
management firms not affiliated with banks.
    It would deprive the current participants of their right to 
compete in the marketplace without undue influence by banking 
entities.
    I, as a real estate property manager, must disclose 
proprietary data on rental market conditions and projections, 
business plans, and data on specific properties. This would be 
a sensitive situation for a real estate development firm that 
has a property management unit in that data on both development 
and management operations could be required to support loan 
decisions.
    This information, if shared by the bank with its property 
management affiliate, could give that entity an unfair 
competitive advantage over other firms in the market.
    Also, this proposal would create conflicts of interest when 
banks must make decisions about financing involving companies 
with competing property management operations. Banks may be 
unwilling to provide financial services including loans to 
competitors, or may provide such services at terms that are 
less attractive than those extended to its property management 
affiliate.
    Second, I will address the proposal that would allow bank 
holding companies or national banks to engage in real estate 
brokerage.
    Real estate brokerage involves bringing together parties 
for the purposes of accomplishing a real estate purchase, sale, 
exchange, lease or rental transaction. Again, these activities 
are commercial in nature, not financial.
    Just as with real estate management activities, the 
financial components of real estate brokerage are incidental to 
the commercial elements of the transaction.
    Real estate brokerage activities do not satisfy the test of 
being financial or incidental to financial activity.
    Finally, this proposal would be harmful to consumers. 
Despite the assertion that consumers benefit from one-stop 
shopping, there is a significant risk to consumers who utilize 
brokers affiliated with banks.
    Consumers utilizing these services might not have access to 
independent sources of information that they would have if they 
used an independent real estate broker.
    Also, a consumer could reasonably fear that they might not 
be approved for financing of a real estate purchase if they do 
not use the brokerage and other services of the affiliates of 
the banking organization.
    Again, we believe that going forward with this proposal 
would be inconsistent with the congressional intent in passing 
Gramm-Leach-Bliley.
    We are grateful you have had this hearing today and 
listened to our views. We hope that the subcommittee can 
utilize its oversight authority to reaffirm its commitment to 
maintain the separation of banking and commerce.
    Thank you very much.
    [The prepared statement of Robert Nielsen can be found on 
page 121 in the appendix.]
    Chairman Bachus. Mr. Torres.

STATEMENT OF FRANK TORRES, LEGISLATIVE COUNSEL, CONSUMERS UNION

    Mr. Torres. Chairman Bachus, Members of the subcommittee, 
Consumers Union appreciates the opportunity to be here today. 
I've got realtors to the left and bankers to my right, and 
maybe I'm stuck in the middle with some of you on some of the 
issues that are related to the proposed rule.
    Chairman Bachus. You also have an auctioneer there.
    Mr. Torres. That's right, but that kind of skews the 
perspective then perhaps a little.
    I do want to raise three points about the proposed rule 
today.
    First, we believe that it's questionable if this type of 
activity is permissible under Gramm-Leach-Bliley.
    Second, the existing marketplace might not be perfect for 
consumers, but allowing banks in won't necessarily change 
things or automatically provide benefits for consumers.
    Third, if banks are allowed to be real estate agents, then 
there need to be safeguards like those Congress included in the 
Gramm-Leach-Bliley Act for the retail sales of insurance by 
financial institutions.
    I guess the threshold question here is whether Congress 
intended that banks be allowed to engage in this type of 
activity when it passed the Financial Modernization Law.
    Many Members, including some today on this subcommittee, 
have said, no.
    During the financial modernization debate, much concern was 
raised about the mixing of banking and commerce. Consumers 
Union, at that time, testified that ``We opposed permitting 
federally-insured institutions to combine with commercial 
interests because of the potential to skew the availability of 
credit, conflict of interest issues, and general safety and 
soundness concerns from expanding the safety net provided by 
the Government.''
    You let the banks get a toe in now, as Congressman Bentsen 
said, or perhaps someone else, they'll keep on coming back to 
the well. The next thing you know, they've plunged in and 
they're swimming across the Atlantic and the taxpayer gets to 
pay for the rescue mission when something goes wrong.
    What can a consumer expect if banks are allowed to engage 
in real estate activities? We've heard a lot about benefits. 
Are we going to see cuts in commissions? Are we going to see 
lowered costs, perhaps reduced fees? No selling of junk 
products and the protecting of my personal information?
    The banks' track records make us a little skeptical. Banks 
are still charging consumers a lot of fees for their bank 
accounts, unless of course you maintain a large balance, which 
many consumers don't.
    Banks continue to oppose life line banking accounts. Will 
they also shut out lower income people if they are allowed to 
participate in the real estate marketplace?
    Some banks are partnering with payday lenders that charge 
consumers in excess of 300 percent for loans. And they use 
existing national banking laws to avoid having to comply with 
State consumer protections.
    ATM fees have quadrupled. Credit card practices are out of 
hand and consumers continue to get hit with fees upon fees. 
Fannie Mae and Freddie Mac have both estimated that many 
consumers in the sub-prime market, where banks are 
participating more and more, can actually qualify for better 
loans.
