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ADMINISTRATIVE AND PROCEDURAL ASPECTS OF

THE FEDERAL RESERVE BOARD/DEPARTMENT

OF THE TREASURY PROPOSED RULE CONCERNING COMPETITION IN THE REAL ESTATE

BROKERAGE AND MANAGEMENT MARKETS

HEARING

BEFORE THE

SUBCOMMITTEE ON 

COMMERCIAL AND ADMINISTRATIVE LAW

OF THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

MAY 16, 2002

Serial No. 77

Printed for the use of the Committee on the Judiciary

(

Available via the World Wide Web: http://www.house.gov/judiciary 

(II)

COMMITTEE ON THE JUDICIARY 

F. JAMES SENSENBRENNER, JR., WISCONSIN, Chairman 

HENRY J. HYDE, Illinois 

GEORGE W. GEKAS, Pennsylvania 

HOWARD COBLE, North Carolina 

LAMAR SMITH, Texas 

ELTON GALLEGLY, California 

BOB GOODLATTE, Virginia 

ED BRYANT, Tennessee 

STEVE CHABOT, Ohio 

BOB BARR, Georgia 

WILLIAM L. JENKINS, Tennessee 

CHRIS CANNON, Utah 

LINDSEY O. GRAHAM, South Carolina 

SPENCER BACHUS, Alabama 

JOHN N. HOSTETTLER, Indiana 

MARK GREEN, Wisconsin 

RIC KELLER, Florida 

DARRELL E. ISSA, California 

MELISSA A. HART, Pennsylvania 

JEFF FLAKE, Arizona 

MIKE PENCE, Indiana 

JOHN CONYERS, JR., Michigan 

BARNEY FRANK, Massachusetts 

HOWARD L. BERMAN, California 

RICK BOUCHER, Virginia 

JERROLD NADLER, New York 

ROBERT C. SCOTT, Virginia 

MELVIN L. WATT, North Carolina 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

MARTIN T. MEEHAN, Massachusetts 

WILLIAM D. DELAHUNT, Massachusetts 

ROBERT WEXLER, Florida 

TAMMY BALDWIN, Wisconsin 

ANTHONY D. WEINER, New York 

ADAM B. SCHIFF, California

PHILIP G. KIKO, Chief of Staff-General Counsel 

PERRY H. APELBAUM, Minority Chief Counsel 

SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW

BOB BARR, Georgia, Chairman

JEFF FLAKE, Arizona, Vice Chair

GEORGE W. GEKAS, Pennsylvania 

MARK GREEN, Wisconsin 

DARRELL E. ISSA, California 

STEVE CHABOT, Ohio 

MELISSA HART, Pennsylvania 

MELVIN L. WATT, North Carolina 

JERROLD NADLER, New York 

TAMMY BALDWIN, Wisconsin 

ANTHONY D. WEINER, New York 

MAXINE WATERS, California

RAYMOND V. SMIETANKA, Chief Counsel 

SUSAN JENSEN-CONKLIN, Counsel 

ROBERT NEIRA TRACCI, Full Committee Counsel 

PATRICIA DEMARCO, Full Committee Counsel 

STEPHANIE MOORE, Minority Counsel 

(III)

C O N T E N T S 

MAY 16, 2002

OPENING STATEMENT 

Page 

The Honorable Bob Barr, a Representative in Congress From the State of 

Georgia, and Chairman, Subcommittee on Commercial and Administrative 

Law ........................................................................................................................ 1

The Honorable Melvin L. Watt, a Representative in Congress From the State 

of North Carolina, and Ranking Member, Subcommittee on Commercial 

and Administrative Law ...................................................................................... 3

The Honorable Maxine Waters, a Representative in Congress From the State 

of California .......................................................................................................... 5

WITNESSES 

Ms. Sheila Bair, Assistant Secretary, United States Department of the Treasury 

Oral Testimony ..................................................................................................... 7

Prepared Statement ............................................................................................. 9

Mr. Martin Edwards, Jr., President, National Association of REALTORS

Oral Testimony ..................................................................................................... 11

Prepared Statement ............................................................................................. 12

Mr. Edward Yingling, Executive Director, American Bankers Association, 

United States Public Interest Group 

Oral Testimony ..................................................................................................... 24

Prepared Statement ............................................................................................. 26

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING 

Prepared Statement of the Honorable Maxine Waters, a Representative in 

Congress From the State of California ............................................................... 41

News Article from Inman News Features, February 22, 2002 ............................ 54

Prepared Statement of The Financial Services Roundtable (With Attachments) ................................................................................................................... 56

APPENDIX 

Material Submitted for the Record ........................................................................ 99

(1)

ADMINISTRATIVE AND PROCEDURAL ASPECTS OF THE FEDERAL RESERVE BOARD/

DEPARTMENT OF THE TREASURY PROPOSED RULE CONCERNING COMPETITION 

IN THE REAL ESTATE BROKERAGE AND 

MANAGEMENT MARKETS 

THURSDAY, MAY 16, 2002

HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON COMMERCIAL

AND ADMINISTRATIVE LAW, 

COMMITTEE ON THE JUDICIARY, 

Washington, DC. 

The Subcommittee met, pursuant to call, at 2:05 p.m., in Room 

2141, Rayburn House Office Building, Hon. Bob Barr [Chairman of 

the Subcommittee] presiding. 

Mr. BARR. Good afternoon, ladies and gentlemen. 

My name is Bob Barr, Chairman of the Subcommittee on Commercial and Administrative Law, joined with two other very distinguished Members of our Subcommittee, the Ranking minority 

Member, Mr. Mel Watt from the great State of North Carolina, and 

Ms. Tammy Baldwin from the great State of Wisconsin. We appreciate them being here today. 

We probably will be joined by other Members of the Subcommittee who will be able to come in between other responsibilities. 

We will probably have floor votes this afternoon on the welfare 

reform reauthorization, other Committee hearings that Members 

have to go to, but we appreciate the witnesses very much being 

with us here today. 

We appreciate members of the audience that are here. 

At this time, I will call this hearing to order. This is a Subcommittee oversight hearing on administrative and procedural aspects of the Federal Reserve Board/Department of the Treasury 

proposed rule concerning competition in the real estate brokerage 

and management markets. 

I am very pleased to convene this hearing on an issue that has 

aroused considerable interest in the banking and the real estate industry, as evidenced by the attendance at today’s hearing. 

As many of you know, on January 3, 2001, the Department of the 

Treasury and the Federal Reserve Board jointly issued a proposed 

rule that would have the effect of transforming the definition of fiVerDate Jan 17 2002 11:40 Jul 31, 2002 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 G:\WORK\COMM\051602\79656.000 HJUD1 PsN: 79656
2

nancial activity to include services theretofore considered commercial in nature. 

Specifically, the proposed rule would permit banking entities to 

enter the real estate brokerage and management markets. This 

proposed rule was issued pursuant to an interpretation of the then 

recently passed Gramm-Leach-Bliley Act. 

The rule was proposed in response to requests from commercial 

banking interests received from the Treasury Department within a 

month of Gramm-Leach-Bliley’s enactment into law. Prior to passage of Gramm-Leach-Bliley, Congress had maintained what was 

termed a firewall between commercial and financial activities. 

The proposed rule is extremely controversial, as evidenced by the 

fact it has occasioned more public comment than any other rule of 

its type in history. In fact, so many comments were received that 

the Treasury Department and the Federal Reserve have twice had 

to delay the effective date of the proposed rule. Late last month, 

as a matter of fact, Treasury Secretary O’Neill stated the rule 

would not be finalized until 2003 at the earliest. 

The Subcommittee on Commercial and Administrative Law does 

not exercise jurisdiction over the substantive issues underlying the 

proposed rule. It is not for us to address the general policy merits 

of these issues. However, this Subcommittee has both the authority 

and continuing responsibility to examine the process by which 

agencies propose and issue rules. 

Since 1946, when the Administrative Procedure Act was first 

signed into law, Congress and the President have labored continuously to craft an administrative process that treats all parties and 

all perspectives fairly. 

While we have striven to obtain the best possible agency rules, 

another equally important purpose is making the administrative 

process an open one that informs the American people about the 

actions of its Government. Today’s hearing helps advance this crucial goal. 

The proposed rule is clearly a matter of considerable public concern which demands serious congressional attention. We must inquire whether issuing agencies adhered to administrative and procedural requirements in examining whether the particular circumstances surrounding the proposed rule necessitate amendment 

of the Administrative Procedure Act and other statutes which pertain to agency rulemaking. 

Specifically, we will address the following questions: 

Did the statute giving rise to the proposed rule provide sufficient 

congressional authority to transform the definition of financial activity to include real estate brokerage and management? 

Was the language sufficiently clear to provide a coherent basis 

on which the respective agencies could make this determination? 

Can—should Congress delegate its authority to regulate interstate commerce without any cognizable constraints on agency discretion? 

Did the issuing agencies provide a sufficient factual or legal basis 

for concluding that real estate brokerage and management are financial activities? 

3

Were the requirements of the Regulatory Flexibility Act, which 

requires agencies to analyze the effects of a proposed rule on small 

businesses, including REALTORS, adequately observed? 

How will the agencies consider and act on the public comments 

it has received? 

Given the broad and deep impact finalization of this rule would 

have, should an alternative method of rulemaking, such as that 

provided in the Negotiated Rulemaking Act, have been contemplated by the issuing agencies? 

How can the experiences of this proposed rulemaking facilitate 

the more effective promulgation of agency rules consistent with 

congressional intent? 

Before we begin, I would like to emphasize that I am committed 

to continuing this Subcommittee’s regulatory reform agenda and 

wish to recognize the effort of former Subcommittee Chairman 

George Gekas to ensure Federal agencies adhere to congressional 

intent during the administrative rulemaking process. 

I am particularly pleased to welcome three very distinguished 

witnesses today who represent our Government and organizations 

most closely associated with the proposed rule and its effects. We 

will receive testimony from the Department of Treasury as well as 

the National Association of REALTORS and the American Bankers Association. I wish to thank all three witnesses in advance for 

their attendance and expert testimony today. 

I now am pleased to recognize Mr. Watt, the Ranking Member 

of this Subcommittee, for his opening remarks. 

Mr. WATT. Thank you, Mr. Chairman; and thank you for convening this hearing, I guess. I am not real sure that I wanted to 

thank you for the second part of that, but to the extent that we 

deal with the issues within this Subcommittee’s jurisdiction, I 

think it is important to have this hearing. 

Let me be pretty direct, as most of the people that I have dealt 

with in the audience know me to be, though, and say right up front 

that I understand that there is a tremendous tug of war going on 

between the real estate interests and the banking interests. If 

there is anybody here in the audience who believes that that tug 

of war is going to be resolved by this hearing, they should get up 

and leave now. 

That question, to the extent that it requires a resolution, will be 

resolved in the Financial Services Committee. It just so happens 

that both the Chairman of this Subcommittee, Chairman Barr, and 

the Ranking Member of this Subcommittee, Ranking Member Watt, 

serve on the Financial Services Committee; and I think we ought 

to let that Committee handle that tug of war. 

Now, it is easy for Congress or Members of Congress or Committees of Congress to write a piece of legislation that has substantial 

ambiguities in it and have regulatory agencies interpret those ambiguities in one way or another and for Members of Congress to 

then bash administrative agencies for doing what they think a law 

authorized them to do. It gives us a sense of deniability, us against 

them. 

But I would submit to you, if there is any ambiguity in the law, 

we bear the responsibility in Congress to clarify that ambiguity. 

4

So I don’t think—and I should say we don’t have the jurisdiction 

in this Committee to clarify that ambiguity. If anybody thinks that 

we do, I think you should rethink this. I am going to encourage our 

witnesses to refrain from a fight about this REALTOR versus 

banking issue and stick to the matters that are under the jurisdiction of this Committee. 

As I understand the purpose of this hearing—and I am reading 

from what I was given—we are to determine, number one, the efficacy of the Administrative Procedure Act in ensuring that congressional intent is realized in the rulemaking process; and, number 

two, determine the responsiveness of Federal regulators to Congress and the public. 

Now, I didn’t write that. I have no idea really—well, I have some 

idea of what it means. I have my own conceptions of what it 

means. But my conception does not include a resolution of this conflict between REALTORS and banking. 

If we think the regulators have done something improper and 

they think that they have done something proper, then I think it 

is Congress’s responsibility to clarify that and not to just beat up 

on the regulators; and that is regardless of where you stand on the 

substantive issue here. We can’t resolve it in the context of this 

hearing. 

So, that having been said, I am looking forward to hearing the 

witnesses. I hope they will restrain themselves in the substantive 

analysis of this REALTOR versus banking issue and deal with the 

Administrative Procedure Act issue that this jurisdiction—this 

Subcommittee has jurisdiction over. If we can bring some light to 

that, then this hearing will be of benefit. If we can’t bring light to 

that, then I think we have done this Subcommittee, the Judiciary 

Committee and the Financial Services Committee and Congress 

and the jurisdictions that each of those bodies have, a disservice. 

So I am proceeding with confidence that we will stay on mission 

today, and I hope everybody will cooperate in that mission. 

Thank you very much, Mr. Chairman. I yield back. 

Mr. BARR. The gentleman from Arizona, Mr. Flake, the Vice 

Chairman of the Subcommittee, is recognized. 

Mr. FLAKE. I thank the Chairman. 

I have no opening statement, but I will yield the remainder of 

my time to the Chairman. 

Mr. BARR. Thank you. 

It is a common practice for this Subcommittee to hold hearings 

of this sort today. This is not a unique hearing. It is not the first 

one this Subcommittee has ever held. There have been a number 

of other instances in recent years where rules have been proposed 

by one Federal agency or another and this Subcommittee has, within the exercise of its jurisdiction to maintain oversight over the regulatory processes of the executive branch, held hearings. 

For example, on March 4, 1999, this Subcommittee held a hearing entitled, Know Your Customer Rules: Privacy in the Hands of 

Federal Regulators. The hearing examined rules that had been noticed by the Federal Reserve Board and Treasury Department 

under the purported authority of the Bank Secrecy Act. 

In May 1999, the Subcommittee held a hearing into novel procedures in FCC license transfer proceedings. That hearing examined 

5

the administrative efficacy of license transfer regulations that 

raised considerable administrative law questions. 

In February 1998, the Subcommittee conducted an oversight 

hearing on administrative taxation to examine the administrative 

efficacy and constitutionality of the universal service fee. 

In 1996, the Subcommittee held a hearing on the role of Congress in monitoring administrative rulemaking. 

And there are others. So if there is any confusion on the part of 

any of the witnesses or audience or Committee Members about the 

history of this Subcommittee under different leadership to conduct 

appropriate hearings of this sort, let me set their minds at ease. 

This is a long-held practice of this Subcommittee, and we again— we welcome the witnesses being here today and look forward to 

their testimony. 

I yield back to the gentleman from Arizona. 

Mr. FLAKE. Thanks. I yield back. 

Mr. BARR. The gentlelady from Wisconsin is recognized for any 

opening statement that she may have to make. 

Ms. BALDWIN. Thank you, Mr. Chairman. I do not have an opening statement and yield back. 

Mr. BARR. Thank you. 

The gentlelady from California is recognized for an opening 

statement she might have. 

Ms. WATERS. Thank you very much, Mr. Chairman. 

I do have a prepared opening statement, and I think I am not 

going to read my statement because I think Mr. Watt’s comments 

and your comments are so very interesting. 

Let me thank you for holding this hearing to look at the rulemaking process. 

Also let me just comment a bit on how this Congress works and 

what we do in Committees and why it is important for the people 

who are here today to understand that, despite the fact that Mr. 

Watt believes that somehow it is extremely important to stick to 

the subject matter of rulemaking and not to wander off into the socalled tug of war that he so eloquently referred to, since he did call 

it a tug of war, all is fair in love and war. And let me just say that, 

despite the fact he gave you this classic description and definition 

of what we are supposed to do and what we should not be doing, 

this place doesn’t work like that. As a matter of fact, what happens 

here is he or she who is creative enough, smart enough, visionary 

enough to concoct something to their advantage, we do that; and 

we do it day in and day out; and that is not going to stop. I am 

amazed at the kind of creativity that is used in this place and what 

benefits come from it. 

You are here today and Mr. Barr has been smart enough to organize this hearing to give you an opportunity, number one, just to 

show yourselves. The fact that you are here and that you are concerned about this, this in itself may get a press story that will 

serve to influence somebody. 

So it is not always about the rules as they are written somewhere, it is about the ability for Members to be their own best advocates and advocates for those that they care about. 

Let me just say this. Also, Mr. Barr went so far as to recite chapter and verse all of the other hearings that have been held in an 

6

effort to say, see, I am not out of line. I am holding this hearing 

in this matter, and it has been done before. But that doesn’t make 

any difference either. Whether he had that kind of documentation 

or not, I am sure he would be holding this hearing because he 

thinks there is some benefit in doing so. 

So let me just welcome you and say to you that I am very pleased 

that the hearing is being held. The regulators who have the responsibility for this rulemaking, don’t worry about getting beaten up on. 

You have been beaten up on before, and this will not be such a 

beating that you won’t be able to withstand it. You will do just fine. 

So, with that, this tug of war includes whatever we do today in 

the Subcommittee. Let’s get on with it. Thank you very much. 

Mr. BARR. Mr. Watt. 

Mr. WATT. That was classic. 

Mr. BARR. I thank the gentlelady from California. 

We have been joined by the gentleman from Ohio, Mr. Chabot. 

Do you have an opening statement, Mr. Chabot? 

Mr. CHABOT. No, I don’t. 

Mr. BARR. At this time, we will proceed then to introduce the 

witnesses; and then the witnesses will each be allotted approximately 5 minutes for their opening statements. The full written 

statements and any supplementing material that each one of the 

witnesses or any of the witnesses might have, we encourage them 

to submit that for the record; and it will be admitted to the record 

without objection. 

The record will remain open for an additional 7 days for any additional materials that the witnesses may come across or deem appropriate and relevant for the hearing to aid in the deliberations 

of this Subcommittee. 

Our first witness today is Ms. Sheila Bair, Assistant Secretary 

for Financial Institutions at the United States Department of the 

Treasury. In this role, Secretary Bair leads the Office of Financial 

Institutions in coordinating the Department’s legislative and regulatory agenda, including legislation affecting Federal agencies that 

regulate or ensure financial institutions, as well as securities markets legislation and regulation. 

Before joining the Treasury Department, Secretary Bair was 

Senior Vice President for Government Relations at the New York 

Stock Exchange. She also served as a Commissioner of the Commodity Futures Trading Commission during the Bush and Clinton 

administrations and was chairperson of the FTC’s Financial Products Advisory Committee. Finally, Secretary Bair worked as senior 

counsel under Senator Bob Dole. 

A native of Kansas, Secretary Bair received her bachelor’s degree 

from the University of Kansas and is a graduate of the University 

of Kansas School of Law. 

We are very happy to welcome the Assistant Secretary here 

today, and appreciate her testimony and answers to the Committee’s questions. 

Our next witness will be Mr. Martin Edwards, Jr., the president 

of the National Association of REALTORS. 

The National Association of REALTORS is America’s largest 

professional association, representing more than 800,000 members 

7

involved in all aspects of the residential and commercial real estate 

industry. 

Mr. Edwards has been a REALTOR for more than 30 years and 

is a partner in Colliers, Wilkinson & Snowden, Inc, a commercial 

and industrial real estate firm headquartered in Memphis, Tennessee. He is also a senior instructor for the Commercial Investment and Real Estate Institute, an NEAR affiliate. 

Mr. Edwards is no stranger to Congress, having testified on 

issues ranging from Gramm-Leach-Bliley, brownfields legislation, 

housing affordability and many other housing and real-estate-related issues. Mr. Edwards has served in a number of positions at 

NAR including treasurer, chairman of the association’s finance 

committee, regional vice president for the States of Tennessee, 

South Carolina, North Carolina, and Kentucky and other committees. 

He has been active on various NAR committees, including the executive committee and the building advisory committee. 

Mr. Edwards is also active at the State and local levels. He 

serves on numerous State association committees, including the 

commercial and investment committee. He was named REALTOR

of the Year in 1989. 

We are particularly pleased to have you here today, Mr. Edwards. Thank you. 

Our third witness on today’s panel is Edward Yingling, deputy 

vice president and executive director for Government Relations at 

the American Bankers Association. Mr. Yingling is also a board 

member of the Corporation for American Banking, the American 

Bankers Association’s for-profit subsidiary. He also serves as a director of the American Bankers Professional and Fidelity Insurance 

Company. 

