U.S. GOVERNMENT PRINTING OFFICE

72–396 PS WASHINGTON : 2001

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

(

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: (202) 512–1800 Fax: (202) 512–2550

Mail: Stop SSOP, Washington DC 20402–0001
(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa

MARGE ROUKEMA, New Jersey, Vice Chair

DOUG BEREUTER, Nebraska

RICHARD H. BAKER, Louisiana

SPENCER BACHUS, Alabama

MICHAEL N. CASTLE, Delaware

PETER T. KING, New York

EDWARD R. ROYCE, California

FRANK D. LUCAS, Oklahoma

ROBERT W. NEY, Ohio

BOB BARR, Georgia

SUE W. KELLY, New York

RON PAUL, Texas

PAUL E. GILLMOR, Ohio

CHRISTOPHER COX, California

DAVE WELDON, Florida

JIM RYUN, Kansas

BOB RILEY, Alabama

STEVEN C. LATOURETTE, Ohio

DONALD A. MANZULLO, Illinois

WALTER B. JONES, North Carolina

DOUG OSE, California

JUDY BIGGERT, Illinois

MARK GREEN, Wisconsin

PATRICK J. TOOMEY, Pennsylvania

CHRISTOPHER SHAYS, Connecticut

JOHN B. SHADEGG, Arizona

VITO FOSSELLA, New York

GARY G. MILLER, California

ERIC CANTOR, Virginia

FELIX J. GRUCCI, JR., New York

MELISSA A. HART, Pennsylvania

SHELLEY MOORE CAPITO, West Virginia

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

PATRICK J. TIBERI, Ohio

JOHN J. LAFALCE, New York

BARNEY FRANK, Massachusetts

PAUL E. KANJORSKI, Pennsylvania

MAXINE WATERS, California

CAROLYN B. MALONEY, New York

LUIS V. GUTIERREZ, Illinois

NYDIA M. VELA ́ ZQUEZ, New York

MELVIN L. WATT, North Carolina

GARY L. ACKERMAN, New York

KEN BENTSEN, Texas

JAMES H. MALONEY, Connecticut

DARLENE HOOLEY, Oregon

JULIA CARSON, Indiana

BRAD SHERMAN, California

MAX SANDLIN, Texas

GREGORY W. MEEKS, New York

BARBARA LEE, California

FRANK MASCARA, Pennsylvania

JAY INSLEE, Washington

JANICE D. SCHAKOWSKY, Illinois

DENNIS MOORE, Kansas

CHARLES A. GONZALEZ, Texas

STEPHANIE TUBBS JONES, Ohio

MICHAEL E. CAPUANO, Massachusetts

HAROLD E. FORD JR., Tennessee

RUBE ́ N HINOJOSA, Texas

KEN LUCAS, Kentucky

RONNIE SHOWS, Mississippi

JOSEPH CROWLEY, New York

WILLIAM LACY CLAY, Missouri

STEVE ISRAEL, New York

MIKE ROSS, Arizona

BERNARD SANDERS, Vermont

Terry Haines, Chief Counsel and Staff Director
(III)

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

SPENCER BACHUS, Alabama, Chairman

DAVE WELDON, Florida, Vice Chairman

MARGE ROUKEMA, New Jersey

DOUG BEREUTER, Nebraska

RICHARD H. BAKER, Louisiana

MICHAEL N. CASTLE, Delaware

EDWARD R. ROYCE, California

FRANK D. LUCAS, Oklahoma

BOB BARR, Georgia

SUE W. KELLY, New York

PAUL E. GILLMOR, Ohio

JIM RYUN, Kansas

BOB RILEY, Alabama

STEVEN C. LATOURETTE, Ohio

DONALD A. MANZULLO, Illinois

WALTER B. JONES, North Carolina

JUDY BIGGERT, Illinois

PATRICK J. TOOMEY, Pennsylvania

ERIC CANTOR, Virginia

FELIX J. GRUCCI, JR, New York

MELISSA A. HART, Pennsylvania

SHELLEY MOORE CAPITO, West Virginia

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

PATRICK J. TIBERI, Ohio

MAXINE WATERS, California

CAROLYN B. MALONEY, New York

MELVIN L. WATT, North Carolina

GARY L. ACKERMAN, New York

KEN BENTSEN, Texas

BRAD SHERMAN, California

MAX SANDLIN, Texas

GREGORY W. MEEKS, New York

LUIS V. GUTIERREZ, Illinois

FRANK MASCARA, Pennsylvania

DENNIS MOORE, Kansas

CHARLES A. GONZALEZ, Texas

PAUL E. KANJORSKI, Pennsylvania

JAMES H. MALONEY, Connecticut

DARLENE HOOLEY, Oregon

JULIA CARSON, Indiana

BARBARA LEE, California

HAROLD E. FORD, JR., Tennessee

RUBE ́ N HINOJOSA, Texas

KEN LUCAS, Kentucky

RONNIE SHOWS, Mississippi

JOSEPH CROWLEY, New York

(V)

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

(1)

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. Vela ́zquez 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.
2

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 GrammLeach-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
3

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.
4

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 ac-
5

count 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.
6

[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.
7

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-LeachBliley, 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
8

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 ‘‘financialin-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 ac-
9

tivities. 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 ReserveTreasury 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 effec-
10

tively 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 sub-
11

sidiary 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 antitying 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?
12

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.
13

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 GrammLeach-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 GrammLeach-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 some-
14

thing 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?
15

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 GrammLeach-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.
16

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
17

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
18

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.
19

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
20

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
21

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 GrammLeach-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 al-
22

lowed 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
23

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.
24

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.
25

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.
26

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.
27

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
28

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?
29

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.
30

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.
31

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.
32

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
33

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.
34

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
35

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.
36

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 GrammLeach-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.
37

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 GrammLeach-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-LeachBliley. 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-anda-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.
38

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.
39

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 GrammLeach-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 GrammLeach-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 be-
40

cause 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 argu-
41

ment 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
42

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.
43

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 onestop 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.
44

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.
45

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.
46

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.
47

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.
48

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?
49

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
50

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.
51

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 GrammLeach-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
52

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.
53

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
54

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.]
(55)

A P P E N D I X

May 2, 2001
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