    So to the extent that banks are already participating in 
the marketplace, through offering mortgage and home equity 
loans, some of their practices leave a lot to be desired.
    And what incentive will the banker's agent have to refer a 
customer to a better product that another institution may 
offer?
    And we're really skeptical about the value of one-stop 
shopping for consumers, especially those who don't have a lot 
of money.
    The financial services industry has opposed virtually every 
effort to improve the financial services marketplace for 
consumers, including attempts to curb predatory lending at both 
the Federal and State level.
    Financial institutions have opposed changes to regulations 
protecting consumers who take high cost loans, and even 
expanding some disclosure laws that the Federal Reserve Board 
has proposed.
    It's ironic that the institutions who claim they want to 
get into this marketplace more oppose efforts to keep people in 
their homes by avoiding foreclosure and other problems that 
they have with predatory loans.
    Predatory lending absolutely needs to be addressed as part 
of this discussion, because it gives all of us an idea of what 
to expect from some of these financial institutions.
    We would say clean up your act first before we even begin 
this discussion of allowing banks into the marketplace.
    When confronted, some lenders say that they will restrict 
credit or even leave the marketplace altogether. Lenders made 
that argument in North Carolina, and North Carolina passed the 
Predatory Lending Law anyway, and it hasn't affected lending in 
that State.
    Now Congress included some very good consumer protections 
on the retail sales of insurance products by financial 
institutions. Similar protections are needed if banks are 
allowed to engage in real estate activities.
    In addition, Congresswoman Roukema brought up the fact that 
we might be discussing, at some point this year, reforming the 
Real Estate Settlement Procedures Act and the Truth In Lending 
Act.
    We think it is very vital that consumers have the 
information that they need so they can shop for loans.
    Perhaps what we need to be talking about is some sort of 
real estate consumer bill of rights that would affect anybody 
participating in this marketplace. Perhaps have suitability 
standards when it comes to lending.
    And if Congress really wants to examine how to benefit 
consumers, we should be talking about some of those issues 
during this discussion.
    Simply allowing banks into the marketplace won't be the 
solution to a lot of the problems that consumers have today.
    Thank you.
    [The prepared statement of Frank Torres can be found on 
page 126 in the appendix.]
    Chairman Bachus. Mr. Roebuck.

 STATEMENT OF JOHN ROEBUCK, CAI, AARE, CHAIRMAN OF THE BOARD, 
                NATIONAL AUCTIONEERS ASSOCIATION

    Mr. Roebuck. Yes. Chairman Bachus, Members of the 
subcommittee, I am John Roebuck, Chairman of the Board of the 
National Auctioneers Association, and President of John Roebuck 
& Association of Memphis, Tennessee.
    I'm accompanied today by NAA's legislative consultant, 
Curtis Prins, who is a former director of this subcommittee, 
and who is well known by many of you.
    The National Auctioneers Association is strongly opposed to 
the regulation issued by the Federal Reserve System and the 
Treasury Department, that would allow banks to engage into the 
real estate brokerage business.
    To illustrate NAA's strong, deep concern about the 
proposal, I should point out that, to my knowledge, this is the 
first time ever that my trade association has ever testified 
before Congress.
    We have not been here before because we believe that we 
should not testify unless it's something of a life-threatening 
nature to our industry.
    The proposed regulation will most assuredly cripple, if not 
kill, the real estate auction business as far as companies such 
as mine.
    Today, many of the NAA's auctioneers, 6,000 members plus or 
minus, conduct not only real estate auctions, but also operate 
traditional real estate brokerage business. All of our members 
are small businesses in the true meaning of the word.
    In our business, we face competition from other auction 
firms and real estate companies. The competition that we face, 
however, comes from companies that do not have an unfair 
competitive edge. However, if the regulation goes into effect, 
our industry will be faced with a whole new area of competition 
from banks who will clearly hold an unfair competitive 
advantage.
    Banks have access to customers' deposits and cheap loans 
from the Federal Government and from other banks. Real Estate 
auction companies, such as mine, do not. Banks have access to 
financial information and customer lists that they used for 
marketing purposes. Real estate auction companies don't. Banks 
have the ability to attract customers with a variety of 
financial incentives; real estate auction companies don't.
    While I could list numerous reasons why banks will have an 
unfair advantage in competing with the real estate brokerage 
business, including auctions, I want to spend my remaining time 
trying to understand how the Federal Reserve and Treasury were 
able to put forth such a regulation.
    I'm just a small businessman from Memphis, Tennessee, and 
like the rest of the 6,000-plus members of the NAA, I'm 
confused by the process that led to the real estate regulation.
    I have great faith in the Members of Congress. They are 
elected by the people of their districts and States. They are 
accessible, concerned about their constituents' views and 
willing to listen.
    On the other hand, Government agencies are not made up of a 
single elected person, have narrow, if any, constituencies, and 
are hardly accessible. Certainly, the Fed and Treasury have 
asked for written comments about the proposed regulation, but 
that does not allow groups, such as NAA, to truly express their 
concerns.