Before joining the American Bankers Association, Mr. Yingling 

served in private practice, specializing in the representation of 

banks and other financial institutions. 

From 1973 to 1974, Mr. Yingling served as legislative assistant 

to Senator William J. Fulbright. He is a graduate of Princeton University and the Stanford University Law School. 

Mr. Yingling, thank you very much today; and thank you for 

your service very capably representing America’s bankers for so 

long. 

At this time, I am pleased to welcome the three panelists. 

Mr. BARR. We will go through each one of the panelists beginning 

with the Honorable Sheila Bair, Assistant Secretary of the Treasury, who will be recognized for her opening statement. Ms. Bair. 

STATEMENT OF SHEILA BAIR, ASSISTANT SECRETARY, 

UNITED STATES DEPARTMENT OF THE TREASURY 

Ms. BAIR. I appreciate the opportunity to appear here today to 

discuss administrative and procedural aspects of the joint Federal 

Reserve-Treasury rule proposal on whether to permit financial 

holding companies and financial subsidiaries of national banks to 

engage in real estate brokerage and real estate management under 

the Gramm-Leach-Bliley Act. 

The 4-month public comment for this proposal ended May 1st of 

last year. Based on the substantial number of comment letters that 

8

the Treasury and the Federal Reserve Board have received, there 

clearly is wide public interest in this proposal. The volume of letters demonstrates the sensitivity of this particular determination 

as well as the difficulty of the task that Congress gave us in implementing the Gramm-Leach-Bliley Act. 

On April 22nd, Secretary O’Neill informed Chairman Oxley by 

letter that, in consultation with Chairman Greenspan, he had decided that the Treasury will not make a final determination on this 

proposed rule until next year. It is incumbent upon us to carefully 

review all of the issues in keeping with the statutory criteria and 

purposes of the Gramm-Leach-Bliley Act and to carefully articulate 

criteria that can guide our review of future requests. Given other 

Treasury priorities in the wake of September 11, we do not believe 

such a deliberative review can be completed until next year. 

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 prepared remarks will briefly describe the process. 

The rulemaking process was initiated under the prior administration after Treasury and the Board received requests from the 

American Bankers Association, the Financial Services Roundtable 

and the New York Clearing House Association asking that we determine that real estate brokerage and real estate management activities are financial in nature or incidental to a financial activity. 

Shortly thereafter, the National Association of REALTORS sent a 

letter opposing such a determination. 

In March, 2000, the Treasury issued an Interim Final Rule setting forth specific procedures for requesting determinations under 

the Gramm-Leach-Bliley Act and invited the American Bankers Association and the Financial Services Roundtable to resubmit their 

request to conform to these procedures. The American Bankers Association did so in July of 2000, and a month later Fremont National Bank submitted a request that referenced the American 

Bankers Association’s request. 

After considering the factors specified in the Gramm-Leach-Bliley 

Act and other relevant information and consulting with the Federal 

Reserve Board and its staff, in December of 2000 the Treasury 

agreed with the Board to issue a joint notice of proposed rulemaking with a 60-day comment period. The proposal was published 

in the Federal Register on January 3, 2001. 

Following publication, it soon became apparent that there was a 

great deal of public interest in the proposal. Given this wide public 

interest and our desire to give the public sufficient time to consider 

and comment on the proposal, and in view of letters we received 

requesting an extension, the Treasury and the Board decided to extend the comment period another 60 days. 

As I mentioned, the comment period closed on May 1, 2001. Of 

the 34,735 comment letters we have received, most have come from 

real estate brokers. We are giving serious consideration to the 

views expressed. 

In conclusion, Mr. Chairman, we intend to carefully consider the 

issues raised by all of the commenters. As we move forward next 

year, the Treasury will work closely with the Federal Reserve to 

ensure that this and other rulemakings under the financial in naVerDate Jan 17 2002 11:40 Jul 31, 2002 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 G:\WORK\COMM\051602\79656.000 HJUD1 PsN: 79656
9

ture authority are consistent with the criteria Congress prescribed, 

the legal process, and the public interest. 

Thank you. 

Mr. BARR. Thank you, Ms. Bair. 

[The prepared statement of Ms. Bair follows:]

PREPARED STATEMENT OF SHEILA C. BAIR

Chairman Barr, Mr. Watt, and Members of the Subcommittee, I appreciate the 

opportunity to appear here today to discuss administrative and procedural aspects 

of the joint Federal Reserve-Treasury rule proposal on whether to permit financial 

holding companies and financial subsidiaries of national banks to engage in real estate brokerage and real estate management under the Gramm-Leach-Bliley Act 

(‘‘GLBA’’). 

The four-month public comment period for this proposal ended May 1st of last 

year. Based on the substantial number of comment letters that the Treasury and 

the Federal Reserve Board (‘‘Board’’) have received, there clearly is wide public interest in this proposal. The volume of letters demonstrates the sensitivity of this 

particular determination as well as the difficulty of the task that Congress gave us 

in promoting competition in financial services. 

We also received letters from 160 Members of Congress, some of whom transmitted comments from their constituents and some of whom set forth comments of 

their own. We are carefully reviewing the issues raised by all the commenters. 

On April 22nd, Secretary O’Neill informed Chairman Oxley by letter that, in consultation with Chairman Greenspan, he had decided that the Treasury will not 

make a final determination on this proposed rule until next year. It is incumbent 

on us to carefully review all the issues in keeping with the statutory criteria and 

purposes of the GLBA and to carefully articulate criteria that can guide our review 

of future requests. Given other Treasury priorities in the wake of September 11, we 

do not believe such a deliberative review can be completed until next year. 

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 prepared remarks will briefly describe the process and factors we 

considered in making the proposal and where it stands today. 

By way of background, let me begin by highlighting the key provisions of the 

GLBA that relate to the rulemaking. 

RULEMAKING PROVISIONS OF THE GRAMM-LEACH-BLILEY ACT

At its core, the GLBA stimulates greater competition and innovation in the financial services industry. At the same time, the legislation promotes consumer protection and safety and soundness, and restricts the mixing of banking and commerce. 

To accomplish these outcomes, the GLBA amended the Bank Holding Company 

Act to permit financial holding companies to engage in a broad range of activities 

specifically listed in GLBA, as well as other activities that the Board determines, 

in consultation with the Treasury, to be ‘‘financial in nature or incidental to a financial activity.’’ According to the Conference Report, the ‘‘financial in nature or incidental’’ standard represents a significant expansion of the ‘‘closely related to banking’’ standard that the Board previously applied in determining the permissibility 

of activities for bank holding companies. 

The GLBA also amended the National Bank Act to allow national banks to control 

qualifying ‘‘financial subsidiaries’’ that are permitted to engage in most of the same 

‘‘financial in nature or incidental’’ activities that the GLBA authorizes for financial 

holding companies. Activities in which financial subsidiaries may not engage under 

the GLBA generally include insurance underwriting and merchant banking. GLBA 

also explicitly prohibits financial subsidiaries from engaging in real estate development and investment. 

Just as GLBA requires the Board to consult with Treasury before approving new 

activities as ‘‘financial in nature’’ or ‘‘incidental to a financial activity’’ for financial 

holding companies, GLBA also requires Treasury to consult with the Board in determining whether a new activity should be approved as financial in nature or incidental for financial subsidiaries. Under the GLBA’s consultation requirement, neither the Treasury nor the Board may determine that an activity is financial in nature or incidental to a financial activity if the other agency disagrees with such a 

determination in writing. Treasury and the Board have developed procedures for 

those requesting determinations under the financial activities provisions of GLBA 

and for coordinating and consulting with each other. Treasury and the Board are 

10

1Section 5136A(b)(2) of the Revised Statutes (the National Bank Act) provides that:

‘‘In determining whether an activity is financial in nature or incidental to a financial activity, 

the Secretary shall take into account—

(A) the purposes of this [National Bank] Act and the Gramm-Leach-Bliley Act;

(B) changes or reasonably expected changes in the marketplace in which banks compete;

(C) changes or reasonably expected changes in the technology for delivering financial services; 

and

(D) whether such activity is necessary or appropriate to allow a bank and the subsidiaries of 

a bank to—

(i) compete effectively with any company seeking to provide financial services in the United 

States; 

(ii) efficiently deliver information and services that are financial in nature through the use 

of technological means, including any application necessary to protect the security or efficacy 

of systems for the transmission of data or financial transactions; and 

(iii) offer customers any available or emerging technological means for using financial services 

or for the document imaging of data.’’

working cooperatively in considering these determinations, as the joint proposal on 

real estate brokerage and management demonstrates. 

In making determinations for financial subsidiaries, the GLBA requires Treasury 

to take into account, among other factors:

• the purposes of GLBA and the National Bank Act,

• changes in the marketplace in which banks compete,

• changes in the technology for delivering financial services, and

• whether the activity is necessary or appropriate to allow a bank and its subsidiaries to compete effectively with any company seeking to provide financial 

services in the United States.1

Let me turn now to a description of the process that the Treasury and the Board 

are following and where the rulemaking stands currently. 

STATUS OF THE RULEMAKING PROCESS

The rulemaking process was initiated after Treasury and the Board received requests from the American Bankers Association, the Financial Services Roundtable, 

and the New York Clearing House Association asking that we determine that real 

estate brokerage and real estate management activities are financial in nature or 

incidental to a financial activity. Shortly thereafter, the National Association of REALTORS sent a letter opposing such a determination. 

In March 2000, the Treasury issued an Interim Final Rule setting forth specific 

procedures for requesting determinations under the GLBA, and invited the American Bankers Association and the Financial Services Roundtable to resubmit their 

requests to conform to these procedures. The American Bankers Association did so 

in July 2000, and a month later Freemont National Bank submitted a request that 

referenced the American Bankers Association’s request. 

After considering the factors specified in the GLBA and other relevant information, and consulting with the Federal Reserve Board and its staff, in December of 

2000 the Treasury agreed with the Board to issue a joint notice of proposed rulemaking with a 60-day comment period. The proposal was published in the Federal 

Register on January 3, 2001. 

Following publication, it soon became apparent that there was a great deal of public interest in the proposal. Given this wide public interest and our desire to give 

the public sufficient time to consider and comment on the proposal, and in view of 

letters we received requesting an extension, the Treasury and the Board decided to 

extend the comment period another 60 days. 

As I mentioned, the comment period closed on May 1, 2001. Of the 34,735 comment letters we have received, most have come from real estate brokers expressing 

the same or similar views. We are giving serious consideration to the views expressed. 

CONCLUSION

In conclusion, Mr. Chairman, we intend to carefully consider the issues raised by 

all the commenters. As we move forward next year, 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. I am happy to respond to any questions.

11

Mr. BARR. Mr. Edwards, you are now recognized for your opening 

statement. 

STATEMENT OF MARTIN EDWARDS, JR., PRESIDENT, 

NATIONAL ASSOCIATION OF REALTORS

Mr. EDWARDS. Thank you, Mr. Chairman. 

On behalf of more than 800,000 REALTORS across this country 

engaged in all aspects of commercial and residential real estate, I 

want to thank you and Congressman Watt and the Members of the 

Subcommittee for the opportunity to testify today. 

Like you, we want to know about the process involved in the proposed rulemaking by the Federal Reserve Board and the Treasury 

Department. Both entities have proposed to let financial holding 

companies and national bank subsidiaries operate real estate brokerage, leasing and property management companies. 

As you know, we adamantly oppose the rule. We firmly believe 

that redefining real estate brokerage, leasing, and property management as financial in nature is totally acceptable because it 

mixes banking and commerce. It is our contention that Congress 

never intended to delegate such authority to the regulators. In fact, 

given the criteria set by Congress to determine new financial activities under Gramm-Leach-Bliley, we believe this proposed rule 

would circumvent congressional intent. 

The bottom line is that the banks who petitioned the Federal Reserve and Treasury for this proposed rule cannot gain through regulation what they failed to get through legislation. 

In 1999, as you pointed out, Congress clearly went out on record 

in supporting separation of banking and commerce. We believe that 

congressional intent was clear that section 4(k)(3) of the Bank 

Holding Act was added to give banks new powers to help with delivery of existing financial products and those that evolved as the 

financial services industry changed over time. But section 4(k)(3) 

was not meant to give banks the authority to operate whole new 

commercial businesses; and there is nothing in the law, the legislative history to infer that such broad legislative powers could be delegated to the regulators. 

Let me direct your attention to two charts set up to my left. The 

first chart shows how the commercial and banking industries compete in the financial services areas. REALTORS don’t take deposits or run ATM machines, and banks don’t sell real estate. It is 

that simple. Otherwise, why shouldn’t banks sell automobiles? 

Both banks and GMAC finance automobile purchases. 

The second chart I would like to point out to my left clearly 

shows that REALTORS do compete on mortgage originations. 

Banks clearly are the winner here. REALTOR-affiliated mortgage 

lending companies only originate about 1 percent of the mortgages, 

while banks originate 44 percent. 

Clearly, the time to consider granting of real estate powers was 

during the debate of Gramm-Leach-Bliley and certainly not 

through regulation now, after the close of that debate. 

Even if one believes that Congress intended to delegate the authority, the factors, as spelled out in section 4(k)(3), haven’t been 

met by the regulators. For example, the agencies didn’t address all 

of the necessary factors or explain what determinations they are 

12

making. They also failed to offer explanations of why the regulations should apply to the leasing of real estate or to commercial 

real estate transactions. 

There is no indication whether the OMB has reviewed the Treasury’s proposed regulation. Generally, any regulatory action deemed 

significant by an executive branch agency must first be reviewed 

by OMB. 

Mr. Chairman, the National Association of REALTORS believes 

that Congress should assert its authority to prevent the regulators 

from determining if it is in the Nation’s best interest to mix banking and commerce. We also believe that letting financial holding 

companies and national bank subsidiaries enter into the real estate 

business, brokerage, leasing and property management industry 

would have wide-ranging adverse market effects, including a decline in competition, consumer choices and quality of service. 

That is why we called upon Congress to enact the Community 

Choice in Real Estate, H.R. 3424, and in the Senate a companion 

bill. REALTORS from across this country have sent more than 

75,000 letters to congressional representatives urging support of 

these bills. 

We have sent more than 40,000 to the Federal Reserve and to 

the Treasury expressing our opposition to the proposed regulation; 

and we have sent more than 50,000 letters, by CD-ROM I might 

add, to President Bush urging support. 

So far, H.R. 3424 in this House has generated a tremendous support. We have today over 231 cosponsors; and, last month, Secretary of Treasury O’Neill postponed a decision of this issue until 

next year. The ball is clearly back in Congress’s court, and you 

must act now to resolve this issue. 

In conclusion, Mr. Chairman, REALTORS aren’t alone in this 

issue. A diverse group of trade associations and consumer groups 

stand with us on this issue. 

We look forward to today’s testimony as well as those questions 

rising out of this hearing. We hope that they will shed more light 

on how this whole process by the Federal Reserve and Treasury 

evolved. Thank you. 

Mr. BARR. I would ask the audience to refrain from applause, 

please. 

Mr. Edwards, thank you very much for your testimony. 

[The prepared statement of Mr. Edwards follows:]

PREPARED STATEMENT OF MARTIN EDWARDS, JR. 

Chairman Barr, Congressman Watt, and members of the Subcommittee. Thank 

you for inviting me to testify on this important issue. My name is Martin Edwards. 

I am a REALTOR and a partner with Colliers, Wilkinson and Snowden, Inc. in 

Memphis, Tennessee. I am appearing here today as President of the National Association of REALTORS (NAR) on behalf of over 800,000 REALTORS engaged in 

all aspects of the commercial and residential real estate industry. 

Mr. Chairman, we are pleased you are holding this hearing today to explore the 

process involved in the proposed rulemaking by the Federal Reserve Board and 

Treasury Department that would allow financial holding companies (FHCs) and national bank subsidiaries to operate real estate brokerage, leasing and management 

companies. As you know, we are opposed to this rule. We believe that redefining 

real estate brokerage, leasing and property management as a financial activity is 

an impermissible mixing of banking and commerce that Congress never intended to 

delegate to the regulators. Moreover, given the criteria Congress established for deVerDate Jan 17 2002 11:40 Jul 31, 2002 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6621 G:\WORK\COMM\051602\79656.000 HJUD1 PsN: 79656
13

1The Gramm-Leach-Bliley Act (GLBA) allows the Federal Reserve Board and the Treasury 

Department to determine activities that are ‘‘financial in nature.’’ In their consideration, the 

regulators are required to examine several statutory factors. They are (1) the purposes of the 

Bank Holding Company Act (BHCA) and the GLBA; (2) changes or reasonably expected changes 

in the marketplace in which financial holding companies compete; (3) changes or reasonably expected changes in the technology for delivering financial services; and (4) whether such activity 

is necessary or appropriate to allow a financial holding company and the affiliates of a financial 

holding company to: (i) compete effectively with any company seeking to provide financial services in the U.S.; (ii) efficiently deliver information and services that are financial in nature 

through the use of technological means, including any application necessary to protect the security or efficacy of systems for the transmission of data or financial transactions; and (iii) offer 

customers any available or emerging technological means for using financial services or for the 

document imaging of data. BHCA section 4(k)(3). 

termining new financial activities under the Gramm-Leach-Bliley Act, we believe 

that the proposed rule does not conform with the intent of Congress. 

The procedure followed by the regulators in proposing this rule raises many questions. It will be enlightening to hear responses to questions that would explain how 

and why the proposed rule came so soon after the law was enacted.

• What analysis was provided regarding the impact of the rule on the real estate industry?

• What role did the Office of Management and Budget play in reviewing the 

proposed real estate regulation?

• Congress authorized the Federal Reserve Board and the Treasury Department to jointly agree on new financial activities based on criteria established 

in Section 4(k)(3) of the Act. Do the Agencies view their authority to designate new financial activities as license to effectively hand entire industries 

over to FHCs and bank subsidiaries?

• Were all the criteria examined and met before the rule was issued? What 

weight, if any, was given to each of the enumerated criteria?

• How is it possible that in less than three months after the Act became public 

law the real estate industry, particularly brokerage, leasing and property 

management, could have changed so dramatically to merit consideration as 

a financial activity?

• Congress gave considerable attention to the regulation of insurance activities 

that are traditionally the purview of state regulators. Real estate is similarly 

regulated, yet the Act makes no provision to resolve conflicts of regulatory jurisdiction that most certainly will occur should FHCs and national bank subsidiaries engage in real estate brokerage and management as proposed. Have 

the Federal Reserve and the Treasury Department considered how real estate 

activities of FHCs and bank subsidiaries would be regulated?

• Was federal preemption of state regulatory and licensing authority contemplated?

In February 2000, barely a month after the Gramm-Leach-Bliley Act became public law, several banking institutions and representatives petitioned the Federal Reserve Board and the Treasury Department to grant financial holding companies and 

national bank subsidiaries real estate brokerage and management powers. They argued that they were allowed to participate in virtually every aspect of the real estate transaction except for brokerage. What the bankers failed to recognize was that 

there is a clear difference between these other aspects of the real estate transaction 

and the brokerage activity—the brokerage service is a commercial one. It is the provision of advice, analysis, and marketing of a tangible piece of property-real estate. 

It is unlike a financial or fungible product that has some monetary value. It is just 

like an automobile, boat, jewelry, electronic equipment or groceries. To argue that 

the use of some financing mechanism grants banks the power to broker the sale of 

the underlying durable product is to argue for elimination of the separation of banking and commerce. That debate occurred during consideration of the Gramm-LeachBliley Act (GLBA) and Congress upheld the continued separation of these activities. 

The bankers cannot now gain by regulation what they failed to gain by legislation. 

We believe that Congressional intent was clear that Section 4(k)(3)1 was meant 

to authorize new powers to banks to assist in the delivery of existing financial products or those that evolved as the financial services industry changed over time. Such 

powers might include the authority to operate a new technology to assist in the electronic delivery of financial or investment instruments. Section 4(k)(3) was not meant 

to grant banks the authority to operate whole new commercial businesses. There is 

nothing in the law or legislative history to infer that such broad legislative powers 

14

2See Mortgage Loan Origination chart 

3See ‘‘State Banking and Real Estate Activity’’ chart 

were to be delegated to the regulators. The time to consider the granting of real estate powers was during debate on GLBA, not through regulation after the close of 

that debate. 

Even if one were to believe that Congress intended to delegate this authority, the 

factors enumerated in Section 4(k)(3) have not been met by the regulators. 