    Perhaps the most significant question surrounding this 
whole issue is this. If Congress wanted banks to engage in real 
estate activities, why didn't it grant those powers clearly and 
unmistakably? Surely, if Congress intended banks to have such 
powers, there would be no need for this hearing today. There 
would be a clear record of Congress granting real estate powers 
to banks and probably even a recorded vote.
    I ask this question of the two agencies: How many Members 
of Congress have sent comment letters saying that Congress, in 
passing the Gramm-Leach-Bliley, clearly intended banks to have 
real estate brokerage power. On the other hand, Congress has 
voted several times against allowing banks into the real estate 
brokerage business.
    Congress passed the Glass-Steagall Act in 1933, some 68 
years ago. If it took that long for Congress to decide what 
businesses banks should be in, is it logical that Congress 
would take just over a year to hand over the authority to make 
legislative banking powers decisions to two unelected agencies?
    Mr. Chairman, I applaud you and other Members of this 
subcommittee who have written to the two agencies to question 
their actions. In your letter, you state ``far-reaching and 
controversial financial policies should be determined through 
legislation, not through regulation.'' Those 14 words are the 
clearest testimony that will be heard at this hearing.
    One of the tenets of President Bush's Administration is to 
return Government to the people. I truly hope that happens. But 
when the people see Government agencies legislate against a 
large segment of the people, then we must question if such a 
return is possible.
    This regulation is not just to decide banking powers. It is 
far more than that. If this regulation is finalized, it will 
mean that Congress has given up two basic powers to legislate 
in the area of banking.
    I ask you, is this what you want?
    Thank you very much.
    [The prepared statement of John Roebuck can be found on 
page 134 in the appendix.]
    Chairman Bachus. Thank you, Mr. Roebuck.
    Mr. Parsons.

STATEMENT OF RICHARD J. PARSONS, EXECUTIVE VICE PRESIDENT, BANK 
                OF AMERICA CORP., ON BEHALF OF 
                 FINANCIAL SERVICES ROUNDTABLE

    Mr. Parsons. Good afternoon, Chairman Bachus, Members of 
the subcommittee.
    I'm Rick Parsons, an Executive Vice President at Bank of 
America. I am testifying on behalf of the Financial Services 
Roundtable.
    The Roundtable is a national association representing 100 
of the largest financial companies in the U.S. We are made up 
of 64 different banks and thrifts and a number of different 
insurance companies, as well as security firms and other 
diversified financial services companies.
    The Roundtable appreciates the opportunity to discuss the 
proposal to permit financial holding companies and national 
banks to engage in real estate brokerage.
    The Roundtable strongly supports adoption of the regulation 
for three reasons.
    First, permitting holding companies to engage in real 
estate brokerage is good for consumers.
    Second, it is good for the financial industry.
    Third, brokerage is a financial activity consistent with 
the Gramm-Leach-Bliley Act.
    We believe that the consumers will be the real winners if 
this regulation is adopted. The rule will increase competition 
in the brokerage industry. More competition means more consumer 
choice, can mean lower prices and better service.
    The adoption of the rule is necessary to meet demand for 
one-stop shopping for homebuying services.
    A study conducted on behalf of the National Association of 
Realtors indicates that three out of four homebuyers say that 
getting all or some of their homebuying services through one 
company is appealing.
    The NAR study concludes that 77 percent would consider 
using a bank for those one-stop shopping services in future 
transactions.
    The regulation enhances consumer privacy for brokerage 
customers. Customers of holding companies are entitled today to 
the Act's far reaching privacy protections and customers of 
real estate brokers currently have no Federal privacy 
protections.
    If adopted, the regulation will afford brokerage customers 
the same Federal privacy protections now afforded to bank 
customers.
    Now with regard to the threat of tying, existing banking 
laws, such as the Federal Reserve Act, and the Anti-Tying 
Statutes, are more than adequate to preclude these types of 
practices.
    Because of these laws, a brokerage customer of a holding 
company will enjoy greater protection than a brokerage customer 
of a less regulated competitor.
    Second, adoption of the regulation is prudent for the 
financial industry. Traditional real estate brokers are now 
competing with financial companies by offering financial 
services, such as loans and insurance.
    According to the 1999 NAR profile of its real estate 
members, 56 percent of its members with more than 50 agents are 
involved in mortgage lending. Federal thrifts and credit unions 
as well as State chartered banks in 26 States are now permitted 
to act as real estate brokers.
    Yet, the only financial institutions that are uniformly not 
allowed to engage in brokerage are holding companies and 
national banks.
    A broker is an intermediary in a financial transaction. 
Banks and holding companies are permitted to conduct similar 
agency activities, including travel, securities, and insurance 
brokerage.
    Real estate brokerage poses little risk to the banking 
system.
    Finally, the Act permits the Fed to define certain 
activities as financial in nature, including the, 
``transferring for others, financial assets other than money or 
securities.''
    The Roundtable believes that real estate brokerage is 
exactly that type of activity. Real estate is the largest asset 
owned by most Americans. For many, real estate is the most 
significant source of wealth. Real estate is conferred special 
status under tax laws reflecting our Nation's recognition of 
real estate as a storehouse of consumer net worth.
    For these reasons, we believe that real estate is a 
financial asset, and that brokerage is financial in nature. In 
determining whether an activity is financial in nature, 
Congress mandated that the Fed considered changes in the 
marketplace as well as the ability of financial holding 
companies to compete effectively with any company seeking to 
provide financial services in the U.S. This will provide 
parity.
    We support the regulation, and believe that its adoption 
would be a winning proposition for consumers. The regulation 
will benefit consumers by enabling increased competition, more 
choice, and lower prices.
    Thank you. I will gladly respond to any questions.
    [The prepared statement of Richard J. Parsons can be found 
on page 136 in the appendix.]
    Chairman Bachus. Thank you, Mr. Parsons.
    My first question, and I'll ask this to Mr. Burns and Mr. 
Parsons.
    Mr. Parsons, you mention brokerage is a financial activity. 
Would you gentlemen give me the distinction between a financial 
brokerage and a commercial brokerage?
    What is the distinction?
    Mr. Burns.
    Mr. Burns. Mr. Chairman, there's been a lot of discussion 
about----
    Chairman Bachus. If you will pull the mikes up----
    Mr. Burns:----Financial activities and commercial 
activities. And I think sometimes there is a definite line and 
the issue is black and white.
    Unfortunately, as in many cases in life, I think there is a 
grey area here. There are some types of transactions that have 
some of the characteristics of financial transactions and 
probably some characteristics of a commercial transaction.
    Chairman Bachus. Yes. I guess what I'm saying is we talk 
about financial brokerages and commercial brokerages. Now, are 
you familiar with those terms?
    Mr. Burns. No, I don't think that I am. I'm sorry.
    Chairman Bachus. Mr. Parsons.
    Mr. Parsons. Let me take a shot at that.
    It's the issue, I think, of our contention that this 
transaction is financial in nature, and I think that's the 
heart of the question that the Fed and Treasury are dealing 
with.
    The contention I think that we have is that this 
transaction involving a home is putting us, as an industry, the 
Roundtable members, as agents, as opposed to principals. Agents 
in that we are an intermediary in a financial transaction. We 
don't own the real estate.
    Chairman Bachus. Oh, I understand that. That's true of all 
brokerages. I mean a brokerage brokers and, you know, a 
financial brokerage, my understanding is it brokers paper, it 
brokers intangible as opposed to a tangible----
    Mr. Parsons. And commodities.
    Chairman Bachus: ----And a commercial broker brokers 
property, you know, whether it be an airplane or an automobile 
or a home.
    I mean, if you say that selling, brokering a home is a 
financial transaction, you would say that about an automobile 
too, wouldn't you?
    Now I'm not talking about owning a dealership; I'm talking 
about you could--that's a different matter--there's a 
distinction between owning an automobile, as an automobile 
dealer does, but what about a bank brokering automobiles 
between say the manufacturer and the public?
    Or brokering fine art, or brokering anything? I mean, if we 
allow commercial brokerage, it would have to be on everything, 
wouldn't it?
    Mr. Parsons. Let me go back to something I said in my 
testimony, Mr. Chairman.
    I noted that the financial asset of a home is conferred 
special tax status. I think at least, you know, in our Tax 
Code, there's an indication that there is something different 
between this asset, which is such an important source of net 
worth for most of us, than the other examples that you just 
alluded to.
    And I don't know if that distinction helps, but I think 
that's the one that draws out, in particular, the nature of a 
financial.
    Chairman Bachus. Let's say that you were being allowed to 
broker a home or broker another item. What if you had--what if, 
Mr. Burns, you were a real estate broker for a piece of 
property that you held the mortgage for, and the mortgage was 
in default?
    You'd list the property for sale, but you're also the 
banker, and you have the mortgage, you're holding the mortgage 
on that home, and the mortgage is in default.
    Would your interests be in getting the best value, or would 
it be in paying off the mortgage or seeing that the mortgage 
wasn't in default.
    I mean, do you see a conflict there?
    Or what if that mortgage went into default on a piece of 
property, would you list property that you held a mortgage on?
    Mr. Burns. No, I wouldn't necessarily assume that there is 
a conflict there. Depending on the size of the mortgage and the 
value of the property, it could well be that we need to get 
every penny out of that property that we can.
    Chairman Bachus. Right.
    Mr. Burns. I do know that there are real estate laws that 
regulate when a broker typically is hired by the seller of the 
property to market the property. And there's an agency 
relationship created there, and it's covered by State laws that 
apply to real estate agents.
    And I think actually that it's covered in the real estate 
brokerage laws. And banks, if they are allowed to be brokers, 
will in fact be subject to all of those State laws and 
regulations that brokers are now. I think that's an important 
point.
    Chairman Bachus. I agree.
    Let me ask the realtors a question. We talked about 
competition, and Mr. Mendenhall, I'll ask you this, competition 
in the marketplace.