The agencies did not address all the necessary factors. Although the agencies recite in cursory fashion that they have considered all of these factors, the only one 

they actually discuss is the first prong of the fourth factor, dealing with competition 

with other companies seeking to provide financial services. There is no discussion 

of what weight the other three factors may have been given in the agencies’ decision-making process. 

Furthermore, even as to the factors the agencies did consider, they undertook no 

factual investigation of their own. They simply cite, in a footnote, a petition from 

the American Bankers Association, reporting a review of various companies’ websites. They merely repeat the bankers’ plea to move into this area. Their analysis fails to consider the most important aspect of the issue—that real estate brokerage is a commercial activity. If anything, the mortgage is incidental to the commercial activity. Just the opposite of what the bankers argue. 

Twenty percent of real estate transactions involve no institutional financing at all. 

They are either cash transactions, or owner financed sales. Here there is absolutely 

no bank involvement. There is still the commercial real estate brokerage transaction 

though. Logic dictates that the financing may complement certain real estate transactions, but to argue that the brokerage is incidental to the financing is to put the 

cart before the horse. 

Congress held that commercial businesses and banks would compete in the financial services arena. This ‘‘gray area’’ consists of financial activities that support either a commercial or banking activity. For instance, automobile manufacturers such 

as General Motors provide financing for their auto purchases. Banks also provide 

financing for auto purchases. The competition comes in the financing arena—not in 

the sale of the auto. Likewise for real estate, boats, or jewelry. Congress has granted 

specific legislative authority to banks to include securities and insurance powers 

within that gray area. Thus you have both commercial firms and banks offering 

these products. But they were gained only by a legislative action. Even mortgage 

lending was granted by specific legislative authority. These examples make clear 

congressional intent that new industry powers can only be granted by legislation. 

Existing mortgage activity in this gray area provides banks with little reason to 

complain. Commercial banks account for almost half of the mortgage originations 

in this country. Independent mortgage companies and savings and loans combined 

account for about the same amount. Credit Unions and real estate firm affiliated 

mortgage operations account for only about two percent of mortgage loan originations. The banks dominate this market already.2

While bankers argue that some 26 states allow their state chartered banks to conduct real estate brokerage and management, further analysis shows that in fact 

only eighteen state banks in six states were doing any kind of real estate brokerage 

last year. These banks typically served the smallest communities in those states, 

with 0.57 percent of the U.S. population.3 There are even fewer thrifts operating 

real estate brokerages. There is no evidence to suggest that large national banks 

would serve smaller communities. Today, many of these communities have seen the 

local bank replaced by a national bank’s ATM machine. 

The agencies do not explain what determination they are making. Under the most 

natural reading of the GLB Act, an activity may be ‘‘financial in nature,’’ or it may 

be ‘‘incidental’’ to some other financial activity. The agencies lump these two concepts together, without explaining which determination they are making. If the 

agencies are claiming that real estate brokerage and management are ‘‘incidental’’ to some other financial activity, they should explain what that activity is. 

The agencies offer no explanation for why the regulations should apply to leasing 

of real estate. The agencies’ rationale for describing real estate brokerage as ‘‘financial in nature’’ rests on the theory that ‘‘banks and bank holding companies participate in most aspects of the typical real estate transaction other than brokerage.’’ 66 Fed. Reg. at 309. That may be true as to residential purchases of real estate, 

for which banks commonly provide mortgages and incidental services like appraisals. But it is not generally true as to leasing of real estate, often a relatively simple 

transaction that does not require financing, appraisals, settlement services, escrow 

services, or insurance. Yet the proposed regulations would apply to brokerage for 

lessors and lessees of real estate, as well as purchasers and sellers. The agencies 

15

offer no explanation as to why bank affiliates should be permitted to engage in these 

activities. 

The agencies offer no explanation for why the regulations should apply to commercial real estate transactions. The agencies’ reasoning also appears to focus primarily 

on the purchase of residential real estate by individuals. See 66 Fed. Reg. at 310. 

Yet the proposed regulations would apply to both commercial and residential real 

estate brokerage. Commercial enterprises frequently buy, sell, or lease real estate. 

The agencies offer no explanation why such transactions should be viewed as ‘‘financial’’ activities, rather than as part of a business’s ordinary commercial activities. 

There is no indication whether the Treasury Department’s proposed regulation 

have been reviewed by OMB. Under Executive Order No. 12,866 (3 C.F.R. 658 

(1994) ), any ‘‘significant regulatory action’’ by an Executive Branch agency must 

generally be reviewed by the Office of Management and Budget (‘‘OMB’’).

A ‘‘significant regulatory action’’ includes any action that is likely to result in a rule that may * * * [h]ave an annual effect on the economy of $100 million 

or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, 

or State, local, or tribal governments or communities.

Id. ’ 3(f). Although that requirement does not apply to the Federal Reserve Board 

(an independent regulatory agency), it does apply to the Treasury Department. 

There is no indication in the proposed regulations whether Treasury considers them 

to be a ‘‘significant regulatory action,’’ or whether it plans to submit them (or has 

submitted them) to OMB. 

Congress needs to reassert its authority to prevent regulators from usurping the 

power to determine whether it is in the best interests of our country to mix banking 

and commerce. This decision should not be left to unelected regulators. 

We are calling on Congress to enact The Community Choice in Real Estate Act 

(H.R. 3424/S. 1839) to clarify congressional intent to prohibit the mixing of banking 

and commerce. REALTORS have let members of Congress know where they stand 

on the issue. More than 75,000 REALTORS sent letters to their elected representatives urging support for The Community Choice in Real Estate Act. Before the legislation was even introduced, the Federal Reserve Board and the Treasury Department received more than 40,000 letters each opposing the proposed regulation that 

would allow financial holding companies and national bank subsidiaries to broker 

real estate and manage property. REALTORS from all over the nation sent over 

50,000 letters to President Bush urging his support. 

But REALTORS are not alone on this issue. A number of diverse trade associations and consumer groups stand with the National Association of REALTORS. Consumers Union testified before the House Financial Institutions Subcommittee 

and raised significant questions about the diminished consumer choices and quality 

of service that would likely follow from banks brokering and managing real estate. 

The National Community Reinvestment Coalition, the National Fair Housing Alliance, and the National Association of Hispanic Real Estate Professionals have formally urged members of Congress to support H.R. 3424 and S.1839. 

The issue of banks in real estate cuts across the entire spectrum of real estate 

and related industries, and the FHCs’ aggressive attempts to use regulations to define real estate brokerage and property management as financial activities in order 

to expand their powers threatens other related industries. Consequently, other trade 

groups representing both residential and commercial real estate interests have sent 

comment letters to the Federal Reserve and the Treasury Department opposing the 

proposed regulation. The National Association of Real Estate Professionals 

(NAREP), the National Association of Home Builders (NAHB), the National Association of Real Estate Investment Trusts (NAREIT), the Real Estate Roundtable, the 

Institute for Real Estate Management (IREM), the International Council of Shopping Centers, and the National Apartment Association are all standing with the National Association of REALTORS in keeping large banks out of real estate brokerage and property management. 

We look forward to the testimony and questions at this hearing and hope they 

will shed further light on how this process unfolded. Our written materials include 

further information and data from surveys conducted on this issue. 

Well over a year ago, the Federal Reserve and the Treasury Department issued 

a proposed rule that would allow financial holding companies (FHCs) and financial 

subsidiaries of national banks to engage in real estate brokerage, leasing, and property management activities. The National Association of REALTORS (NAR) 

strongly opposed this regulation on the grounds that real estate brokerage and property management are not financial activities, nor are they incidental to finance, and 

approval of the proposed rule would thus effect a mixing of banking and commerce. 

16

This regulation would not only result in negative market and consumer consequences. An affirmative decision by the Federal Reserve and Treasury on this proposal would also violate Congressional intent, evident in several key banking laws 

which make it very clear that Congress specifically intended to maintain the separation of banking and commerce. 

Congress adopted the Gramm-Leach-Bliley Act in 1999, which established a legal 

and regulatory framework for financial subsidiaries of banks and financial holding 

companies to engage in designated financial activities under the new law. The Act 

created a new entity, the financial holding company that would compete in the financial services area offering services that were prohibited to bank holding companies. By distinguishing the permissible activities of bank holding companies from financial holding companies, the Act also reaffirmed the longstanding national policy 

that separated banking from commerce because of the unique powers and advantages granted to banking institutions by their federal charters. 

NAR-supported legislation was introduced in both the U.S. House of Representatives and the U.S. Senate (H.R. 3424 and S.1839) that will clarify Congressional intent that real estate brokerage and management are not incidental or complimentary to a financial activity. The proposed legislation, The Community Choice in Real 

Estate Act, will maintain the status quo regarding FHCs ability to expand into real 

estate brokerage and property management activities through regulation. The Community Choice in Real Estate Act returns the issue back to its proper forum—the 

U.S. Congress. 

The National Association of REALTORS-supported legislation and its position on 

this issue is based primarily on two strong beliefs:

1. The Congress, not the Board of Governors of the Federal Reserve or the Secretary of the Treasury, is the proper judge of what is commerce and what 

is banking or financial services. The 535 elected Congressional representatives, not the seven Federal Reserve Board Governors or the Secretary of the 

Treasury, should be responsible for any changes in current law that would 

result in a dramatic restructuring of the real estate industry. Real estate 

brokerage and property management are clearly commercial activities. This 

view was central throughout the 25-year debate on the Glass-Steagall Act 

and the passage of the Gramm-Leach-Bliley Act of 1999, and clearly is reflected in historical and present Congressional intent.

2. Permitting financial holding companies and national bank subsidiaries to 

enter the real estate brokerage and management industry would have wideranging, adverse market effects. Industry concentration would increase, competition would decline, and consumer choice would be limited with no real 

benefits from economies of scale or scope. The unprecedented expansion of 

banking powers into the real estate brokerage/management industry would 

clearly expose the financial holding companies’ and their banking subsidiaries’ inherent conflicts of interest in selling financial services (banking products) rather than serving customers in the brokering of real estate property.

NAR’s position was eloquently stated by Congressman Jim Leach of Iowa, the 

sponsor of the Gramm-Leach-Bliley Act:

‘‘The movement to go beyond the integration of financial services and eliminate 

the traditional legal barriers between commerce and banking is simply a bridge 

we should not cross. It is a course fraught with risk and devoid of benefit and 

one for which there is no justification.

Such a step would open the door to a vast restructuring of the American economy 

and an abandonment of the traditional role of banks as impartial providers of 

credit, while exposing the taxpayer to liabilities on a scale far exceeding the savings and loan bailout. At issue with financial services modernization is increased competition. At issue with mixing commerce and banking is economic 

conglomeration, the concentration of ownership of corporate America.’’

Financial holding companies, their representative associations and other groups, 

including some large real estate brokerage companies, argue against the National 

Association of REALTORS position. They claim that the Association is being ‘‘protectionist,’’ and that the entry of banks into real estate would encourage more open 

competition in the real estate marketplace. On the contrary, the National Association of REALTORS position promotes open and fair competition. Indeed, its members would welcome FHCs as competitors if FHCs truly competed in a free market 

without the advantages of their bank subsidiaries’ federal charters and without creating the risks outlined by Chairman Leach. 

17

4See Federal Register, Vol.66, No.2, Wednesday, January 3, 2001, p.310. 

Currently we have a balanced marketplace for commerce, banking and financial 

services. Real estate brokerage firms do not engage in banking. Financial holding 

companies do not engage in commercial activities, such as real estate brokerage and 

property management. Banking and commerce are separate. The arena of financial 

services allows competition from both financial holding companies and commercial 

firms. Both real estate brokerages and financial holding companies (banks) have diversified their business lines into financial services that have served as a buffer between commerce and banking activities. This was the intent of Congress throughout 

its deliberations on financial modernization. 

The reality is that the entry of federally chartered banks or financial holding companies into the real estate brokerage business would tilt this balanced marketplace 

toward the FHCs. It would pit government-subsidized banking companies (putting 

taxpayer money at risk) against privately funded real estate enterprises. Furthermore, if FHCs are permitted to enter the real estate business, REALTORS and 

builders would be placed in the awkward position of having to go to banks which 

are subsidiaries of FHCs—their direct competitors—for loans and financial services. 

WHY REALTORS SUPPORT THE COMMUNITY CHOICE IN REAL ESTATE ACT

The Community Choice in Real Estate Act of 2001 was introduced by Congressmen 

Ken Calvert of California and Paul Kanjorski of Pennsylvania. The Act, H.R. 3424 

was introduced with more than 30 original cosponsors and today has more than 225 

co-sponsors. The legislation, along with its companion bill in the Senate, S.1839, is 

designed to address concerns expressed by both real estate professionals and consumers if financial holding companies and subsidiaries of national banks (FHCs) are 

permitted to engage in real estate brokerage and property management activities. 

In brief, The Community Choice in Real Estate Act stipulates that federal regulators prohibit these financial institutions from engaging in real estate brokerage 

and management activities. More specifically, H.R. 3424 and S.1839 specify that the 

Federal Reserve Board and the Secretary of the Treasury may not determine that 

real estate brokerage or real estate management activities are financial in nature, 

incidental to any financial activity, or complementary to a financial activity. 

THE COMMUNITY CHOICE IN REAL ESTATE ACT RETURNS THE ISSUE TO 

THE PROPER FORUM—THE U.S. CONGRESS 

The National Association of REALTORS position on banks entering the real estate business aligns with both historical and current Congressional intent. The legislative history of banking laws demonstrates that real estate brokerage has been 

consistently interpreted as a commercial, not a financial activity. Although the 

Gramm-Leach-Bliley Act of 1999 (GLB) made specific reforms in the nation’s banking and financial services laws, the separation of banking from commerce remains 

a tenet of national policy. And while the Federal Reserve and the Secretary of the 

Treasury are authorized by Gramm-Leach-Bliley to expand the list of financial activities, Congress has clearly indicated its intent to maintain the separation of banking and commerce. 

Financial modernization—the term that advocates used to characterize the legal 

changes that allowed banks, securities firms and insurance companies to enter each 

other’s businesses—has been interpreted by some as removing all barriers to banks 

entering non-banking businesses. But in its deliberations on the Gramm-Leach-Bliley Act, Congress stopped short of mixing banking and commerce. The GLB Act was 

quite specific from the outset in describing what a financial activity may be. The 

current activities of banks and financial holding companies principally relate to financial instruments: loans, checking accounts, mortgages, etc. While these represent 

value between two parties (usually a bank and a depositor or borrower), they are 

not tangible goods and rarely take any physical form. 

Commercial activities, such as real estate brokerage and property management, 

offer to consumers something that is tangible—a house, an appliance, a car, for example. Although banks argue that real estate has financial attributes, even the Federal Reserve Board and the Secretary of the Treasury in the proposed real estate 

regulation observed that bank-ascribed financial attributes might not be enough to 

treat real estate as a financial asset.4 And while purchasing tangible assets, such 

as a car, computer, or a home, may entail the use of financial instruments—usually 

cash or loans—this does not mean that commerce is ‘‘financial in nature’’ or ‘‘incidental to a financial activity.’’ Rather, it can be argued that financial activity is incidental to the real estate transaction. 

18

5Further evidence of Congressional intent regarding holding company expansion into non-financial areas can be discerned by the vote in the House of Representatives in 1998 in which 

an effort to permit banks to engage in commerce—up to five percent of their annual net revenue 

and five percent of their total assets—was defeated by a vote of 229 to 193. 

In the GLB Act, Congress enumerated those activities that it deemed to be financial in nature, but specifically omitted real estate brokerage and management. (For 

specifics, see 12 U.S.C. 1843 (k)(4)).5 Congress did make provisions to expand the 

list of financial activities. It devised specific criteria that such activities must meet, 

based on new technological developments to deliver financial products to consumers 

and how the marketplace itself evolved. Congress also authorized the Federal Reserve Board and the Treasury Department to agree on such new financial activities. 

However, Congress did not anticipate nor intend for that list of financial activities 

to include commercial ones. There has been no significant change in the relevant 

technology, or in the business of real estate brokerage or management, since enactment of the GLB Act in late 1999. The businesses of real estate brokerage and management remain, for all practical intents and purposes, the same today as they were 

on the date of enactment: the transfer of real property and such commercial activities related to such transactions. The very purpose of the regulation proposed by the 

Federal Reserve and the Treasury Department is to overturn the long-held understanding that real estate is commerce by re-designating it as a financial activity for 

purposes of the Gramm-Leach-Bliley Act. The proposal from the Federal Reserve 

and the Secretary of the Treasury runs counter to Congressional intent. 

The proposal to redefine real estate brokerage as a financial activity has met opposition from a full spectrum of consumer and industry groups. In support of that 

opposition, Congress is reasserting its authority in the arena by introducing The 

Community Choice in Real Estate Act. This bill amends the Bank Holding Company 

Act to preclude any such action by the Federal Reserve or Treasury, and clarifies 

Congressional intent by prohibiting banks and financial holding companies from entering real estate brokerage or property management. The bill’s intent is to maintain the status quo; it does not seek to preclude any current activities that banks 

and their affiliated businesses are authorized to do. It reasserts Congressional intent in maintaining the separation of banking and commerce. 

Members of Congress overwhelmingly are signaling their support for retaining the 

commercial distinction of real estate activities and their intention to maintain the 

separation of banking and commerce. In fewer than five months after The Community Choice in Real Estate Act was introduced in Congress, more than 225 members 

of the House of Representatives and at least 10 members of the Senate signed on 

as co-sponsors of the bills. 

THE ACT SUPPORTS A DIVERSIFIED REAL ESTATE SERVICES MARKETPLACE

During the past two decades, the financial services marketplace has grown substantially due, in part, to the entry of both commercial firms and banking companies. Commercial firms that are involved in the selling and/or brokering of durable 

goods (such as refrigerators, automobiles and homes) have naturally expanded into 

financial services to facilitate the transaction by offering consumer financing that 

is complementary to their primary service—the brokering/selling of a tangible product. Similarly, banking companies that are involved in the selling of banking services (such as consumer loans and commercial and industrial loans) have also expanded into financial services so that they can capture a greater market share by 

offering their customers financial services that complement their primary service—

banking. 

However, unlike a commercial firm, which risks its own capital funds, a bank’s 

ability to expand its powers and diversify into financial activities has historically 

been constrained by Congressional oversight. Because of the ‘‘special nature’’ of 

banks and the many federal subsidies that flow through a bank (e.g., deposit insurance, privileged access to credit), Congress has continually repeated its intent to 

separate banking activities from commerce activities in an effort to avoid conflicts 

of interest, adverse market outcomes and fairness issues that can be caused by a 

bank’s special privileges. 

The Gramm-Leach-Bliley Act provided an opportunity for financial holding companies to expand their product/service lines into financial activities and activities that 

are incidental to finance. It is very clear that the GLB Act set the foundation for 

a shared competitive playing field for both commercial firms and banks—the financial services marketplace. Commercial firms that have subsidiaries involved in financial activities compete head on with bank-owned financial subsidiaries. This 

competition was not ‘‘created’’ by the GLB Act; it already existed because bank-affiliVerDate Jan 17 2002 11:40 Jul 31, 2002 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6621 G:\WORK\COMM\051602\79656.000 HJUD1 PsN: 79656
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ated mortgage lenders already existed and, in fact, dominated—and still dominate—

mortgage originations. (In 1999, commercial banks and subsidiaries of commercial 

banks accounted for the largest market share—44 percent—of mortgage originations, according to the Home Mortgage Disclosure Act. The top 25 diversified real 

estate brokerage firms accounted for only 0.8 percent of mortgage originations.) For 

example, the General Motors Acceptance Corporation (GMAC)—a financial services 

subsidiary of General Motors competes against Wells Fargo and other banks to sell 

financing services to customers purchasing a General Motors automobile. Similarly, 

Circuit City competes directly with Bank America to sell financing services to customers purchasing Circuit City-electronic products. 

In the real estate marketplace, companies like John Doe, REALTOR, compete directly with banks, like BankAmerica, in the financial services marketplace by providing real estate-related financial services—principally mortgage brokering services 

and title insurance—to customers purchasing a home that was brokered/sold by 

John Doe, REALTOR. Both the real estate brokerage company and the bank offer 

a number of real estate related financial services to homebuyers and sellers. 

In the post-GLB Act marketplace, the real estate brokerage company does not 

offer banking services and banks do not offer commercial services—real estate brokerage and management. The separation of banking and commercial activities is intact. The competition is in the financial services arena where it belongs. Consumers 

benefit from this arrangement because the direct competition for financial services 

between commercial companies and banks results in greater consumer choice and 

customer service. Prohibitions against the encroachment of federally subsidized 

banks into the world of commerce limit conflicts of interest or unfair competition.