    In my home town there are four gas stations on the corner; 
Texaco, Exxon, Amoco, and Philips. Is there competition?
    Mr. Mendenhall. In my marketplace, I can tell you that 
there is.
    Chairman Bachus. What if they are all $1.39 a gallon?
    Mr. Mendenhall. There is not going to be competition at 
that kind of level, but I do want to speak to the issue of 
competition.
    I think the purpose, which we all talk about----
    Chairman Bachus. Let me address that. I mean, if you have 
four gas stations on a corner, they're all selling gas for the 
same price, is that competition?
    Mr. Mendenhall. Yes, it's competition in my mind.
    Chairman Bachus. Even if they're all selling it for the 
same price, they all go up the same? You know, we've all seen 
that.
    Is the 6 percent commission, which is standard in the 
industry, at least in Alabama, I mean is that competition?
    Mr. Mendenhall. Well, first of all, I would say that I 
don't know what--I can't speak for Alabama, but I can speak for 
my own State, and tell you that real estate commissions are 
highly competitive.
    That in fact, in my own firm in the last 3 years, our real 
estate commission has dropped by 20 percent.
    And then I go to the testimony that was given by the person 
for the consumer. Credit card fees for banks have gone up in 1 
year by 7.7 percent, penalty fees by 23.1 percent, and cash 
advance fees by 36.7 percent.
    So when somebody argues that they're going to get more 
market share, and that's going to make it more competitive, I 
just don't see that.
    Right now, the financial holding companies have 44 percent 
of all the loan originations in the country.
    I have a mortgage company in my real estate firm. I'm not 
trying to say that one-stop-shop is not fair. What we were 
trying to say, on behalf of the National Association of 
Realtors, is that if you're going to have it, make sure it's 
fair.
    And that the people who are going to get into our business 
don't enjoy, don't have advantages that we can't also have. It 
is significant that they can borrow money cheaper that we can 
borrow it to run a real estate firm.
    So in effect, even if you had, in your example, the four 
gas stations of everybody selling at the same price, if they 
can run their business at less cost than I can because of their 
borrowing power, they have a significant advantage of that. And 
I think that's very important.
    Chairman Bachus. With the number of Members we've got, what 
we may do is just expand the questioning to about 8 or 10 
minutes.
    Mr. Watt.
    Mr. Watt. Thank you, Mr. Chairman.
    I want to express my thanks to this panel of witnesses who 
I think all have enlightened us in various ways, and extend a 
special greeting to Mr. Parsons who comes from my hometown and, 
works for one of the institutions that is based in my 
congressional district.
    I come away from this hearing troubled at some level, I 
guess. And I think I want to address my first line of questions 
to Mr. Mendenhall.
    Mr. Hammond, earlier today, testified that there were two 
rationales under which the regulators found that there was a 
threshold high enough to promulgate this proposed regulation.
    One of those I think you can't do anything about is that 
some States allow banks to be real estate brokers. I guess you 
don't have any control over that.
    But the second one is pretty well illustrated by a comment 
that you just made and by this Long & Foster ad over here, 
which is that realtors are in direct competition with financial 
services businesses.
    And I guess I know this. To some extent, I knew it at some 
level, because when I came to Washington, Long & Foster was my 
real estate company, and they arranged the loan, and they 
arranged the title insurance.
    But it's kind of striking to see that in an ad which says 
``Long & Foster, more than a great real estate company, we're 
also a great mortgage, title, and insurance company too.'' 
That's in the headline.
    I guess I wasn't completely aware that that was going on. 
Is that, in fact--I mean, if there is a rational basis for the 
regulators doing this, it seems to me that that might be a 
compelling rationale, and that does seem to be sanctioned 
because there's something in the statute that talks about 
competition.
    Are realtors regularly getting into the business now of 
mortgage, providing mortgages. This says ``Prosperity Mortgage 
Company'' is Long & Foster's company.
    Are you regularly getting into the business of providing 
title insurance. This says ``Midstate Title Insurance Agency, 
Inc.'' is a Long & Foster company.
    Are you regularly getting into the business of providing 
insurance. This says ``Long & Foster Insurance Agency, Inc.'' 
is the insurance provider.
    Is this something that's happening?
    Mr. Mendenhall. The answer to that is yes, real estate 
firms are doing one-stop-shopping. But I want to emphasize that 
that is commerce versus commerce, not banking versus commerce.
    Mr. Watt. So this Prosperity Mortgage Company is not really 
a mortgage company of Long & Foster then? They're not making 
loans?
    Mr. Mendenhall. They are making loans.
    Mr. Watt. Well how is that not financial?
    Mr. Mendenhall. I'm not saying that that's not financial. 
What I'm trying to say is that when that mortgage company makes 
loans, they're not a bank; they don't accept deposits, they 
don't have the ability to do a financial transaction other 
than--in fact, in my company, which I can speak to the 
closely--half the loans we make we sell to the local bank.
    Mr. Watt. All right, let me go to the other end.
    Mr. Parsons, I won't exempt him just because he's my 
neighbor.
    This ad points up an interesting and troubling aspect from 
the other end. Let's assume that banks are allowed to get into 
the real estate business.
    Would it be appropriate for Bank of America, for example, 
to have an ad like this, which says, ``I can be your lender, I 
can be your mortgage company, I can be your realtor, I can be 
your insurance company, I can be your title insurance 
company.'' I don't think we allow you to do that in North 
Carolina--but, you know, would that be appropriate?
    And the second step in that is, how close does that come 
really, what's the distinction really between providing a 
convenience and providing a tie?
    I know there's a legal distinction, but in the consumer's 
mind--and maybe we can get Mr. Torres to comment on this too--
in the consumer's mind, can a consumer really distinguish, when 
he's in a hurry, trying to get a real estate transaction 
closed, moving, on the move, got nine million other things, how 
do we distinguish between what is a convenience and what is 
really a tie when an ad like this is what we're responding to.
    Mr. Parsons. Two questions. Let me take the first one.
    And I think as you would expect, Mr. Watt, I would say, 
yes, Bank of America and all the members of the Roundtable 
should be entitled to have the same opportunity as the company 
mentioned, you know, in your comment, to be able to talk about 
convenience, one-stop shopping.
    To your second question, specifically that that fine line 
perhaps between the tying and the real element of choice for 
the consumer, I really think there are several distinctions 
there, not the least of which are clearcut laws that are in 
place today around anti-tying.
    And I think second, is----
    Mr. Watt. Are realtors subject to those same laws?
    Mr. Parsons. No, they are not.
    Mr. Watt. So if Long & Foster's mortgage insurance company 
mortgage company wanted to direct me there, Long & Foster could 
direct me there?
    Mr. Parsons. I'm not sure I understand your question.
    Mr. Watt. If Long & Foster's agency wanted to direct me to 
Prosperity Mortgage Company, Long & Foster Mortgage Company, 
would they have the legal authority to do that?
    Mr. Parsons. Well, I'm not a lawyer so I'm not sure that I 
could answer that specific question. I'd be happy to get some 
advice on that one.
    Mr. Watt. Mr. Torres will tell us quickly here.
    Mr. Torres. It's hard for consumers to comparison shop. And 
one thing in today's marketplace, and it's not going to get any 
easier if this idea of one-stop-shopping, you know, perhaps 
evolves in a way that consumers really aren't benefiting.
    How do you shop for a mortgage today if you want to shop 
for the interest rate, because it always changes. You can't fix 
it unless you plunk down a lot of money to make it stable so 
that you can go to Bank of America and say, ``Hey, I'm getting 
a 6 percent loan from Long & Foster, can you beat that?''
    The marketplace isn't set up that way today, so it's very 
difficult for consumers.
    Mr. Watt. But people are at least attuned to shopping for 
interest rates. I don't know that there's anybody that's really 
attuned to shopping for a title insurance company.
    The premiums are essentially the same, going back to the 
Chairman's question, is competition, competition, competition. 
If the price is the same for a title insurance policy, 
regardless of whether you get it in the bank or get it at the 
real estate company, aren't you always going to get it from the 
place that's most convenient, and isn't that always the first 
person to grab a hold on you and that might be the realtor, it 
might be the lender.
    In some cases, because I've gone and tried to--my 
experience is that it was seldom the lawyer, the lawyer got 
kind of, you know, cut out of the equation, although every once 
in a while, my clients would insist that a lender use the 
lawyer that he wanted to use, rather than the lawyer that the 
bank wanted to send him to.
    I mean, there's a lot of implicit tying going on in here 
that I'm troubled about, I would have to say from the realtor 
perspective and from the lender perspective. And I'm even more 
troubled--I guess that's why I'm troubled at the end of this 
hearing--because I'm not sure I realized that realtors were 
doing all this, or at least had the legal capacity to do it 
all, and were permitted to do it all.
    But I'm not sure that I would consider that necessarily a 
compelling rationale, just because somebody else is doing 
something that I don't like, to say OK, somebody else in the 
industry ought to be able to do something I'm not going to like 
either. As my mom used to say, ``Two wrongs have never made a 
right'' in my opinion.
    But this is a difficult area. And I'm going to wrap up, Mr. 
Chairman. I know I'm over my time.
    I just, I'm troubled by this ad, and I'd be even more 
troubled, I'd have to say, if a bank were able to do the same 
ad, because I really do not think that consumers really are in 
a position to go through in this process, in a real estate 
process. I know how complicated they are. That's why I've 
always thought all this RESPA stuff was heavy-handed, because 
even after you get it, nobody understands it.
    The lawyers don't even understand it, you know.
    But I don't think people are going to go through and shop 
for any of this stuff. The first person that gets ahold of 
them, is going to have a captive audience.
    That's basically what we are creating here I think.
    Mr. Burns is anxious to respond to me.
    Mr. Burns. Well, personally in response to your initial 
question, Congressman, and it's an excellent one. Actually, 
under the Real Estate Settlement Procedures Act, it requires 
any mortgage lender, whether they are affiliated with a realtor 
or with a bank, that if we have an affiliation with somebody 
where we're providing the property insurance on the property or 
title insurance, that has to be disclosed.