The ability of real estate brokerage companies to diversify their business lines 

into the financial services marketplace has produced a number of diversified real 

estate services companies to better serve consumers. Even the smaller and less diversified real estate brokerage companies now look to offer ancillary services to their 

homebuying and selling clients. Moreover, there are examples where banks and real 

estate brokerage companies have joint ventured in the financial services marketplace. A prominent example is Prosperity Mortgage, which couples Wells Fargo 

Bank and Long and Foster, REALTORS. 

Diversified real estate brokerage companies compete directly against the large financial holding companies (banks) in the financial services marketplace each and 

every day. The competitive dynamics in this marketplace are no different from the 

competitive nature of the automobile and electronics marketplaces. The beneficiaries 

in all of these markets are consumers. 

THE COMMUNITY CHOICE IN REAL ESTATE ACT WILL BENEFIT CONSUMERS AND THE

REAL ESTATE INDUSTRY

The Community Choice in Real Estate Act will help to maintain a competitive, 

efficient, and balanced real estate marketplace, providing consumer choice at low 

cost and with no risk to the U.S. taxpayers. The entry of federally insured depository lending institutions into the real estate brokerage business would tilt the competitive playing field by pitting government-subsidized financial holding companies 

and national bank subsidiaries against privately funded real estate enterprises. Passage of the Act will help preserve a fiercely competitive real estate brokerage marketplace. 


EdwA.eps
20

6There are approximately two million people who hold real estate licenses. However, not all 

of those are active practitioners. It should be noted that REALTOR, REALTORS, and REALTOR-ASSOCIATE(r) are registered collective membership marks that identify, and may be used 

only by, real estate professionals who are members of the National Association of REALTORS

and subscribe to is strict Code of Ethics. 

The real estate brokerage industry as it exists today has large numbers of independent real estate professionals and brokerages actively competing for prospective 

buyers and sellers. Competition is fierce, efficiencies are high, and there are relatively few barriers to entry. These characteristics make it highly unlikely that the 

proposed regulation would benefit either business or consumer interests. 

The residential real estate brokerage industry is a competitive marketplace, 

where more three quarters of a million REALTORS 6 and tens of thousands of real 

estate brokerages compete for customers’ business each day. The underlying cost 

structure of the industry and the relative ease of entry into the market serve as 

checks to the concentration of market power. The large number of industry players 

ensures homebuyers and sellers access to service providers who best meet consumers’ needs at the lowest price possible. 

Real estate firms tend to compete actively for business in three different arenas. 

First, firms compete for the best real estate agents. Second, firms compete for sellers’ listings and homebuyers against other real estate firms in their market area. 

Finally, real estate firms and agents compete against the other homebuying and 

selling options, including For Sale by Owner (FSBOs). The result of this threepronged competition revenue and cost pressures that limit profitability for most real 

estate brokerages. But this competition also results in excellent service provided efficiently by real estate firms and agents for both buyers and sellers. The Community 

Choice in Real Estate Act would preserve this system. 

MIXING BANKING AND COMMERCE WILL STIFLE COMPETITION IN THE 

REAL ESTATE INDUSTRY 

Today any commercial firm can enter real estate brokerage, but FHCs have government-imposed barriers to entry. National banks and financial holding companies 

have long been able to own mortgage companies and engage in joint ventures with 

real estate firms. They now claim that real estate brokerage and management are 

financial activities, without acknowledging their current competition in this area 

through their existing mortgage lending affiliates. Financial holding companies now 

want to directly own commercial firms in the form of real estate firms and compete 

with other commercial firms using the federal subsidies available to their banking 

subsidiaries. This is not the sort of competition that Gramm-Leach-Bliley envisioned. 

The expansion of banking powers that would permit FHCs to engage in real estate brokerage activities will have a detrimental effect on the real estate brokerage 

industry. The federal banking charter provides federal deposit insurance and privileged access to credit—advantages not offered to real estate brokerage firms. Most 

of the advantages of the bank charter directly add to bank profitability that would 

flow up to the financial holding company, thus offering FHCs and their real estate 

brokerage subsidiaries a competitive advantage over commercial firms in the real 

estate industry. 

Allowing FHCs to provide brokerage, funding and investment services for real estate would increase the power of these integrated firms. This power could be used 

to limit the entry of new real estate firms and thus limit the competition characterizing the market today in two distinct ways. 

First, FHCs would have the ability to fund new real estate brokerages with revenues from the banking side of the business, thus tilting the playing field towards 

FHCs. Financial holding companies would be able to use banking fees or even profits from their mortgage operations both to increase profitability and to subsidize 

their entry into insurance and other financial services. Few traditional real estate 

brokerages have access to outside income streams to subsidize the real estate brokerage business. The result could be an increase in industry concentration as real 

estate brokerages exit the industry unable to respond to their well-financed new 

competitors. The same dynamic would limit entry of new real estate firms. 

Second, FHCs could leverage their privileged access to capital, access to numerous 

subsidiaries and outside income streams to engage in a sustained period of belowcost pricing designed to eliminate other firms providing the same service. This could 

damage any real estate brokerage firms that do not have the resources to defend 

themselves against a well-financed and subsidized FHC. Again, formerly viable real 

estate brokerages could be forced to dissolve—not because of an inability to provide 

efficient and quality service to consumers, but because below-cost pricing can unVerDate Jan 17 2002 11:40 Jul 31, 2002 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6621 G:\WORK\COMM\051602\79656.000 HJUD1 PsN: 79656
21

fairly eliminate the competition. The result could be a smaller number of firms that 

are less likely to provide the benefits that competition brings to today’s real estate 

brokerage market. 

MIXING BANKING AND COMMERCE HURTS CONSUMERS 

The National Association of REALTORS agrees with the message sent by the 

U.S. Congress: mixing commerce and banking will adversely affect the real estate 

industry. If big banks are allowed into the real estate business, the market could 

soon be dominated by a smattering of large banking conglomerates whose primary 

goal is to cross-sell various financial products, not to put people in homes and commercial properties. The end result could be fewer choices for consumers, higher fees 

and less competition. 

In the banking industry a few dominant firms control a significant share of the 

total market. FHCs’ entry into the real estate brokerage market would likely increase concentration and introduce unfair competition because of their federal subsidies. There is likely to be a significant decline in the number of firms and the 

number of small firms that represent a key segment of the industry. The real estate 

brokerage business could change from a localized, highly competitive industry to one 

that is dominated by nationwide federally chartered firms. 

It is unclear what FHCs could bring to the market that would increase competition. Any additional entry will not necessarily lower costs. FHCs claim that consumer costs will go down, but those lower costs can only be realized by introducing 

economies of scale or scope, cross-subsidization, or predatory pricing. The latter two 

reasons are not permanent benefits for consumers. Only the first—economies of 

scale—enhances consumer welfare. Without an increase in efficiency, there would be 

no cost savings to pass along to consumers. But there are limited economies of scale 

in the real estate brokerage industry. 

Even if FHCs were able to reduce real estate brokerage fees temporarily, any savings to homebuyers would be offset by higher costs for bank customers. Absent 

economies of scale, lower real estate brokerage fees can only come via cross-subsidization from other business arenas. The higher banking fees are likely to become 

permanent features of the banking system, given barriers to entry and concentration of market power, while reductions in real estate brokerage fees could be temporary as firms exit the industry. 

The expansion of banking powers that would permit financial holding companies 

into the real estate brokerage business could also limit consumer choice in the selection of a real estate professional and other real estate-related service providers. 

FHCs have an inherent conflict of interest in selling financial services (banking 

products) rather than serving customers in the brokering of real property. The parental relationship between FHCs and their subsidiary real estate brokerage business would likely steer consumers to the FHCs’ subsidiaries. Agents working for an 

FHC-owned real estate brokerage firm would have less incentive to find an outside 

loan provider or other real estate settlement service vendor that best fits their customers’ needs. 

There is also the likelihood that FHCs entering the real estate brokerage industry 

would retain their real estate agents as salary-based employees, rather than as commission-based independent contractors. As FHC employees, these real estate agents 

would focus on the FHC’s profits, cross-selling the holding company’s other services. 

This is contrary to the current real estate market where there is fierce competition 

among a large number of firms ensuring that consumers receive valuable, impartial

advice when they most need it. 

THE ACT BENEFITS CONSUMERS AND THE REAL ESTATE INDUSTRY 

In summary, passage of The Community Choice in Real Estate Act will ensure 

more competition, and thus more consumer choice. More competition will maintain 

the lowest cost real estate brokerage services as well as lower banking fees. Taxpayers will be protected from risks associated with commercial endeavors underwritten by federally insured depository lending institutions. Consumers will continue to be served by real estate professionals whose interests are aligned with 

theirs. 

The Community Choice in Real Estate Act defines real estate brokerage and management as commercial activities, outside the scope of a federal bank charter. The 

Community Choice in Real Estate Act will limit banking institutions to activities 

permitted under their current charters, and maintain the current environment that 

provides for an efficient and competitive real estate brokerage market that benefits 

both the real estate industry and America’s consumers. 

22

OVERWHELMING INDUSTRY SUPPORT FOR THE NATIONAL ASSOCIATION OF REALTORS

POSITION

The National Association of REALTORS represents all of its members and the 

real estate industry as a whole. In the last 14 months, the Association has spoken 

for its 800,000 members with one voice, as The Voice for Real Estate. A unified voice 

is crucial in maintaining a competitive and highly efficient real estate industry that 

serves America’s property owners. It is even more vital on the issue of allowing financial holding companies and national bank subsidiaries (FHCs) to engage in real 

estate brokerage and property management activities. 

Recent research indicates that the National Associatino of REALTORS does

speak for an overwhelming majority of its members who oppose FHCs’ entry into 

the real estate brokerage and management business. In a recent survey (February 

2002), more than nine out of 10 REALTORS oppose the pending Federal Reserve 

and Treasury Department rule that would allow big banking conglomerates to enter 

real estate brokerage and management. Perhaps more importantly, 96 percent support efforts by the National Association of REALTORS to prevent FHCs from entering real estate brokerage management.

The survey found widespread support among broker-owners as well as sales 

agents. Some 82 percent of large brokers support NAR’s position, according to the 

survey. The survey also found that 81 percent of REALTORS want NAR to be even 

more aggressive in its efforts, and majority of large brokers also want NAR to do 

more to stop FHCs from entering the real estate business.


EdwB.eps
23


EdwC.eps EdwD.eps
24

Mr. BARR. Mr. Yingling, you are now recognized for a 5-minute 

opening statement, sir. 

STATEMENT OF EDWARD L. YINGLING, EXECUTIVE DIRECTOR, 

AMERICAN BANKERS ASSOCIATION, UNITED STATES PUBLIC 

INTEREST GROUP 

Mr. YINGLING. Thank you, Mr. Chairman and thank you for inviting the ABA to testify this afternoon. 

We believe that it is clear that the Fed and the Treasury are correctly following the process established in the Gramm-Leach-Bliley 

Act and under established principles of administrative law. 

The provision of law under which the real estate issue has been 

raised is really the heart and soul of the Gramm-Leach-Bliley Act. 


EdwE.eps
25

In more than 15 years of debate leading up to the act, Congress 

often found itself in the middle of arguments between financial 

services sectors about who should do what. The result was gridlock 

and an out-of-date financial system that did not reflect changes in 

consumer needs or in the use of technology. 

Now, unfortunately, the Congress is being asked to ignore the 

primary purpose of Gramm-Leach-Bliley and to once again become 

a referee deciding who should do what. 

In enacting Gramm-Leach-Bliley Congress created a flexible yet 

conservative process. For a new activity to be approved, not one 

agency but two must approve it. The Fed and the Treasury were 

chosen for their obvious expertise in financial services and on the 

economy. 

Under the statute, the Fed and the Treasury determine whether 

a new activity is, ‘‘financial in nature or incidental to a financial 

activity.’’ The regulators must consider, among other factors, 

changes in the marketplace and technology and whether the activity would enable a bank to compete with any company providing 

financial services. 

The marketplace and technology are rapidly changing. Moreover, 

combining real estate brokerage and banking services is not a new 

or unusual activity. Real estate firms combine banking services and 

real estate brokerage. Insurance companies do it, securities firms 

do it, and well over half of the federally insured depository institutions in this country today have the authority to do it. The ABA 

believes that all banks should have the same opportunity to provide services to meet the needs of our customers. 

Despite comments to the contrary, anyone who paid attention 

during the years of debate that led up to the Gramm-Leach-Bliley 

Act should not have been surprised to see the current proposal. 

I can add from personal experience that over 10 years ago I negotiated at length with my counterpart at the National Association 

of REALTORS the rules under which banks could provide real estate brokerage services. This negotiation was in the context of a 

previous version of Gramm-Leach-Bliley, which was actually more 

restrictive than the one that was enacted in 1999. 

Thus, over 10 years ago, the National Association of REALTORS recognized that a more restrictive version of financial modernization could be interpreted as permitting banks to offer real estate brokerage. Furthermore, in 1995, the National Association of 

REALTORS testified on another forerunner of Gramm-Leach-Bliley before the House Banking Committee and stated unequivocally 

that the language must be amended to exclude brokerage and management. 

It was not amended then, nor was it amended in 1999; and, of 

course, the marketplace has changed dramatically in the 10 years 

since I first negotiated with the REALTORS. Just look at the ads 

attached to my testimony to see what is really going on today. 

No one has been able to point to any specific language in the legislative history that supports the argument that Congress intended 

to exclude real estate brokerage. 

Congress, on the other hand, did specifically exclude one aspect 

of real estate in Gramm-Leach-Bliley, and that aspect was real esVerDate Jan 17 2002 11:40 Jul 31, 2002 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6601 G:\WORK\COMM\051602\79656.000 HJUD1 PsN: 79656
26

tate development. Certainly the real estate brokerage issue would 

have been raised in that context if it was going to be raised. 

Finally, I would point out that the language in question is in the 

form of amendments to section 4 of the Bank Holding Company 

Act, which has been in existence since 1956; and section 4 has a 

long history of regulatory action and court review, including numerous Supreme Court reviews, particularly since 1970. So there 

is a long history with regard to this process. We strongly believe 

that the Fed and the Treasury have correctly followed the letter 

and intent of the law. 

More importantly, increased competition clearly benefits consumers and the economy. It is a catalyst for innovation, more customer choice, better service and competitive prices. 

Thank you, Mr. Chairman. 

Mr. BARR. Thank you very much, Mr. Yingling, for your testimony. 

[The prepared statement of Mr. Yingling follows:]

PREPARED STATEMENT OF EDWARD L. YINGLING

Mr. Chairman, thank you for inviting the American Bankers Association (ABA) 

to testify this afternoon. My name is Edward L. Yingling, and I am the Executive 

Director of Government Relations at the ABA. The American Bankers Association 

brings together all categories of banking institutions to best represent the interests 

of a rapidly changing industry. Its membership—which includes community, regional and money center banks and holding companies, as well as savings associations, trust companies and savings banks—makes ABA the largest banking trade 

association in the country. 

Mr. Chairman, in addition to my role in government relations at the ABA, I am 

also an attorney with over 25 years of experience in the banking field. Both in private practice and at the ABA, I have been directly involved for well over two decades in the Congressional and legal debates that led eventually, after so many 

years, to the enactment of the financial modernization legislation known as the 

Gramm-Leach-Bliley Act (GLBA). Hopefully, with this background, I can provide 

some useful insight to the Subcommittee with respect to the administrative process, 

as requested in your letter of invitation. 

In my testimony today I would like to make the following points: 

In enacting GLBA, Congress created a flexible, yet conservative regulatory process 

to allow banks to offer new services—a process that the Federal Reserve Board and 

the Treasury Department have correctly followed. 

We have grave concerns about the broader effects of the current controversy and 

whether it sets a precedent that could hinder future approvals of new services under 

GLBA. The Act was designed to keep our financial system up-to-date by delegating 

those decisions to the FRB and the Treasury. This goal is being frustrated by efforts 

to take the case for determining what is financial in nature back to Congress, placing Congress in the very role that it delegated in GLBA to the agencies with the 

greatest level of expertise. 

The request by the American Bankers Association and others to have real estate 

brokerage and management approved fully meets the statutory standard contained 

within GLBA. 

I. OVERVIEW

We believe it is quite evident that the Federal Reserve Board (FRB) and the Department of the Treasury are following the process laid down in GLBA, as well as 

the normal process under established principles of administrative law. Of course, we 

do not know, nor does anyone know at this point, what the result of this regulatory 

process will be, although we believe there is a strong case that real estate brokerage 

and management activities should be approved under the standards of GLBA. 

While much of the public discussion during consideration of GLBA was on securities and insurance activities, which had been the focus of the most controversy over 

a number of years, it is quite clear that GLBA had a more general and broader purpose. In fact, the provision of GLBA under which the real estate issue has been 

raised is really the heart and soul of that Act. The primary purpose of GLBA was 

to create a mechanism to bring our financial services laws up-to-date both at the 

27

time of its enactment, and also going forward. It was widely believed that the 

contentiousness, turf wars, and delays that preceded GLBA were harmful to our financial system, our economy, and the consumers of financial services. Therefore, 

Congress provided a mechanism to keep our financial system up-to-date going forward, and, importantly in this context, to remove the need to have Congress referee 

between industries every time any change to our financial system was proposed. It 

is ironic, but really very sad, that on the first issue of modernization raised under 

this new regulatory process, the Congress is being asked to ignore this primary purpose of GLBA, and to once again become a referee, deciding whether or not a specific industry should be exempt from the criteria Congress set up less than three 

years ago. 

In enacting GLBA, Congress created a flexible, yet conservative, process. In order 

for a new activity to be approved, not one agency, but two, must approve it. The 

two agencies chosen were, not surprisingly, the FRB and the Treasury. These are 

the two agencies that have the most expertise with respect to the entire financial 

services industry, as well as the economy. They are also two conservative agencies. 

It is worth noting, since the National Association of REALTORS (NAR) has 

raised the specter of banking and commerce, that the FRB has, for many years, 

been the primary opponent of breaching the wall between banking and commerce. 

Based on this record, one would certainly expect the FRB to look very closely at any 

question relating to commercial activities. 

It is important, of course, to look at the specific language in the statute. Under 

the statute, the FRB and the Treasury determine whether or not a potential new 

activity is ‘‘financial in nature or incidental to a financial activity.’’ In making that 

determination, GLBA directs the regulators to consider a variety of factors. Those 

factors include: 1) the purposes of the GLBA; 2) changes, or reasonably expected 

changes, in the marketplace in which financial holding companies compete; 3) 

changes, or reasonably expected changes, in the technology for delivering financial 

services; and 4) 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. 

As discussed more fully below, we believe that real estate brokerage and property 

management, in the context of the changes taking place in the marketplace for 

these services, clearly meet the criteria of the statute. However, that is something 

for the regulators ultimately to determine. One thing is for certain—it is quite clear 

that a strong case can be made that these criteria are met. 

While many of the issues are discussed further below, at this stage it is worth 

emphasizing a couple of points. First, while the purchase of a home has many aspects, it is clearly the most important financial transaction for the great majority 

of people. It is not only the largest monetary transaction in which most people engage, but also the mechanism through which they accumulate a great portion of 

their wealth over time. Second, the criteria in the statute specifically refer to competing with companies providing financial services in the United States. It is a fact 

that a significant majority of insured depository institutions can already offer real 

estate brokerage services under the laws of many states and under federal statutes. 

More importantly, as demonstrated by the advertisements attached to this testimony, many real estate brokerage firms are actively engaged in providing financial 

services in direct competition with banks. 

The NAR has tried to make a simplistic argument that the proposal involves 

‘‘commerce’’ and is, therefore, beyond the scope of GLBA. However, the issue is not 

at all that simple. GLBA does not prohibit commercial activities; rather it sets out 

specific criteria to determine permissible activities. The authors of GLBA clearly 

recognized that there was no exact or permanent line to define financial services. 

That is why they set up a mechanism to have the FRB and Treasury make determinations going forward, and why they developed the specific criteria that are in 

the statute. 

Despite comments to the contrary, anyone who paid attention to the debate over 

the many years that led up to GLBA would not have been surprised to see the current proposal. I can add from personal experience that over ten years ago I negotiated, at length, with my counterpart at the NAR, the rules under which banks 

would enter the real estate brokerage business. This negotiation took place with respect to criteria in a previous version of GLBA which was, in fact, much more restrictive than the criteria enacted in 1999. Thus, over ten years ago, the NAR recognized that even a more restrictive version of financial modernization could be interpreted as permitting banking companies to offer real estate brokerage. Furthermore, 

in 1995, NAR testified on another forerunner of GLBA before the House Banking 

Committee. In that testimony, NAR stated unequivocally that the language must be 

clarified to exclude brokerage and management. It was not clarified then, nor was 

28

1 12 U.S.C. § 2601 et seq 2The requirement for affiliated business disclosures is part of the regulations of the Department of Housing and Urban Development that implement RESPA. 24 C.F.R. § 3500.15. 

it in GLBA. That bill, the ‘‘Financial Services Competitiveness Act of 1995,’’ con- tained similar, but less broad, language to that ultimately enacted in GLBA. 

The NAR has conducted an extensive lobbying and public relations campaign on 

this issue. Yet, it has been unable to point to any specific language in the legislative 

history that supports its argument that Congress intended to exclude real estate 

brokerage. In fact, Congress did specifically exclude one aspect of real estate—real 

estate development and investment—in GLBA. Certainly the real estate brokerage 

issue would have been raised in that context, if it were going to be raised. 

The FRB and Treasury have correctly followed the letter and intent of GLBA, as 

well as all administrative law requirements, in this matter. Their approach is precisely what Congress intended. It is NAR’s efforts to have Congress serve as referee 

that is a prime example of what Congress was seeking to avoid in enacting GLBA. 

II. LEGAL ANALYSIS

The Regulatory Process 

The FRB and Treasury began the regulatory process over two years ago, on March 

17, 2000, when the agencies published an interim rule in the Federal Register enu- merating those activities determined specifically under the statute to be ‘‘financial 

in nature or incidental to such financial activity, ‘‘as well as proposing a process by 

which any party could seek to have additional activities included in the list. This 

process was approved by the FRB and Treasury without amendment and republished in the Federal Register on January 13, 2001. 

The regulatory process adopted by the FRB and Treasury requires the petitioner 

to do the following: 1) identify and define the activity for which the determination 

is sought; 2) provide specific information about what the activity would involve and 

how it would be conducted; and 3) explain in detail why the activity should be considered financial in nature or incidental to a financial activity and provide information that is sufficient to support a finding that the activity is financial. 

On July 25, 2000, the ABA petitioned the FRB and Treasury under the interim 

rule for a determination that real estate brokerage and real estate management activities were permissible activities for financial holding companies and financial subsidiaries under GLBA. 

On January 3, 2001, the FRB and Treasury published a request for comments as 

to whether the agencies should determine that real estate brokerage and management were activities that were ‘‘financial in nature or incidental to a financial activity.’’ On April 30, 2001, ABA responded to the request, stating that real estate brokerage and management activities fall squarely within the language of GLBA. Authorizing these activities, we believe, would increase competition in the real estate 

markets and provide consumers with innovation, more choices and lower prices. The 

proposal raises no new consumer protection or safety and soundness concerns and 

will enable banks to compete with integrated real estate firms that currently provide brokerage and mortgage lending activities. 

While I will outline the compelling market and technological factors in a moment, 

the point that existing federal and state laws protect consumers from the potentially 

adverse effects of combining banking and real estate brokerage is also an important 

one. The simple fact is the same potential for abuse the NAR alleges will occur if 

banks offer real estate brokerage services exists any time one of the many real estate firms engaged in financial services deals with a customer. However, while these 

firms, along with some insured depository institutions, have been selling real estate 

and funding mortgages for years, there has been no outcry about these conflicts of 

interest. Why?—Because the Real Estate Settlement Procedures Act (RESPA) 1 requires realtors affiliated with lenders to disclose that fact to customers before the 

purchase occurs. 

The RESPA disclosure,2 which must be on a separate piece of paper, must state 

the relationship between the real estate agent and the lender and provide the estimated charges or range of charges by the lender. It must also notify the customer 

that he or she is not required to use the lender and is free to shop around for a 

better deal. If the real estate agent requires the use of its affiliated lender, that 

agent violates the kickback and unearned fee provisions of Section 8 of RESPA. The 

customer is expected to sign an acknowledgement of the disclosure. 

Bank involvement in real estate brokerage and management services is also consistent with safe and sound banking. First, providing these services will help to diversify the income stream of these institutions and help to improve their financial 

29

base. Real estate brokerage and management services are activities where a bank 

acts only as an agent for a third party, but does not take an ownership position in 

the property. By their very nature, agency activities pose very little risk to the safety 

and soundness of depository institutions. 

Second, under GLBA, the bank regulators must deem a bank to be well-capitalized and well-managed before a banking organization can participate in any of the 

expanded financial activities permitted under the GLB Act, including real estate 

brokerage and property management. Thus, only financially strong institutions 

would be authorized to engage in these activities. 

Third, banking organizations are also subject to Sections 23A and 23B of the Federal Reserve Act, which limit the amount of credit and other forms of support a 

bank could provide to a real estate brokerage affiliate or subsidiary. Such limits ensure the safety and soundness of the bank will not be negatively impacted by its 

subsidiaries or affiliates. 

Fourth, many banking organizations already have years of experience in providing 

real estate activities. In fact, the purchase, sale and management of real estate are 

frequently significant aspects of fiduciary asset management in many bank trust departments. Because banks currently have trust personnel who provide real estate 

brokerage and management services on a daily basis to trust customers, providing 

the service outside of the trust department would not be a new activity in which 

banking organizations lack expertise. Thus, no new safety and soundness issues 

would be raised. 

Finally, a precedent already exists for bank involvement in real estate activities. 

In over half of the states, state banking regulators have the authority (either explicitly, through regulatory interpretations, and through wildcard and parity statutes) 

to allow state-chartered banking organizations to engage in real estate activities. 

(See the attached state-by-state listing developed by the Conference of State Bank 

Supervisors.) Moreover, savings institutions and credit unions already have brokerage authority. Thus well over a majority of federally insured depository institutions 

already have this authority. Allowing all banks the same rights and privileges 

should enhance the competition for real estate services. 

In July, it will be two years since the filing of the original petition requesting a 

determination that real estate brokerage and management be deemed financial in 

nature. It is now certain that this determination will not be made until 2003. As 

you are aware, in a letter to Congressman Michael G. Oxley, dated April 22, 2002, 

Treasury Secretary Paul H. O’Neill indicated, in consultation with the FRB, the 

Treasury will not make a final decision on this proposed rule until next year. 

A fundamental purpose of GLBA was to enable banking institutions to compete 

with other financial services providers, and ABA has amply demonstrated that the 

competition is touting the advantages of one-stop homebuying services. While we as 

an industry have always looked at real estate brokerage and management as providing us with more options to compete in the long term, with each passing day, 

real estate firms become more deeply involved in financial services such as mortgage and insurance. And with each passing day, the case for allowing banks to offer 

real estate services only gets stronger. 

As an industry we have grave concerns about the broader effects of this controversy and whether it sets a precedent that could hinder future approvals of new 

powers under GLB. The Act was designed to keep our financial system up-to-date 

by delegating those decisions to the FRB and Treasury. This goal is being frustrated 

by efforts to take the case for determining what is appropriate back to Congress, 

placing Congress in the very role that it delegated to the agencies with the greatest 

level of expertise to make these decisions based on specific statutory criteria. 

H.R. 3424 not only frustrates the GLBA process, it reduces consumer choice. Consumers would have fewer choices of whom to do business with; agents would have 

fewer choices of whom to work for; and businesses would have fewer choices for joint 

marketing, fewer potential merger partners, and fewer potential buyers. We believe 

a competitive market is the best way to provide quality real estate brokerage and 

management services. 

The Statutory Standard 

Congress did not give the FRB and the Treasury unfettered discretion to make 

the determination that an activity is appropriate for approval. GLBA specifically 

sets forth certain traditional banking activities that Congress knew were clearly financial in nature. 

In addition to these currently-recognized activities, the Act authorizes activities 

that the FRB and Treasury determine, by regulation or order, to be ‘‘financial in 

nature or incidental to such financial activity.’’ This authority to permit new financial activities is considerably broader than the FRB’s comparable authority before 

30

3 12 CFR 7.1002. 

GLBA was enacted, which had only extended to a new activity that was ‘‘so closely 

related to banking as to be a proper incident thereto.’’ One specific aspect of this new authority is that the FRB is directed to define the 

extent to which three types of activities are ‘‘financial in nature:’’ 1) lending, exchanging, and engaging in certain other transactions with financial assets other 

than money or securities; 2) providing any device or instrumentality for transferring 

money or other financial assets; or 3) arranging, effecting, or facilitating financial 

transactions for the account of third parties. 

ABA believes the proposed real estate activities qualify under the first and third 

statutory categories. For example, real estate brokerage is generally the business of 

negotiating a contract for the purchase, sale, exchange, lease, or rental of real estate—which we believe is a financial asset—for others. 

The FRB and Treasury, in their request for public comment, note that many of 

the essential aspects of real estate brokerage are already permissible under national 

bank ‘‘finder’’ authority. The regulators already authorize financial holding companies, as well as national banks and their subsidiaries, to act as finders in bringing 

together buyers and sellers for financial or nonfinancial transactions. Permissible 

finder activities include ‘‘identifying potential parties, making inquiries as to interest, introducing or arranging meetings of interested parties, and otherwise bringing 

parties together for a transaction . . .’’ 3 This description of finders authority is the 

essence of every real estate transaction. 

Apart from their authority with respect to these three specified activities, the FRB 

and Treasury have broad discretion to determine that other types of activities are 

‘‘financial in nature or incidental to such activity.’’ In making such a determination, 

the regulators are directed to consider a number of factors. Among the specific factors to be considered are:

fl Changes or reasonably expected changes in the marketplace in which financial holding companies compete or the technology for delivering financial 

services; and

fl Whether the proposed activity is necessary or appropriate to allow a financial holding company to -

• Compete effectively with any company seeking to provide financial services;

• Efficiently deliver information and services that are financial in nature 

through the use of technology, including applications involving systems for 

data transmission or financial transactions; and

• Offer customers any available or emerging technological means for using 

financial services or for the document imaging of data.

The GLBA standard is a significant expansion of the FRB and Treasury’s capacity 

to consider the competitive realities of our nation’s financial marketplace when determining permissible activities for financial holding companies and financial subsidiaries. It is our contention that the marketplace, and the technology associated 

with it, in the case of real estate brokerage and property management, have already 

changed and will continue to change dramatically in ways that significantly impact 

the ability of banks to effectively compete with other companies that provide financial services. 

Finally, in addition to the newly-authorized financial activities described above, 

the Act authorizes financial holding companies to engage in certain nonfinancial activities. Specifically, a financial holding company may engage in a nonfinancial activity, or acquire a company engaged in a nonfinancial activity, if the FRB and 

Treasury determine by regulation or order that the activity: 1) is complementary to 

a financial activity; and 2) does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. 

III. THE MARKETPLACE AND TECHNOLOGY

Clearly, combining real estate brokerage and banking services is not a new or unusual activity. Real estate firms do it. Insurance companies do it. Securities firms 

do it. And well over half the federally insured depository institutions in this country, 

including many of the largest banks and savings institutions, can do it. The ABA 

believes that all banks should have the same opportunity to provide services that 

meet the needs of our customers. 

In 1990 there were 150,000 residential real estate firms. Today there are about 

half that many. In this new, competitive environment, bankers and real estate proVerDate Jan 17 2002 11:40 Jul 31, 2002 Jkt 000000 PO 00000 Frm 00034 Fmt 6633 Sfmt 6621 G:\WORK\COMM\051602\79656.000 HJUD1 PsN: 79656
31

4For example, recently several credit unions in Wisconsin jointly purchased a majority interest in one of the state’s larger real estate brokerage firms. 

fessionals have much to offer to each other—and to consumers. Banks could provide 

needed capital and cross-marketing opportunities to support the growth of local real 

estate firms. Real estate professionals could provide the personalized services and 

experience that is their strength. Many real estate brokers have told the ABA that 

they would welcome approval of the proposal because it would provide a potential 

local partner to help them compete with the large national chains that are increasingly dominating the real estate market. 

The benefits of competition are well known. In a free market, businesses choose 

to offer new products if they believe they can provide better services at competitive 

prices. Obviously, not all banking organizations will choose to offer real estate services, but those that do will enter the market because they believe they can meet 

or beat the competition. Increasing the number of providers raises the bar for all 

the participants, forcing improvements in efficiency, pricing and service levels—all 

to the benefit of homebuyers. If banks were allowed to offer real estate brokerage and management services 

there would be more choices for everyone.

fl More Choices for Consumers 

More players in the real estate business mean more and better products for 

consumers. In any competitive market, new participants bring new, creative 

ideas to the market—all designed to provide better service and greater convenience, at reasonable prices. In fact, businesses can only be successful in 

new markets by providing services that meet the needs of customers. Free 

competition among a wide variety of providers is the cornerstone of our economic system.

fl More Choices for Real Estate Agents 

Real estate agents pride themselves on being independent contractors, 

choosing the best companies to work for. If there are more companies to 

choose from, agents’ employment opportunities will be much broader. Banks 

will only be able to attract good agents by offering competitive commissions 

and other incentive-based compensation packages. And because the real estate business requires expertise, licensing, and other requirements, banks 

would look to hire experienced real estate agents. Banks know that converting tellers to real estate agents would be a poor business strategy.

fl More Choices for Real Estate Companies 

Forward-looking businesses are always looking for opportunities to improve 

their franchise value—strengthening, expanding, merging, or even selling 

their business. Allowing banks to engage in real estate brokerage and management services gives real estate companies more options for bringing additional capital and technology to the table, through joint ventures, for example. Banks also represent potential buyers if agencies choose to sell their 

businesses. Indeed, in some communities, partnering with the local bank 

may be the only way for the local real estate brokerage to compete with the 

growing national chains. This is one reason why many real estate firms also 

oppose H.R. 3424 and S. 1839. It is interesting to note that many insurance 

agencies thought that bank involvement was going to hurt their business—

until they realized that it provided many more options than they had before. 

The Marketplace is Changing—Real Estate and Banking Services Combined 

Ironically, the NAR is now objecting to the very combinations that their members 

have undertaken—offering brokerage, mortgage banking, and, often, insurance 

under one roof. As I previously noted, securities firms, insurance companies, credit 

unions, savings associations and state-chartered banks in half the states can offer 

end-to-end services.4

Take, for example, two of the biggest real estate companies in the Washington 

D.C. area—Weichert and Long & Foster. Both offer the full range of financial services. Weichert calls it ‘‘One Stop Gold’’ and Long & Foster calls it ‘‘Real-Edge Services.’’ These packages provide cost, convenience and service options for customers. 

They may not be right for every consumer, but they give those consumers choices. 

These examples show the importance companies—and their customers—place on 

having the option to combine real estate brokerage, mortgage and insurance services. I’ve included as an attachment several pages of examples—in their own 

words—of real estate companies that offer both banking and brokerage services. 

All banks should have the same options. In fact, according to NAR’s own survey 

in 1999 and a recent 2002 survey by Murray Consulting, not only is one-stop shopVerDate Jan 17 2002 11:40 Jul 31, 2002 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6621 G:\WORK\COMM\051602\79656.000 HJUD1 PsN: 79656
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5The Boston Globe, February 25, 2001

ping viewed very positively by homebuyers, but banks, mortgage companies and real 

estate companies are all viewed equally as appropriate providers of these services. 

Restricting some banking organizations from offering the same end-to-end combination of real estate services and mortgage lending as others will place those 

banks at a tremendous competitive disadvantage—losing not just an opportunity in 

the brokerage field, but also the opportunity to interact with the customer in the 

first place and to offer one of the most traditional of banking products—the mortgage loan. 

Simply put, if real estate services and other financial products are already combined by real estate firms, securities firms, insurance companies, credit unions, savings associations and state-chartered banks in half the states, there is no reason 

why all banks should not be accorded the same opportunities to provide these products to their customers. 

Many Real Estate Agents Support Open Competition and Oppose H.R. 3424

Many agents and real estate companies are not concerned by the prospect of 

banking organizations offering real estate services. Many look forward to the opportunity to partner with a local bank. Independent agents who provide good service 

today know that they will be competitive with anyone, whether the competitor is 

another independent agent or one affiliated with a bank. Here are a few examples 

of comments filed by real estate agents with the regulators on this proposal:

fl A real estate broker in North Carolina writes: ‘‘I am a 38-year veteran of 

the real estate industry and do not agree with our National Association of 

[REALTORS] . . . There are several reasons I feel this way, primarily because our small family-owned business has always faced stiff competition 

from large real estate firms, yet we have been able to earn a good, honest 

living. I believe that competition is the American way and if you’re good at 

what you do, you can survive whether large or small.’’

fl A real estate broker in Wisconsin writes: ‘‘I don’t recall the NAR concerning 

themselves with real estate brokers having access to on-line companies 

therefore cutting the independent mortgage banker and local lender out of 

the transaction.’’

fl Another real estate agent notes: ‘‘I would welcome the hopefully more professional business management that banks would likely bring to this business. With most real estate being part-time people with limited training, the 

real estate business is full of misinformation, poor service, etc., a situation 

that could be improved with bank involvement. Furthermore, the American 

consumer deserves more true competition in this business. Bank owned real 

estate agencies may be able to lower transactions costs to consumers 

through aggregation of services benefiting the public as a whole.’’

fl A broker from California writes: ‘‘Additional competition will be healthy for 

the industry. Banks and other financial institutions have learned how to 

meet the needs of consumers and to handle their financial matters. One’s 

home is the biggest financial asset most consumers will ever deal with. If 

agents are so special for consumers, then they have nothing to fear. Maybe 

we could see commissions come down!’’

fl Another real estate agent writes: ‘‘NAR [National Association of REALTORS] predicted the doom and gloom many, many years ago when franchise brokerage was in its formative stages. ERA, RE/MAX, Coldwell Banker 

et al were all predicted to end ’mom and pop’ real estate firms. These franchises have come, many have gone or merged with others. And yet still, 

’mom & pop’ brokerage firms continue to survive because of the personal attention. I welcome the competition, and I will continue to survive.’’

Many Real Estate Companies Also Support Open Competition and Many Oppose 

H.R. 3424

For example, Paul Harrington, president of DeWolfe New England, which is one 

of the largest real estate firms in the Northeast, was quoted in the Boston Globe 

as saying: ‘‘We believe that banks ought to be able to compete with us as long as 

there are safeguards to insure that deposits are not being improperly invested. It 

would be hypocritical for us to say otherwise because we promote the fact that we 

offer customers convenience through one-stop shopping.’’ 5

The Realty Alliance—comprised of many of the nation’s largest and most successful independent real estate companies with a total of 62,000 agents—went on record 

33

in February in opposition to NAR’s position. In its letter to NAR, the Realty Alliance 

stated: ‘‘Our members favor and support a fair, free-market environment unbound 

by legislative restrictions. We find it hypocritical and fundamentally wrong to ask 

that national bank subsidiaries be barred from real estate brokerage activity, while 

real estate brokerages operate mortgage banking, insurance and title insurance 

businesses. . . . We believe, in fact, that consumers would benefit from the influx 

of capital that may result from nationally chartered banks entering this arena. We 

also believe that increased competition from companies of size would benefit consumers by making all of us sharpen our skills and improve the services we provide. 

In our view, the role of government is not to limit competition, as your legislation 

would do, but rather to foster a business environment in which consumers benefit 

from competition. The members of The Realty Alliance look forward to working, and 

prospering, in such an environment.’’

This is an Issue for All Banks, Not Just Large Banks 

Despite the rhetoric about ‘‘big’’ banks, small banking organizations have a deep 

interest in this issue. It is also a misconception that all national banks are large.

More than 40 percent of all banks—over 4,000 institutions—have fewer than 25 employees. As Chart 1 demonstrates, over ninety percent of national banks are community banks. These are truly small businesses that would like the option to broaden 

the financial products they can offer their customers and to compete with real estate 

firms offering loans and homeowners insurance.

In fact, the ability to offer real estate brokerage may be more important for smaller institutions. Rural communities may lack real estate agents or are served only 

by branches of brokers in other towns because there is insufficient business to warrant a local brokerage office. In such small communities, the bank is perceived as 

the place that will have the greatest amount of information on what properties are 

for sale, including farmland acreage in agricultural communities. 