    It has to be disclosed on a separate piece of paper and 
acknowledged by the customers, so customers are made aware of 
that.
    Mr. Watt. But you know, Mr. Burns, let me be clear. That's 
going to take place in a lawyer's office after the whole 
transaction has been approved and you had a closing, and the 
lawyer's going to stick a piece of paper under your nose and 
say, ``Sign it.''
    You know, I like to tell this story, and I'm going to quit, 
Mr. Chairman. It was only one real estate closing that I ever 
had where anybody ever got up and walked out of it. And they 
came back the next week. That's when we actually disclosed the 
annual percentage rate and the wife looked at the husband and 
said, ``I'm not signing this.''
    And he begged her for an hour in the middle of the closing, 
``Please sign the documents, honey.'' And then next week, I 
guess, I don't know what he did for her over the weekend, maybe 
he gave her some flowers or something, but nobody's going to 
walk away from a closing at that point. It's just not going to 
happen.
    So I mean, I hear what you're saying, but I've been there 
and I've done this. And I know it just is not going to happen. 
Nobody's walking away from a closing because all of a sudden 
they realize--I wouldn't have walked away from the closing, if 
I realized that Prosperity Mortgage, I don't know whether that 
was the company they were using, was affiliated with Long & 
Foster. I thought I had a reasonable rate, you know.
    But the first person who got a hold on me in Washington 
happened to be a Long & Foster agent. They were in control of 
that transaction, and I'm a Member of Congress. Now, imagine, 
and I've done this for 22 years, leading up to this.
    Now imagine somebody who has never been involved in the 
real estate business, a regular consumer, so to speak, and 
you've multiplied my confusion times one hundred, I guess.
    But maybe we can't solve all of these problems.
    Chairman Bachus. You owe me about 10 minutes.
    [Laughter.]
    Chairman Bachus. Thank you, Mr. Watt.
    Mr. Bentsen.
    Mr. Bentsen. Thank you. Actually I think he owes me about 
10 minutes.
    First of all, I think the answer to the second question, 
Mr. Parsons, would be price. And I think Mr. Torres that at 
least for some sectors of the public, there is greater 
transparency.
    But I would agree that for other sectors, particularly 
lower income sectors, the transparency has not existed where 
there is sufficient competition.
    But I want to go back to the Long & Foster example that is 
given, and I think we need to clarify some points.
    There's nothing under the law, prior to or since the 
passage I think, of Gramm-Leach-Bliley, that would preclude a 
separate company, a non-banking company from engaging in 
mortgage banking, or establishing a mortgage finance company, 
or any other type of finance company.
    And it is a little unrealistic I think to compare Long & 
Foster or some other company to a financial institution, 
primarily because Long & Foster, to my knowledge, does not have 
access to the discount window, it doesn't have access to the 
Federal Home Loan Bank system.
    Their mortgage company does have access to the other GSEs, 
Fannie and Freddie, but so to the banks and thrifts through 
their mortgage banking operation.
    So there is I think that distinct difference.
    The other thing, and I don't know the answer to this, but I 
think it is unlikely that these mortgage finance companies are 
taking down the loans for their own account. And quite frankly, 
I don't think the banks are taking too many loans down for 
their own account either, maybe more so now than they have in 
the past, but most of these are going into the secondary market 
and into some form of mortgage-backed securities.
    So I think we need to be certain that there are those 
differences.
    The question I want to get to, and why I stuck around, 
because I kind of figured out what everybody was going to say 
beforehand, is what Mr. Parsons brought up, and I would like 
you to expand on this.
    You did actually as I was writing down the question, you 
started to talk about it in your testimony. And I think the two 
issues at play here, and I'm only going to ask you about one of 
them, what was our intent, and I'm sure you can find varying 
opinions with respect to that.
    The second issue, I think, is whether or not the regulators 
would have authority to expand the powers as such under the 
Gramm-Leach-Bliley for financial holding companies, that was 
otherwise expanded by legislation for thrifts under the Thrift 
Charter. And I'm sure there are varying opinions on that, and 
we won't resolve that issue; somebody else will across the 
street.
    But the third issue, which I think we may or may not 
address, but if not us, the nine people across the street may 
address ultimately is whether or not real estate is a financial 
asset under the law.
    I'm not sure, based upon what you said, that you really 
fleshed it out enough for my interpretation, and I would add to 
that, and this sort of goes back to what my colleague, Mr. 
Watt, was saying about when he came to Washington, and goes to 
the realtor and they say, ``Oh, you can finance, you can get 
your mortgage us through us here and this through this here.''
    I mean, I went to buy a car the other day, and like every 
time I've bought a car, when you sit down to sign, to close the 
deal, they say ``How are you paying for this, and are you going 
to finance this, or are you paying cash?''
    Did you know we have some really good financing options 
that are available through, I won't say which company, because 
I don't want it to appear that I have some preference for one 
car versus the other or some car company because of our 
esteemed position here. But the fact is that I'm not sure that 
automobiles are, in and of themselves, a financial product.