As such, in communities where there are no real estate firms, community banks 

would typically contemplate establishing a subsidiary and hiring real estate brokers 

(fully subject, of course, to state real estate licensing provisions). In other instances, 

small banks are likely to partner with existing real estate brokers to provide these 

services. 

Moreover, of the ten largest banking companies, four already have depository institutions which have authority to engage in real estate activities. There certainly 


YingA.eps
34

has been no market disruption from the fact that well over half of the depository 

institutions in this country have the ability to offer real estate brokerage and management services today. 

The GLB Act Was Designed to Allow Flexibility to Adjust to the Marketplace 

Technological innovations have also had a dramatic impact on real estate markets. Perhaps the biggest change is the development of the secondary market for 

mortgage loans and the efficient process that bundles individual home loans into 

highly liquid, globally-traded securities (see Chart 2).

The increasing importance of the secondary market has facilitated the rapid 

growth of mortgage lending outside traditional banking and savings institutions (see 

Chart 3). In fact, securitization has significantly changed the very nature of mortgage funding, enabling real estate firms to establish their own mortgage companies 

and to offer end-to-end real estate transactions—helping a buyer find a home, finance it, and insure it. The result is that traditional deposit-based lenders—banks 

and thrifts—are often bypassed completely. These are exactly the kinds of technological changes the GLB Act authorized the Treasury and the Fed to address.


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The dominance of the secondary market is clear evidence that this form of funding 

for plain vanilla mortgage loans is generally superior in terms of costs to funding 

with bank deposits. If banks somehow enjoyed some special benefit from deposits, 

or deposit insurance (which banks pay for through premiums and extensive regulatory costs), banks would not be selling into the secondary market, and the secondary market would not control an ever-increasing share of the marketplace. More 

importantly, access to this secondary market source of funding is available equally 

to mortgage and banking organizations, and is clearly why real estate companies 

increasingly are affiliating with mortgage banking companies. 

CONCLUSION

Mr. Chairman, increased competition clearly benefits consumers and the economy. 

It is a catalyst for innovation, more customer choice, better service, and competitive 

prices. 

In fact, promoting competition in financial markets was the primary motivation 

for passage of the GLB Act. Congress also recognized the need for regulatory flexibility in an environment where the bright lines between financial activities and between financial providers has all but disappeared. Providing real estate brokerage 

and property management is no exception to this rule. We strongly believe that both 

real estate brokerage and property management meet the criteria set forth by Congress in enacting the GLB Act. 

Not only would consumers benefit from bank involvement in real estate services, 

but also bank involvement is consistent with safe and sound banking. All consumer 

protections that apply to independent realtors would apply to bank-affiliated real estate agents—plus bank-affiliated agents would be subject to additional anti-tying 

regulations. And because brokerage and management are agency activities, they 

pose no financial risk to the safety and soundness of the banking organization. 

I thank you, Mr. Chairman, for this opportunity to present the views of the American Bankers Association.


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Mr. BARR. As I mentioned earlier, the entire testimony—the entire written testimony of all of the witnesses will be submitted as 

part of the record; and, again, any additional testimony or information you all wish to make a part of the record, please feel free to 

do so for up to 7 days following this hearing during which time the 

record will remain open. 

I would like to recognize—we have been joined by a couple of 

other Members of the Subcommittee, including our distinguished 

former Chairman, the gentleman from the Commonwealth of Pennsylvania, Mr. Gekas. Did you have an opening statement, Mr. 

Gekas? 

Mr. GEKAS. I will waive that, Mr. Chairman, and await the question period. 

Mr. BARR. Very good. 

There being no other Members that have not had an opportunity 

for an opening statement——

Ms. WATERS. Mr. Chairman, I would like unanimous consent to 

submit my real opening statement for the record. 

Mr. BARR. Without objection, so ordered. 

[The prepared statement of Ms. Waters follows:]

PREPARED STATEMENT OF THE HONORABLE MAXINE WATERS, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF CALIFORNIA

Thank you, Chairman Barr, for holding this hearing to look at the Rulemaking 

Process used in making the Proposed Rule Concerning Competition in the Real Estate Brokerage and Management Markets. It is important that we focus our attention on that process to be sure that it is done in an appropriate and legal manner. 

I look forward to hearing the testimony of the witnesses. 

I especially am concerned that the process used to develop this particular rule was 

done properly, because the Rule could potentially have a devastating impact on consumers. Under this Proposed Rule, banks would be allowed to enter into the real 

estate business. This would constitute a true breach of the division between banking 

and commerce. That separation has been a hallmark of U.S. banking law since the 

Great Depression, and is critical to ensuring that this country does not end up following the Japanese system model. There, the indiscriminate mixing of banking and 

commerce arguably has had disastrous consequences for the banking system and the 

economy as a whole. During consideration of financial modernization, we looked at 

this issue and Congress decided to maintain our tradition of separating banking and 

commerce. 

Some parties have advocated in favor of permitting banks to engage in real estate 

activities. I am very concerned that we 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?’’

As a result of these concerns, I became an original cosponsor of H.R. 3424, the 

‘‘Community Choice in Real Estate Act.’’ HR 3424 will make it clear that banking 

and commerce should not be mixed and will prevent financial institutions from engaging in real estate management and brokerage. These activities are not ‘‘financial 

in nature’’ and should not be conducted by financial institutions. HR 3424 will prohibit federal regulators from issuing regulations that would permit banks to engage 

in real estate activities. 

This legislation will protect consumers and small businesses operating in our communities. If big banks were allowed to enter the real estate business, it would lead 

to industry consolidation, higher costs and fewer choices for consumers, and conflicts 

of interest for the lenders and brokers. HR 3424 will ensure that consumers maintain choices and control in their real estate transactions. 

I understand that the comments received by the Federal Reserve and the Treasury have been overwhelmingly negative. In 1971, a similar Proposed Rule was not 

made final in part because of a substantial amount of negative public comment. It 

is my hope that this Proposed Rule will follow a similar course.

42

Mr. BARR. We will now proceed with questions in 5-minute increments, and the Chair recognizes himself for 5 minutes. 

Ms. Bair, with regard to the various different laws and executive 

orders that have to be taken or that must be taken into account 

by an executive agency prior to issuing a proposed rule, as you 

know, Executive Order 12866 requires agencies to submit rules 

that would constitute a significant regulatory action to the Office 

of Management and Budget. Would this proposed rule have an annual effect on the economy of more than $100 million? 

Ms. BAIR. The previous leadership of the Treasury Department, 

which issued this rule jointly with the Federal Reserve Board, determined that this was not a significant regulatory action, thus did 

not do a cost-benefit analysis. If and when we proceed with this 

rule, we will have to revisit that determination. 

Mr. BARR. Thank you. 

Do you know whether the proposed rule was submitted to the Office of Management and Budget for a cost-benefit analysis under 

Executive Order 12866? 

Ms. BAIR. It was. They did not exercise their authority to review 

it. 

Mr. BARR. Thank you. 

The Regulatory Flexibility Act requires agencies to consider the 

small business impact of proposed rules when they are noticed for 

public comment. Are most real estate brokers considered small 

business, Ms. Bair? 

Ms. BAIR. Again, I have no record basis on which to answer that 

question. Because when this rule was issued under the prior administration, a determination was made that it would not have a 

significant economic impact on a substantial number of small businesses. Again, we will be required to revisit that determination, 

make it—look at it again if and when we go to a final rule on this. 

Mr. BARR. Thank you. 

Mr. Edwards, being at least tangentially familiar with the real 

estate business yourself, could you provide some enlightenment to 

the Subcommittee with regard to the nature of most REALTORS

in terms of the number that might be affected by this proposed rule 

if it does go into effect and the nature of those REALTORS, their 

size, and would they be considered small businesses? 

Mr. EDWARDS. Thank you, Mr. Chairman. 

First of all, most REALTORS are independent agents or independent contractors. So if you really want to go to the heart of the 

issue, each one of them is a small business. They are not—by great 

margin, they are not employees. They are free—they are independent contractors. So they are, by your definition, a small business onto themselves. 

Also, from a firm size, the individual firm size, about 80 percent 

of our firms across the country are less than 10 or 12 members, 

something like that. So it is, for sure, a very significant small-business business. 

So if you want to just say it one way, you know, every agent that 

is an independent contractor is a small businessperson, but then 

the firms themselves which hire independent contractors are small 

businesses, the great preponderance of them. 

Your second question? I am sorry. 

43

Mr. BARR. I was wondering if the National Association of REALTORS, have they made an analysis with regard to the overall impact on the economy of the proposed rule? As you know, we mentioned in my question to Ms. Bair the hundred million dollar 

threshold. Have you all done an analysis to determine whether that 

would be a—whether that threshold would be met if this proposed 

rule goes into effect? 

Mr. EDWARDS. That is a question that I do not have an answer 

to. I will tell you that over the last several years, and this is a direct—this is a result of the marketplace as much as anything else, 

we have—over the last 8 years we have added 11 million new 

homeowners. We have—home ownership is up, has increased to 

about 68 percent. There has been about a 44 percent increase in 

minority ownership. 

But for me to be able to tell you how it would be affected, I do 

not have that answer. It would be a pretty good-sized undertaking, 

I am sure, to do that, because you have to figure out how many 

of those independent contractors would be removed from business. 

Mr. BARR. It might be a worthwhile exercise to go through that. 

Mr. EDWARDS. It would be a big exercise, but I think it would 

be a very worthwhile exercise. 

Mr. BARR. Ms. Bair, there is, of course, the many other different 

laws that are applicable or might be applicable to the rulemaking 

procedures. Is the Negotiated Rulemaking Act—is this something 

that the Federal Reserve Board or, in the case of your expertise 

and jurisdiction, the Department of Treasury would consider utilizing when looking at this proposed rule in an effort to try and 

bring the parties together and see if there is a consensus that could 

be reached? 

Ms. BAIR. Yes. Anticipating that, I consulted with the career staff 

who were involved in the preparation of the original proposed rule 

for publications. To our knowledge, that issue was not considered 

at the time it was proposed. I would have to consult with our general counsel to determine whether that is a process, given the current state of the rulemaking, that we could utilize. But it is a fair 

question. I will be happy to consult with them and get back to you 

in writing. 

Mr. BARR. Thank you. We appreciate that. 

Recognize the distinguished Ranking Member, the gentleman 

from North Carolina, for 5 minutes. 

Mr. WATT. Mr. Chairman, I think that I do not have any questions. I am happy to yield back. Or if the Chairman has a series 

of questions that he wants to ask, I am happy to yield him my 

time. Either way is fine with me. 

Mr. BARR. I appreciate very much the gentleman’s eloquence. 

What we will do is proceed. If myself or any other Members have 

additional questions, we will have a second round. So if there are 

some other things you think of, Mr. Watt, certainly just jot them 

down, and you will have more time. 

Mr. WATT. I yield back. 

Mr. BARR. The gentleman from Arizona, Mr. Flake, is recognized 

for 5 minutes. 

Mr. FLAKE. Thank you, Mr. Chairman. 

44

Mr. Edwards, one of the arguments that is raised against this is 

that if banks get involved in the real estate business they default, 

taxpayers are on the hook. Do you want to—because of FDIC. Do 

you want to elaborate on that? 

Mr. EDWARDS. Mr. Flake, I would be happy to. 

I happen to have been in the business, as I said, 30 years; and 

I went through the savings and loan issue in the late 1980’s. The 

real estate business is not in—my firm is not insured by any Federal agency. And when we in our business—our capital comes from 

at-risk capital. So if we make a mistake, we don’t do something correctly or we get—we expand our business, we are in the commercial business too far, we pay for it. 

We went through a series of years in the late 1980’s and early 

1990’s where we did have an industry—and, as a matter of fact, 

it was a very significant industry for the real estate industry—in 

the financial world called the savings and loans. There are a few 

left. But I felt at that point in time that some of those expanded 

powers that were given to savings and loans got them in a position 

where there was a lot of default. 

Certainly, there were other areas that caused that huge bailout, as we will call it, that has been probably totalled at $500 or $600 

billion. Our concern is that the banking industry—— And let me just say this. I started off as a bank. You know it 

is an insured—that capital comes from insured deposits. My capital 

comes from borrowing from those banks. So it would be hard for 

me to say that I don’t fear—I fear that mixing banking and commerce is something that I don’t think this country is wanting to do 

or willing to do, and I would question what is broke that we are 

trying to fix. 

Mr. YINGLING. Can I comment? 

Mr. FLAKE. Yes. You mentioned that half of those who can already engage in real estate are federally insured. Do you want to 

expand on that? Or several organizations or institutions? 

Mr. YINGLING. Right. Thank you. 

First, with respect to deposit insurance, this is an agency activity. It is not a principal activity. And, as the Members of the former 

Banking Committee, now Financial Services Committee, could tell 

you, there is a big difference with respect to agency versus principal activity. That is because you don’t make big investments. 

We are not talking about owning any homes here. We are not 

talking about real estate development. In fact, it is interesting that 

the Congress specifically said, there is one thing you cannot do, 

and only one thing in this law we are talking about; that was real 

estate development. 

Second, under this proposal, the bank can’t do it. It has to be 

done in either a subsidiary of the holding company or a subsidiary 

of the bank. Under banking rules, those subsidiaries are walled off. 

They are not subject to the use of deposit insurance, and they are 

protected from the bank. So there is series of protections to wall 

them off. 

Now, with respect to the rights of others to do it today with respect to insured depository institutions, not under this rule but 

under current law in 25 States, State-chartered banks have this 

authority, as do all Federal savings institutions. You would not 

45

know whether it was a commercial bank or a savings institution 

if you walked in the door. They can all do it. All Federal credit 

unions can do it, and a lot of State-chartered savings institutions 

and credit unions can do it. The only group that really can’t do it 

are national banks and those State-chartered banks in the States 

which have not yet given them that authority. 

Mr. FLAKE. Thank you, Mr. Chairman. I yield back. 

Mr. BARR. Thank the gentleman from Arizona. 

The gentlelady from California is recognized for 5 minutes for 

any questions. 

Ms. WATERS. Thank you very much, Mr. Chairman. 

Some of this may have been answered, but I think it is very important for me to delve into it a little bit more. 

As I understand it, the act is silent on this particular question; 

is that correct? 

Mr. YINGLING. It is correct that the act nowhere uses the word 

real estate brokerage, correct. 

Ms. WATERS. At no time, no place does it use that word. And it 

seems to me that the fact that we are now trying to determine 

whether or not real estate brokerage and management activities 

are financial in nature kind of bypasses the work of Congress in 

some way. It seems to me that this is not simply a gray area to 

be decided through rulemaking. It seems to me this is a question 

for the Congress of the United States in the same process that 

passed the act in the first place to come back if it has to be revisited and go through the Congress of the United States. 

How, in fact, did we get to the point where we are asking the 

Board of Governors of the Federal Reserve and the Secretary of the 

Treasury to get involved in this? How? Would you explain, please, 

Ms. Bair? 

Ms. BAIR. The Gramm-Leach-Bliley Act delegated fairly broad 

authority to the Treasury Department and the Federal Reserve 

Board to determine what activities are financial in nature or incidental to a financial activity. There are some factors that are listed 

that the Treasury and the Federal Reserve are required to consider 

in making that determination. But the delegation of authority is 

fairly broad. 

Ms. WATERS. Have you ever had a question put before you that 

you refused to deal with and say we think that this question does 

not fall within our jurisdiction, that you are asking us to decide on 

something that really should be decided by Congress? This is 

not——

Ms. BAIR. Under Gramm-Leach-Bliley or in general? 

Ms. WATERS. In general.

Ms. BAIR. I would like to consult with our attorneys. 

Ms. WATERS. Have you ever turned one down because you didn’t 

think it was within your authority? 

Ms. BAIR. I can’t cite you any specific examples. I mean, clearly 

if we were petitioned to promulgate a rulemaking that we felt outside of our congressionally-delegated authority we would decline to 

do so. We can’t off the top of our heads think of any specific examples where that has happened, but they may have. 

Ms. WATERS. Well, then, could you specifically tell me why you 

think this is within your authority? 

46

Ms. BAIR. Because—well, again, I think one of the issues we will 

have to decide as we proceed with this rule, a lot of the comment 

letters, most of them in opposition, raised the issue whether we 

were mixing financial banking and commerce, which would be, if 

that is what in fact the rule entailed, that would be exceeding the 

delegation of authority. But Congress is fairly clear about wanting 

to maintain that separation. However, the devil is in the details, 

and definitely not a lot of guidance is provided. 

Again, on the face of it, the grant of authority to us and the Fed 

to determine what is financial in nature as opposed to a commercial activity is fairly broad. But I think that is exactly a key issue 

that we will have to decide if and when we go final with this rule. 

Ms. WATERS. Let me suggest something to you. Let me suggest 

to you this would be an economical, financial, structural change in 

the way we do business in this country. This is big. This is not simply a gray area where a decision by regulatory agency would decide 

a structural change. 

I would suggest to you that this could have such a huge economic 

impact that the Congress of the United States is the only body that 

should be in the business of deciding whether or not we want to 

make this structural change. 

I would suggest to you that it is absolutely reasonable to take a 

look at this and the regulatory agencies turn it back and say, this 

is too big. This is out of our authority. We should not be involved 

in this. If you people over there want to do this, then you had better come out with a law that spells it out, but don’t throw this in 

our laps. I think you would do yourselves a big favor, and you 

would do all of us a big favor. 

Because I really do believe that it is not specifically addressed in 

the act. You don’t see it anywhere. And I think that for those who 

are trying to make this change, they shouldn’t be able to hide behind the act and say, somehow you have the right to determine 

whether or not this is financial activity. 

Wash your hands of it. Get rid of it. Put it back over here. We 

will take care of it. 

Mr. YINGLING. Ms. Waters, I don’t want to take your time. On 

your question about kind of the history of it, again, this provision 

amends section 4 of the Bank Holding Company Act. There is a 

long history to that. It was under the Fed’s jurisdiction totally. 

Now, this new procedure, you have to have two approve it, the Fed 

and the Treasury. 

Now, during that history there was something called the closely 

related to banking test that I am sure you are familiar with. And 

from time to time the Fed approves things, and from time to time 

they turn down approvals. And there are instances where they first 

turned them down, then as the market changed they approved 

them. 

Now, in the House Banking Committee, as the report said in 

1999 when they did Gramm-Leach-Bliley, they indicated they were 

building on that history. And what they said about this section is, 

‘‘it greatly expands permissible activities for bank holding companies from the current requirements in section 4 that affiliations be 

closely related to banking to those that are financial in nature.’’

47

So it is clear, at least to me, that what the Congress was saying 

is, we are going to build on that. We cannot decide in advance, just 

like we couldn’t in 1970 when we enacted this, what is appropriate. 

And when we try to do that we get gridlocked. So we are going to 

delegate that to these two agencies, which is more conservative 

than one, and have this new test. 

But there is a precedent under which they approve it. They 

sometimes turn it down. And that is what the Committee, I believe, 

was building on and what the legislative history would show. 

Ms. WATERS. Reclaiming my time. I suppose that is a fair interpretation, you know, based on your point of view. But again, I don’t 

think so. I don’t agree with that at all. Again, even if the act refers 

to expanded authority and to two agencies in order to ensure the 

kind of review that you may be alluding to, again, this is a structural change in the economic business of this country. 

This is big. This is not simply something that we say, oh, we 

think that falls within. No. It has got to be clearly legislated by the 

Congress of the United States, in my opinion, in order to take a 

whole industry and literally undermine it and open up opportunities for others who will be in an advantaged position. If I got a 

bank and I can sell real estate, I am in a very good position to be 

able to grab all of the business. Because the REALTORS don’t 

own banks for the most part. They are shopping. They are helping 

their clients to connect. 

And that is another thing. I am hoping—as I have seen real estate agents who can help their clients find the best financial services for them to be able to shop around. If I am stuck with a bank, 

I don’t know, you may be a predatory lender, you may be giving 

me interest rates that I could do better if I didn’t have—I was not 

your captive coming to your bank. I may can pay a lot less in 

charges, in fees and on and on and on. I don’t know if I want you 

to have that much power. 

I think it is very important to have this kind of separation by 

way of distant industries so that that real estate person out there 

who is the advocate for the buyer remains in position to be able 

to not only assist the buyer but to help that buyer make good decisions about the financing and to get them the best buy. So this is 

not a little gray area where you think that perhaps that is what 

we intended. 

I think that it is a good thing that we are having this hearing 

today, because it gives us an opportunity, having been able to see 

some of this, to talk about how we grab this back, Mr. Chairman. 

As Members of the Financial Services Committee in this House, we 

need to take it out of this arena altogether. 

Thank you for the extended time. 

Mr. BARR. I thank the gentlelady from California. 

The Chair now recognizes the distinguished former Chairman of 

the Subcommittee, the gentleman from Pennsylvania, Mr. Gekas. 

Mr. GEKAS. Yes, I thank the Chair. 

I recall in the former life of this Subcommittee that we engaged, 

back in 1996, in reauthorizing the rulemaking—how did we phrase 

that—the Negotiated Rulemaking Law, which was, I thought, intended to try, at least at the outset, to deal with these kinds of 

problems. And, Ms. Bair, did that ever come into play at all? Did 

48

anyone suggest that, in this issue, that the negotiated rulemaking 

process should come into play? 

Ms. BAIR. Again, this rule was proposed under the previous administration. I was not there when the rule was proposed. My consultations with the career staff that were involved have suggested 

to me that, no, that was not considered. And I can’t—since I wasn’t 

there, I really don’t know. I can’t tell you much more. 

Mr. GEKAS. Since you took office, you don’t remember any one 

proposing this or falling back to a negotiated rulemaking posture 

before future action should be taken? 

Ms. BAIR. In response to Chairman Barr’s expression of interest, 

we are going to take a look at whether at this stage in the process 

that is something that can be utilized, but we will have to get back 

to you in writing. 

Mr. GEKAS. Then maybe we can add your comments to this hearing book later on. 

Mr. GEKAS. One thing that fascinated me, Mr. Yingling, when 

you were describing how the separation of entities within banking 

places a firewall, some separation between the banking portion and 

that which would take up real estate in the future under this rule, 

in other words, you would be—you are saying that, in effect, it is 

an arm’s-length transaction with another entity created in different 

ways. That is really not the bank itself. Is that what you were trying to imply? 

Mr. YINGLING. Well, there are two aspects. You may be raising 

both of them. 

I was responding to the question about, really, safety and soundness; and there are a whole series of rules which are used to segregate activities in affiliates and subsidiaries from the bank. The 

whole purpose of those rules is to protect the deposit insurance 

fund. For example, there are very strict limits on the ability of a 

bank to lend to any of its affiliates. And there are rules about how 

much you can lend and what interest rates have to be. In other 

words, they have to be arms-length, as you say. There also are a 

series of rules that relate to the ability to cross-market and that 

type of thing. 

Now there is one set, the Real Estate Settlement Procedures Act, 

which actually applies to all real estate transactions and would 

apply to a bank with a real estate affiliate. It also applies, for example, to Long & Foster here in this area, which has a mortgage 

bank and has an insurance company. They are also subject to those 

rules that protect consumers. For example, nobody can tell a consumer, if you are going to use me as the REALTOR, you have to 

use my mortgage company. Long & Foster couldn’t do it. A bank 

couldn’t do it. 

Now, in banking, there actually is another rule, a specific antitie-in rule which applies only to banks, which basically says, I can’t 

tell—I, the bank, can’t tell you, the customer, that if you are going 

to get a loan from me, you have to use this service. I can’t tie those 

services. 

Mr. GEKAS. But the fact remains that you are trying, in the way 

you described it, to demonstrate that banking as the principal 

would not be engaged in all of the necessary functions of the real 

estate portion under a subsidiary. Is that correct? 

49

Mr. YINGLING. Well, the bank itself couldn’t. This would have to 

be a separate company that would be a regulated like any other 

real estate firm. 

Mr. GEKAS. What you have described, sir, it seems to me, is what 

the situation is today. That is, banking and real estate, and that 

the wall that you are talking about to allow this separation of activities and protection for consumers and all of that exists under 

the current market system in which real estate people and the 

bank are separated by a wall of noncompetition, as it were. 

So I want to analyze—and I haven’t really thought it through 

fully—how the holding company, the separation you are talking 

about and so forth really benefits banking anyway, if they are 

going to be talking about separate entities and separate bottom 

lines and separate rules and separate corporate officers and all of 

that. Maybe we should leave it as it is, because that is what the 

situation is now. 

Mr. YINGLING. If I might comment. I don’t want to use up all of 

your time. Let me just give you an example of what we hear from 

a community bank, and that is that in a small town in Pennsylvania it could be that——

Mr. GEKAS. Why did you say Pennsylvania? 

Mr. YINGLING. It seemed like a good State in my hypothetical—

that what may have happened is there may be four or five independent real estate firms a few years ago that are doing quite well. 

Then one of them has been bought by Century 21. One of them has 

been bought by Prudential. There is a tremendous amount of consolidation. So what is happening to the local bank is that, as the 

customer—it may be a new person that moved to town or it may 

be an existing bank customer—goes to buy a home, they go to the 

REALTOR first. The REALTOR now is affiliated with somebody 

that has a mortgage arm, an insurance arm. The bank never sees 

the customer. The customer goes and buys the house. The bank 

never has a chance to make the loan, never has a chance to sell 

the insurance. 

So what they may want to do is in some fashion go to one of the 

remaining independent REALTORS. That remaining independent 

REALTOR may be saying, I am having a little trouble because I 

have got these deep-pocket companies now that can market like 

crazy; and the two of them might want to get together. They could 

become affiliated. The bank could make an investment in the real 

estate firm. Quite frankly, what they want to be able to do is say 

to each other, I have got a customer here who wants to buy a 

house. You would have a chance to make the loan. You would have 

a chance to sell the insurance. So that’s what they want to be able 

to do, basically, is not lose the entire customer. 

Mr. GEKAS. Do you endorse the concept of an independent REALTOR? 

Mr. YINGLING. Sure. 

Mr. GEKAS. And, therefore, the structure that you described to 

me, which I have to delve into farther, maybe, with your help, results—if this rule were to become effective, results in a bank with 

a wall, with a subsidiary, that deals as an independent REALTOR, in effect; is that correct? 

50

Mr. YINGLING. That is largely correct. We would be subject to all 

of the State rules. But we would own—we would have an investment—the bank, if I am the bank, has an investment in the REALTOR, or the realty firm could have an investment in the bank, or 

the bank could own the realty firm. But they would be subject to 

all of these kind of firewalls and consumer protections that I am 

talking about. 

Mr. GEKAS. Well, I think we are talking about the same thing 

in different terms. 

I yield back the balance of my time. 

Ms. WATERS. Will the gentleman yield? 

Mr. BARR. We will have another round of questions. Will that be 

sufficient? We will have a second round of questions, and I will recognize myself for 5 minutes. 

One of the matters that we sort of touched on a little bit—I think 

it comes into play certainly in my mind with the last questions between Mr. Yingling and Mr. Gekas—are privacy concerns with this 

legislation. Of course, one of the—Mr. Yingling, there has been 

pressure to revisit the privacy aspects of Gramm-Leach-Bliley; and 

a number of us have resisted that as being premature, preferring 

to let a couple of years go by, during which time all of the different 

provisions of Gramm-Leach-Bliley could be, you know, allowed to 

sort of run their course and we will see how they work before going 

back in and tinkering, upsetting the apple cart as it were, by retinkering with the privacy provisions of the bill. And the banking industry has been supportive of that approach. 

Given the fact that, I think, any way you look at it, this is—as 

Ms. Waters said, this is a very significant proposal before the 

American people now. And already, because I think of the complexities of it and the issues raised and the amount of public comment, 

the Treasury and the Fed are taking a considerable amount of 

time, as I think that they should, to look at it, make sure the process operated properly, make sure that substantially it is good or 

bad to proceed. 

What will be wrong to take the same consistent approach with 

regard to this that the banking industry has taken with regard to 

privacy? Let’s see how the provisions of Gramm-Leach-Bliley operate for a few years before we immediately go back in and try and 

reconfigure it and tinker with it. Will there be a great harm in allowing the procedures as are already implemented through the passage of the bill and the signing into law operate for a while before 

we address this very important issue? 

Mr. YINGLING. Well, first of all, that is one possible response of 

the agencies. I referred in my discussion with Ms. Waters to the 

history of the Bank Holding Company Act and the Fed; and there 

are instances wherein the Fed said, we will delay starting for a 

while or we will start small. If you look at the history, for example, 

of bank holding company entry into the securities area, that was 

done. 

One of our big concerns here, though, is that this section of 

Gramm-Leach-Bliley is, in our opinion, the heart and soul of it. 

And the purpose, we believe, of Gramm-Leach-Bliley was to set up 

a process to permanently keep our——

51

Mr. BARR. Excuse me. Do you mean to say that allowing banks 

to involve themselves directly in real estate brokerage and management is the heart and soul of Gramm-Leach-Bliley? 

Mr. YINGLING. The general provision that we are talking about 

under the statute, the financial and incidental to financial section. 

Because it is the provision under which we will be able, for the 

foreseeable future, to go back and look at what happened in GlassSteigel, that future turned out to be about 60 years long. 

Mr. BARR. But my point was, is there any harm that would 

ensue? In other words, the banking industry, I think correctly, has 

told those who want to go in and tinker with Gramm-Leach-Bliley 

even a year or a year and a half ago on privacy issues that the position of the banking community was, hold on, let’s not tinker with 

this thing. Let’s see how this law plays itself out. Correctly, I think, 

arguing that there would be harm if, you know, somebody went in 

and did the opposite. 

What harm would befall the banking industry if this rule—this 

proposed rule, you know, did not go into effect immediately but we 

have a couple of years at least to see how the provisions of the 

bill—as you say, if the heart and soul of it, let’s assume, is the 

breaking down of the barriers between financial and commercial, at 

least to some extent, let’s see how that operates first. 

Mr. YINGLING. Well, first, I want to add, we appreciate what you 

do in the area of privacy. But first there is a distinction there. We 

are talking about the Congress coming back and legislating. Here 

we are talking about the regulators implementing a part of the 

law. 

Mr. BARR. We have already seen—you might be pushing Congress to come in and legislate. There are a number of ways that 

that might happen. Of course, the legislation currently before the 

House. In addition, the Congressional Review Act, which could 

come into play if, in fact, the Administration makes a final determination to move forward with the proposed rule and finalizes it. 

The Congressional Review Act could come into play, as it did about 

a year and a half ago with regard to the ergonomics rule. 

So there are a number of areas where I am not sure that you—

I certainly can’t tell you what to do, but you are almost pushing 

Congress into acting in an area, whereas maybe it would be better 

to just wait a little while to see how the bill plays itself out. 

Mr. YINGLING. One of our big concerns is the precedent here. 

This is the first attempt to implement what this section which we 

are arguing is the heart and soul——

Mr. BARR. It is a big one. 

Mr. YINGLING. It is a big one. But if Congress enacts something 

that says we intend for the regulators to have a process for modernizing the system and we don’t want to be in the position of referring that every time there is a new proposal and the first one 

out of the box gets basically beat back, how are we going to ever 

test it? Because the next one out of the box—— Mr. BARR. You might take a small step first, instead of a giant 

leap for mankind. 

Mr. YINGLING. It is taking us—it is taking a long time, I would 

point out. And just—since we are allowed to get into it, Ms. Waters, maybe the alternative—maybe the equal of that is, if real esVerDate Jan 17 2002 11:40 Jul 31, 2002 Jkt 000000 PO 00000 Frm 00055 Fmt 6633 Sfmt 6601 G:\WORK\COMM\051602\79656.000 HJUD1 PsN: 79656
52

tate firms would stop getting into the mortgage business and the 

insurance business during that period, maybe there is a deal there. 

Mr. BARR. You heard it here first. There is room for a deal. 

Mr. YINGLING. I said maybe. 

Mr. BARR. We do hope—that is one reason why several of us 

have mentioned the Negotiated Rulemaking Act, which was a 

mechanism that was passed a dozen or so years ago and reauthorized, which would seem, at least on the surface, to have been a 

mechanism that might lend itself more to this. 

But, anyway, I have a few more questions, but I don’t want to 

monopolize the time. 

The gentleman from North Carolina is recognized. 

Mr. WATT. Is the Chairman trying to finish and avoid coming 

back, or are you planning to come back anyway? 

Mr. BARR. I am informed that we do have a vote. What we might 

try and do is, we have maybe just 5 or 7 more minutes, and then, 

you know because I don’t want to keep the witnesses—and, you 

know, I also want to recognize we do have many REALTORS in 

town. We very much appreciate you all being here and participating in this public process. My admonition before not to applaud 

had nothing to do with all of us being very pleased with you all 

being here. It is just normal protocol in our Committee hearings. 

But we do very much appreciate you all being here in town and 

coming by today. 

Mr. WATT. Are you planning to come back? 

Mr. BARR. No. What I would like to do is finish up. 

Mr. WATT. Okay. All right. Let me just ask Mr. Edwards and Mr. 

Yingling a question which I think they probably will not have the 

information readily available to answer. But I would ask you to 

submit the information just so we will have a complete picture 

here. 

I think this mortgage loan origination chart indicates that there 

is 1 percent real estate firms currently doing banking or lending 

origination activities. It would be interesting for me to know how 

unprecedented what is being proposed here is, to have the reverse 

of that, which would be the number or percentage of real estate 

transactions that are currently being originated by non-national 

banks and other financial institutions. 

Mr. Yingling testified that there were a number of State-regulated banks, non-Federal financial stations that are authorized now 

to do real estate. Just for the completeness of the record, it seems 

to me we—it would be good to have a chart that basically tells how 

much banking is now doing real estate, as opposed to how much 

real estate is now doing banking, just for completeness. 

Mr. EDWARDS. Mr. Watt, I think we have that information. We 

would be glad to supply it to you. 

Mr. WATT. If you all could—then we could compare you-alls two 

charts, and hopefully they would correspond—but might not necessarily. 

Mr. YINGLING. While we are at it, we would like to take an opportunity to maybe do our own chart. Because that 1 percent really 

puzzles us. Because, for example, Cendant is one of the largest 

mortgage lenders in the country. 

53

Mr. WATT. I would invite you to do that, too. If there is a counter 

chart that you want to originate. That would be helpful. 

Other than that, Mr. Chairman, I would just ask unanimous consent to insert for the record a statement which has been submitted 

by the Financial Services Roundtable, so we will have that in the 

record, and a copy of a news article from Inman News Features 

dated February 22, 2002, about, apparently, some real estate—REALTORS who may be on the opposite side of this issue, so we will 

have that on the public record, also. 

Mr. BARR. Without objection, so ordered. 

[The information referred to follows:]

54

ARTICLE FROM INMAN NEWS FEATURES, DATED FEBRUARY 22, 2002


Inman1.eps
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PREPARED STATEMENT OF THE FINANCIAL SERVICES ROUNDTABLE

(WITH ATTACHMENTS)


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ATTACHMENT A


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ATTACHMENT B


Firm.eps I13.eps
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ATTACHMENT C


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ATTACHMENT D


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Mr. WATT. I yield back any time that I have. 

Mr. BARR. The gentlelady from California, did she have some 

final? 

Ms. WATERS. I don’t think I am going to—I was going to engage 

on the walls of separation that have been alluded to and what the 

holding company cannot do in relationship to the subsidiary. I 

didn’t want us to leave here thinking that there was no connection 

that somehow the banks wanted to get into this business, but they 

are not interested in what their subsidiary, the real estate subsidiary would be doing. 

It seems to me, we all know that we get those little notices that 

say, tell us whether or not you will allow us to market your name 

to our subsidiaries or to others. Well, I mean, that is what it is all 

about. It is about having a captive audience. It is about all of those 

people who don’t read this and get to be on the list that can get 

marketed to—over in the subsidiary from the bank to say, hey, we 

got a great product here for you. 

So it is okay. That is the American way. We understand that it 

is okay to try and market and to do business in ways that will enhance the bottom line of the company. But I just didn’t want us to 

kind of think that somehow the separation was such that one 

would not in any way be touching the other, because that is not 

true. Thank you. 

Mr. YINGLING. You are correct. 

Mr. BARR. I would like to ask unanimous consent that the statement by the Building Owners and Managers Association be incorporated in the record. 

Without objection, so ordered. 

Mr. BARR. I think this has been a very, very worthwhile hearing. 

I hope that we met the burden laid down to us by Mr. Watt at the 

beginning and that we did essentially stick to the issues within the 

jurisdiction of this Subcommittee, namely the procedures and processes whereby this proposal has come before the American people. 

We have raised a number of very interesting questions, and we 

appreciate the testimony. Especially appreciate the Treasury Department being here and indicating a willingness to look at various 

aspects of this process. I think that is a fair recognition of the complexities involved in this and the very long-term, significant consequences of it. 

And we appreciate very much the REALTORS being here and 

especially taking some time during your very busy trip to Washington this year. We very much appreciate the banks involvement. 

They are an important part of any consideration of matters that affect our economy and businesses in this country. They are one of 

the true backbones or underpinnings of our financial structure. We 

certainly appreciate that. 

There are a number of areas that we certainly will be looking 

into, such as the Congressional Review Act and others, as well certainly the legislation that we all know is pending. But we appreciate you all being here today, and we appreciate very much any 

additional material that you wish to submit for the record for the 

consideration of this Subcommittee as we deliberate this very important rulemaking aspect. 

With that, I declare this hearing closed. 

98

[Whereupon, at 3:30 p.m., the Subcommittee was adjourned.] 

(99)

A P P E N D I X 

MATERIAL SUBMITTED FOR THE HEARING RECORD

RESPONSES TO CHAIRMAN BOB BARR, SUBCOMMITTEE ON COMMERCIAL AND

ADMINISTRATIVE LAW

1. What procedural and administrative law problems does this proposed 

rule raise? 

Overall Framework 

Under § 706 of the Administrative Procedure Act, an agency may not act in an 

arbitrary and capricious manner. Its decision must be ‘‘rational, based on consideration of relevant factors, and within the scope of the authority delegated to the 

agency by the statute.’’ Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 

463 U.S. 20, 42 (1983). Furthermore, the agency must comply with procedures required by law. 

Specific Points 

1. The agencies did not address all the necessary factors. Congress set forth four 

factors that the Board and the Secretary must use in determining whether an activity is ‘‘financial in nature’’ or ‘‘incidental to a financial activity’’ under 12 U.S.C. 

§§ 24a, 1843(k). They are:

• The purposes of the Bank Holding Company Act and the GLB Act;

• Changes or reasonably expected changes in the marketplace in which FHCs 

and/or banks compete;

• Changes or reasonably expected changes in the technology for delivering financial services; and

• Whether the activity is necessary or appropriate to allow an FHC or its affiliates or a bank and its financial subsidiaries to:

(i) compete effectively with other companies seeking to provide financial services 

in the United States; 

(ii) efficiently deliver information and services that are financial in nature 

through technological means; and 

(iii) offer customers any available or emerging technological means for using financial services or for the document imaging of data. 

Although the agencies recite in cursory fashion that they have considered all of 

these factors, the only one they actually discuss is the first prong of the fourth factor, dealing with competition with other companies seeking to provide financial services. There is no discussion of what weight the other three factors may have been 

given in the agencies’ decisionmaking process. 

Furthermore, even as to the factors the agencies did consider, they undertook no 

factual investigation of their own. They simply cite, in a footnote, a petition from 

the American Bankers Association, reporting a review of various companies’ websites.

2. The agencies do not explain what determination they are making. Under the 

most natural reading of the GLB Act, an activity may be ‘‘financial in nature,’’ or it may be ‘‘incidental’’ to some other financial activity. The agencies lump these two 

concepts together, without explaining which determination they are making. If the 

agencies are claiming that real estate brokerage and management are ‘‘incidental’’ to some other financial activity, they should explain what that activity is. 

3. The agencies offer no explanation for why the regulations should apply to leasing of real estate. The agencies’ rationale for describing real estate brokerage as ‘‘financial in nature’’ rests on the theory that ‘‘banks and bank holding companies participate in most aspects of the typical real estate transaction other than brokerage.’’

See 66 Fed. Reg. at 309. That may be true as to residential purchases of real estate, 

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for which banks commonly provide mortgages and incidental services like appraisals. But it is not generally true as to leasing of real estate, often a relatively simple 

transaction that does not require financing, appraisals, settlement services, escrow 

services, or insurance. Yet the proposed regulations would apply to brokerage for 

lessors and lessees of real estate, as well as purchasers and sellers. The agencies 

offer no explanation as to why bank affiliates should be permitted to engage in these 

activities. 

4. The agencies offer no explanation for why the regulations should apply to commercial real estate transactions. The agencies’ reasoning also appears to focus primarily on the purchase of residential real estate by individuals. See 66 Fed. Reg. 

at 310. Yet the proposed regulations would apply to both commercial and residential 

real estate brokerage. Commercial enterprises frequently buy, sell, or lease real estate. The agencies offer no explanation why such transactions should be viewed as 

‘‘financial’’ activities, rather than as part of a business’s ordinary commercial activities. 