    Automobile finance is a financial product, but automobiles 
are not. And I'm not sure that that same line of thought does 
not follow through to a piece of real estate.
    And while real estate, like other assets, can be used as a 
pledge, I'm not sure that it's necessarily considered legal 
tender, I'm not sure that it's necessarily considered the type 
of liquid asset that is easily tradeable, and so I'm curious in 
more detail where you believe it actually would be defined as a 
financial asset.
    Mr. Parsons. Thank you. A couple of thoughts on that one.
    You made a good point about real estate being used as a 
pledge, and I think that is an element of at least part of that 
discussion.
    And to expand on this notion of financial in nature, there 
are some related comments that are part of this existing Act, 
and that is such words as ``complementary'' or ``incidental'' 
to activities that are financial in nature.
    And to expand on that a little bit, if you look at the kind 
of activities that Gramm-Leach-Bliley allow banks and financial 
holding companies to currently do today, you have a role of 
finding that we can play; appraisal, title insurance, property 
and casualty insurance, loan brokerage, lending, closing, and 
escrow.
    And I think, you know, as you said earlier, that maybe this 
is one that will be, you know, debated in other forums as well.
    But in our review of this, what I think we conclude is that 
these activities collectively plus the fact that it is an asset 
that is so important and is probably the most important one to 
most Americans, collectively convert that into being a 
financial asset, at least part of this discussion.
    Mr. Bentsen. The only thing I would say is, I'm not sure, I 
mean, escrow, closing, any of those, those are complimentary to 
any financial transaction and involve the movement of cash or 
other fungible assets like that.
    But that is true whether it's involving real estate, 
residential or commercial real estate, whether it is involving 
some other asset, whether it is involving a merger or an 
acquisition.
    So I am not sure that they are on equal footing.
    Insurance, and believe me, I've got the scars from going 
through the insurance battles here, and I do think that 
insurance, in general, is a financial asset. I think that was 
well-proven.
    But again, I'm not sure, I mean, is jewelry a financial 
asset? Because jewelry can be used as a pledge.
    Somebody brought up fine art, and I know one of the 
institutions some years back tried to create a fine art index. 
It didn't work very well; it got caught in the bubble of the 
1980s.
    But is fine art a financial asset or not? It certainly has 
value and has been used, in some cases, for a pledge.
    So I think, and I won't push you on this, but I do think 
that's a burden that you all have to overcome and I'm not sure 
the case has been made there.
    Mr. Parsons. At the risk of repeating what I said to 
Chairman Bachus, there is one other distinction, and that is 
the treatment under the tax laws. And I think that does raise, 
you know, another element of question as to what that means in 
this discussion.
    Mr. Bentsen. Well, some of the economists tell us that the 
treatment of the tax laws is built as an incentive to enhance 
homeownership, and again, I guess you can look both ways. We 
also have tax incentives for people to save. We're debating a 
bill to enhance those tax incentives for people to save right 
now.
    But again, I'm not sure that the nexus is there.
    Thank you, Mr. Chairman.
    Chairman Bachus. Thank you. There are no other questions?
    I appreciate your attendance.
    Let me say this. The one thing that I would say to the 
realtors that I do consider that you may be walking uphill, and 
the reason for that is competition, you know, to understand 
America is to understand competition.
    I think we have a free market philosophy. Competition is 
what normally, most effectively at the cheapest cost, delivers 
goods and services to the American people.
    I think we've found, through all our experiences, that 
competition normally is a good deal for the consumer, for the 
American public.
    I think the question here is, is it unfair competition.
    Mr. Mendenhall. Exactly.
    Chairman Bachus. I will tell you that the other problem is 
you do have--you've got Long & Foster, you've got Century 21, 
you've got Federal Thrift, you've got Federal Savings & Loan, 
and you have State chartered banks in I don't know, maybe it's 
four States, getting into the market.
    It is unfair to allow everyone but the banks into this 
market and allow other financial institutions into the market. 
And we are moving in that direction.
    If there's anything that the Fed can say, they can say that 
the marketplace is moving in that direction.
    I think, from your standpoint, you're going to have to find 
where it is unfair, it is bad for the consumers, and I think 
that ought to be where your focus is.
    Because it is a brokerage, as opposed to an ownership, I am 
not sure that you even believe it is going to threaten the 
banking institutions, because if they get in the business and 
they do not make a profit, they will be out of the business. 
So, you know, I think we almost assume that they will be 
profitable. If they are not, they will either take themselves 
out of the business or the regulators will take them out.
    Now we have all heard all of this about Japan, but in 
Japan, it was unwise banking practices, just as well as getting 
involved in commerce. It is an over-simplification to say they 
got involved in commerce and that is what pulled them down. 
They did a lot of things that they would not be permitted to do 
here under our banking laws.
    This concludes our hearing. Thank you.
    [Whereupon, at 1:03 p.m., the hearing was adjourned.]

                            A P P E N D I X

                              May 2, 2001

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