5. There is no indication whether the Treasury Department’s proposed regulations 

have been reviewed by OMB. Under Executive Order No. 12,866 (3 C.F.R. 658 

(1994)), any ‘‘significant regulatory action’’ by an Executive Branch agency must 

generally be reviewed by the Office of Management and Budget (‘‘OMB’’). A ‘‘significant regulatory action’’ includes any action

that is likely to result in a rule that may * * * [h]ave an annual effect on the 

economy of $100 million or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, 

public health or safety, or State, local, or tribal governments or communities.

Although that requirement does not apply to the Federal Reserve Board (an independent regulatory agency), it does apply to the Treasury Department. There is no 

indication in the proposed regulations whether Treasury considers them to be a ‘‘significant regulatory action,’’ or whether it plans to submit them (or has submitted 

them) to OMB.

2. Please explain the rationale for Congress’ long-term policy prohibition 

against merging ‘‘commercial’’ and ‘‘financial’’ activities.

Congress has continued to separate banking and commerce to prevent inherent 

conflicts of interest. An example of this conflict can be explained by the following 

example that could occur if the proposed real estate regs were finalized: If a real 

estate broker needed operating capital and had to go to a bank who is now a competitor, would that broker get the best rates on this needed loan? Congress voted 

against combining commercial and financial activities during debate on the GrammLeach-Bliley Act. In the House, an amendment was passed to not only prevent this 

mix, but to require any entity created under the act that had a commercial affiliation to divest that operation within ten years of enactment. In the Senate, an 

amendment to close the ‘‘unitary thrift loophole’’ that allowed a mix of banking and 

commerce was successful. It is interesting to note that the American Bankers’ Association priority for Senate action was to close this loophole. Banks are now seeking 

for themselves, through regulation, powers they successfully removed from their 

thrift competitors during GLB.

3. Are most realtors small businesses? If so, why did the Treasury Department and Federal Reserve fail to consider the impact of the proposed rule 

on small businesses as is required by the Regulatory Flexibility Act?

Most REALTORS are small businesses. Seventy-seven percent of all residential 

firms consist of a single office. Ninety-two percent of all REALTORS are independent contractors, who typically earn a gross personal income of $34,100. Eightyfour percent of all residential firms are independent, not affiliated with a franchise. 

Even the vast majority of franchise real estate operations are independently owned 

and operated. According to the most recent Economic Census, over 375,000 small 

women and minority owned real estate businesses operate in this country. As the 

Treasury witness testified during your hearing, they didn’t consider the Regulatory 

Flexibility Act. NAR would assert that this should have been considered. Our only 

assumption can be that the regulators only looked to the effect on their regulated 

industry-banks. How the real estate industry, with many minority and women 

owned small businesses would be effected was not considered.

4. The proposed rule defines ‘‘real estate management and brokerage’’ as 

‘‘financial’’ in nature. Please explain why these two activities are more 

properly viewed as ‘‘commercial’’ activities? What is the difference between 

‘‘commercial’’ and ‘‘financial’’ activities?

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Real estate brokerage, leasing and property management are commercial activities. Selling and leasing real estate, although much more complicated, is much like 

selling any other durable goods such as automobiles, appliances, groceries, jewelry 

or boats. The business of brokering, leasing, or managing real estate does not involve lending. It is financing of the mortgage that facilitates the transfer of real 

property that involves lending. More than twenty percent of residential home purchases involve no lender financing whatsoever. See page twelve in NAR testimony 

where banking, commercial, and financial activities are charted. Congress added insurance and securities brokerage to the gray area of financial activity that both 

banks and commercial entities compete in. There are several other financial activities such as auto or appliance financing that are offered by both banks and commercial entities. But real estate brokerage is not one of those activities. Real estate brokers do not offer banking services, like check cashing and deposit taking, and banks 

don’t offer real estate brokerage. It is just that simple.

5. Do all purchases of real estate involve lending activities by banks? Why 

is this important?

As stated in the previous question, twenty percent of residential real estate sales 

involve no lender financing whatsoever. They may be cash transfers, or owner financed sales. In addition, commercial real estate sales often are financed in far different methods than bank financing. There may be development bonds sold or other 

more complex financing schemes. Certainly, property leasing and management involve no bank financing.

6. Some have suggested that the National Association of REALTORS

stands alone against this proposed rule. Is this an accurate statement?

This statement is inaccurate. The Federal Reserve and Treasury Department received over 50,000 comment letters opposed to the rule from many different sources 

other than REALTORS . As of the date we are drafting these responses, 240 Members of the House and 15 Senators have cosponsored the Community Choice in Real 

Estate Act, H.R. 3424. We have been joined by over a dozen business and consumer 

groups in calling for passage of this legislation that would prevent the Federal Reserve and Treasury from granting real estate brokerage, leasing and property management authority to financial holding company and national bank subsidiaries. 

They include the American Auctioneers Association, American Association of Small 

Property Owners, Building Owners and Managers Association, CCIM Institute, Consumers Union, International Council of Shopping Centers, Institute for Real Estate 

Management, the National Association of Home Builders, the National Community 

Reinvestment Coalition, National Fair Housing Alliance, National Association of 

Hispanic Real Estate Professionals, National Association of Industrial and Office 

Properties, National Association of Real Estate Brokers, Real Estate Roundtable, 

Society of Industrial and Office REALTORS. NAR conducted a survey of our membership of over 800,000 members and found 

that ninety-six percent of REALTORS support our efforts to prevent this proposed 

rule. Eighty-two percent of large broker/owners support this effort, and over eighty 

percent of all REALTORS said NAR should do more to stop this action.

7. You explain in your testimony a loan to procure real estate is ‘‘incident’’

to a commercial activity. Please explain why it is important we understand 

what you mean by this statement.

The GLBA required the federal regulators to examine if new powers for banks 

would be incidental or complementary to banking. Only those powers so defined 

could be authorized by the regulators. It is important to understand that all real 

estate transactions involve a transfer of real property and most involve a real estate 

agent’s assistance. But as explained in previous answers, not all real estate transactions involve financing. Thus the loan is incidental to the commercial real estate 

transfer. The transfer itself is a purely commercial transaction involving a contract 

between two parties. It may or may not involve financing. Thus the financing or 

loan is incidental to the real estate transaction. Using that logic, it might better be 

said that a real estate broker should be able to own a bank, as the loan is incidental 

to the real estate transaction. This is a huge difference and a major reason why 

NAR believes that the regulators are exceeding Congressional intent with this proposed rule.

8. Why is it important Congress retain the ‘‘firewall’’ separating banking 

from commerce?

It is important to retain the separation of banking and commerce due to the inherent risks that would be created. Congress took explicit action during GLB to 

avoid creating that mixture. Great debate was held on whether the United States 

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should move to a ‘‘universal banking’’ system like that employed by Japan. Even 

Fed Chairman Alan Greenspan made a critical point during hearings on GrammLeach-Bliley: Firewalls leak and in today’s closely integrated financial institutions 

they leak quickly. Chairman Greenspan had the ‘‘Asian contagion’’ fear in mind 

when making these comments. Given the failure of the Japanese universal banking 

system these comments were well founded. The whole point in banks getting these 

additional authorities is to cross sell their proprietary products. Banks call this 

‘‘one-stop’’ shopping. We call it ‘‘one-bank’’ shopping. Banks do not have an agency 

relationship with their customers. Banks necessarily will promote their bank and 

financial products to the exclusion of any competitive products. That’s the nature 

of banking. The business of banking requires capturing customers for proprietary 

product and service sales. Real estate brokers and agents have a completely different relationship with their clients based on an agency relationship and the 

unique nature of selling and marketing real estate. Their only goal is to assist in 

the marketing or purchase of their client’s real estate. Although they may recommend ancillary services, their only compensation comes from the completion of 

that transaction. Thus their motivations are completely different from a banker’s. 

A real estate agent’s sole obligation is to their client.

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ATTACHMENT 

THE ECONOMIC IMPACT OF REGULATIONS ON RESIDENTIAL REAL ESTATE

The residential real estate sector of the U.S. economy is large and fulfills an important role in maintaining economic stability in our economy. The size of the housing market is immense: there are 115.9 million housing units in the United States 

according to the 2000 Census. In 2001, 5.3 million existing homes were sold across 

the country. With the median price of an existing home in 2001 at $147,800, the 

economic value of homes sold is $783 billion. 

The housing sector has an impact on the U.S. economy that goes beyond mere 

size. During the 2001 recession, housing has carried the economy through the recession. While profits declined and payrolls fell off, consumers had confidence in housing and bought homes in record numbers. Indeed from the fourth quarter of 2000 

to the fourth quarter of 2001, the GDP grew only 0.48 percent and the housing sector contributed 0.3 percent of that amount: 61 percent. 

With the economy teetering on the edge of a recovery, now is not the time to disrupt the housing markets with policy changes that have not been carefully considered. Housing and homeownership play a role beyond the current home sales. The 

national homeownership rate is over 68 percent, but just as underrepresented 

groups are beginning to enter these markets, changing the rules could disrupt these 

gains. Confidence in the system used to buy and sell homes is critical to maintaining an efficient market that allows homebuyers to obtain a home at the best price. 

Given the size and importance of the real estate sector, it is vitally important that 

a thorough analysis be conducted of the impact of the rule proposed by the Board 

of Governors of the Federal Reserve adding real estate brokerage and property management to the list of activities permissible for financial holding companies. Consideration of the rule in advance of this analysis is short-sighted. 

June 7, 2002

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APPENDIX A 

The Advantages of the Federal Bank Charter 

APPENDIX B 

An Estimate of Consumer Costs If Financial Holding Companies Enter the Real Estate Brokerage Industry 

ATTACHMENTS 

‘‘An Economic Analysis of the Proposal to Allow National Banks to Compete in the 

Real Estate Brokerage Market,’’ Consultant Study, Capital Economics, Washington, DC, April 2001

Bernard Shull, ‘‘Real Estate Brokerage and Management Services As Permissible 

Activities for Banking Organizations: An Evaluation of the Agencies’ Proposal of 

December 2000,’’ Consultant Study, April 2001

Leonard Zumpano, ‘‘The Possible Consequences of Allowing Banks Into the Real Estate Brokerage Industry,’’ Consultant Study, April 2001

EXECUTIVE SUMMARY

The history of banking legislation and regulation in the U.S. has maintained the 

separation of banking and commerce. Both Congress and the Federal Reserve have 

consistently interpreted real estate brokerage and property management activities 

to be commercial in nature. For nearly two decades, the financial services industry 

has lobbied Congress for the right to engage in real estate and other non-financial 

activities. A provision of the Gramm-Leach-Bliley Act of 1999 allows for the Federal 

Reserve Board and the Department of the Treasury—acting in accord—to expand 

the list of permitted financial activities if they determine the activities are financial 

in nature or incidental to a financial activity. The Federal Reserve and Treasury 

have issued a joint proposal which would effectively remove the barrier between 

commerce and finance, by permitting financial holding companies and federally 


Econres.eps
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chartered banks to operate real estate brokerage firms and engage in property management. The National Association of REALTORS strongly opposes this proposal 

on the grounds that real estate brokerage and property management is not a financial activity, nor is it incidental to finance, and that the implementation of such a 

proposal would lead to negative market and consumer consequences. 

THE SEPARATION OF BANKING AND COMMERCE 

The strict separation between banking and commercial sectors of the economy has 

been codified in several key banking laws, including the Glass-Steagall Act (1933), 

the Bank Holding Company Act of 1956, and the Gramm-Leach-Bliley Act of 1999. 

These laws prohibit commercial firms from engaging in banking and prohibit banks 

from engaging in commercial activities. 

The most recent legislation on bank powers—the Gramm-Leach-Bliley Act—delineates which activities are financial. It does not include real estate brokerage and 

property management among them. Indeed, the Act maintains the long-standing 

principle that even though banking organizations may be allowed to expand into 

non-banking financial activities, they ought not be permitted to engaged in commercial ones. 

Real Estate Brokerage is not a financial activity, nor is it incidental to finance. 

Financial activities involve financial instruments—loans, deposit accounts, etc. 

Real property is not a financial instrument. Ninety three percent of homebuyers 

purchase their home not as an investment, but rather for a place to live. 

The assertion that real estate brokerage is incidental to finance is erroneous; 

rather, it is the financial activity that is incidental to real estate brokerage. Obtaining a loan is not a requirement for a home purchase any more than getting a loan 

is necessary to buy cars, boats or fine jewelry. Those are consumer durables that 

frequently are purchased with multi-year financing. While most households use 

some kind of financing to purchase their homes, a significant portion do not. The 

American Housing Survey reports that up to 20 percent of homebuyers purchase 

their homes without a mortgage. 

THE RESIDENTIAL REAL ESTATE BROKERAGE BUSINESS 

The residential real estate brokerage industry as it exists today has large numbers of independent real estate professionals and brokerages actively competing for 

prospective buyers and sellers. Competition is fierce, efficiencies are high, and there 

are relatively few barriers to entry. These characteristics make it highly unlikely 

that the entry of financial holding companies and subsidiaries of national banks into 

the commercial real estate marketplace would benefit either business or consumer 

interests. 

There are approximately two million real estate licensees, of whom more than 

760,000 are members of the National Association of REALTORS, and over 60,000 

real estate firms that serve nearly 12 million American homebuyers and sellers 

every year. Most real estate firms are small businesses with five real estate salespeople or less who are independent contractors. These real estate professionals are 

generally compensated through a commission. Even franchise brokerages operate as 

independent firms; the franchiser does not make policy or price decisions for the 

firm, and cannot influence the price of real estate services through wholesale pricing 

of the goods sold. 

In general, the real estate brokerage business is a local activity. Most real estate 

professionals serve one town or city, and as such they are well versed in information 

about schools, neighborhoods, and other quality of life issues. 

There is little concentration in the real estate brokerage industry. It is relatively 

easy and inexpensive to enter the real estate business. There are always new entrants in the industry, increasing competition and expanding consumer choice. Competition among agents and firms is also high. A firm’s—and real estate professional’s—success depends on the level of service they provide to homebuyers and 

sellers. 

There are limited economies of scale in the real estate brokerage business. Permitting financial holding companies to engage in real estate activities would not 

make real estate brokerage more efficient or cost less. 

THE RISKS OF COMBINING REAL ESTATE AND BANKING 

We conclude that the unprecedented expansion of banking powers into the real 

estate brokerage industry would have little, if any positive effects for either the 

banking or real estate brokerage industries. FHCs bring with them inherent advantages through the potential upstreaming of the advantages held by their federally 

insured bank subsidiary. These advantages could be used to undercut real estate 

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brokerage firms and have the potential of making the government a player in the 

real estate brokerage market. 

Expansion of Banking Powers 

In contrast to the real estate brokerage industry, banking is a highly concentrated 

industry dominated by a few powerful firms. This concentration has been driven by 

mergers and acquisitions that have yet to produce positive outcomes for either the 

industry or consumers. 

Bank entry into non-banking activities has neither improved bank profitability 

and performance nor decreased risk through diversification. Allowing banks to engage in real estate brokerage activities would not yield better results, as profitability for real estate companies is low in comparison to banks, cross selling opportunities are few, and there are limited economies of scale to exploit. 

Banks do not need to enter the real estate brokerage business in order to compete 

in the mortgage market. Bank and mortgage company subsidiaries of banks already 

dominate both mortgage origination and mortgage servicing markets. Even those 

thrift institutions that currently engage in real estate brokerage activities account 

for less than five percent of mortgage originations. 

Real estate brokerage firms with mortgage banking subsidiaries also pose no competitive threat to FHCs. In 1999 the top 75 real estate firms that had mortgage 

banking affiliates originated only 1.1 percent of mortgages. In comparison, the top 

25 financial holding companies alone accounted for 39.2 percent. 

Impact on the Real Estate Brokerage Industry 

Bank entrance into real estate brokerage could actually threaten the safety and 

soundness of the nation’s banking system. FHC bank subsidiaries have important 

benefits from their federal charter, including a lower cost-of-funds and access to the 

Federal Reserve’s discount window. The federal ‘‘safety net’’ would likely be extended to other FHC affiliated businesses when they are in distress, thus exposing 

the nation’s payment and monetary systems to losses. 

Bank entrance into the real estate brokerage business would increase market concentration. As banks increase their role in real estate brokerage, the real estate industry would change from a localized, highly competitive industry to one dominated 

by large, national firms. This increased concentration would not improve efficiency 

of the real estate industry. 

Impact on Consumers 

Combining real estate and banking services will impose significant costs to consumers. The costs will come in the form of higher prices and fees paid by consumers, 

reduced level of real estate brokerage services, limited consumer choice, and discomforting intrusion into consumer privacy. Rather than seeing consumer costs go 

down, as claimed by the FHCs, the cost, even in the best scenario, will likely increase. Contrary to FHC claims, allowing banks to enter the real estate brokerage industry will not lead to lower costs for consumers. Any temporary reduction in FHC-real 

estate services fees would be offset by higher costs for bank customers. 

Combining real estate and banking services would limit consumer choice. Increased concentration is likely to reduce the number of independent, local real estate brokerage firms that offer services and expertise currently tailored to local real 

estate needs. It would also eliminate the incentives for FHC-employed real estate 

professionals to get the ‘‘best deal’’ for their customers, especially in terms of mortgages and other settlement services. 

Research studies have found that while consumers take advantage of real estate 

professional recommendations on lenders and other real estate related service providers, they still want choice. Seventy three percent of real estate professionals recommend two or more mortgage lenders to their clients. This is the type of one-stop 

stopping consumers value—not the type where they get their mortgage from the 

same place as they purchase their home. 

The entry of banks into real estate also poses concerns about consumer privacy. 

Under the Gramm-Leach-Bliley Act, financial institutions are permitted to share information with their FHCs and other subsidiaries. If FHCs are permitted to engage 

in real estate brokerage activities, consumer information currently kept private to 

real estate brokerages would be exposed to a much larger entity, and shared among 

affiliated third parties under the provisions of the GLB Act without the prior consent of the consumer. 

IMPLICATIONS FOR HOMEOWNERSHIP 

Expanding bank powers to allow FHCs to engage in real estate related activities 

could prove detrimental to homeownership. Banks would find it more profitable to 

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foreclose on delinquent mortgages. Homeowners who experienced foreclosure would 

lose their homes and be marked as poor credit risks, and thus be unable to finance 

another home purchase. 

Since mortgage origination fees and cross-selling opportunities would be greater 

for higher income households, incentives for serving those households would increase and those for serving lower-income households would decrease. This would 

directly impact first-time homebuyers because they generally have lower incomes 

than repeat buyers. 

SUMMARY 

This research paper clearly demonstrates that real estate brokerage is not a financial activity, nor is it incidental to finance. Quite the contrary, finance is incidental to real estate brokerage activities. The expansion of bank powers that would 

permit financial holding companies and subsidiaries of national banks to engage in 

real estate activities would contravene the long history of banking legislation that 

specifically precludes the mixing of banking and commerce. Furthermore, financial 

holding companies would bring with them unfair federally chartered advantages, 

unleveling the playing field in an already competitive marketplace. 

Even if such expansion were allowable under Federal law, it would not be justified because of negative consequences it could impose on both the real estate brokerage business and on consumers. The real estate brokerage industry today is a highly 

competitive, efficient market with few economies of scale. It is dominated by large 

numbers of local firms actively competing for market share. Allowing financial holding companies to enter the real estate brokerage business would lead to an increase 

in market concentration with no appreciable economies of scale or scope. Large financial institutions would gain market share at the expense of small, local businesses. American consumers would suffer from higher real estate and banking fees, 

limited choice, privacy threats, and a reduced ability to own a home. 

INTRODUCTION

The U.S. Congress has consistently mandated the separation of banking and commerce throughout the past two centuries, beginning with the National Bank Act of 

1864 and extending through the Bank Holding Company Act of 1956 and the recently adopted Gramm-Leach-Bliley Act of 1999. The Board of Governors of the Federal Reserve has maintained this view throughout the Federal Reserve’s history. 

However, in a dramatic shift in view, the Federal Reserve and the Department of 

the Treasury are now considering an unprecedented expansion of banking powers. 

They have jointly issued a proposed rule that would enable financial holding companies (FHCs) and financial subsidiaries of national banks to engage in real estate 

brokerage and property management activities. 

To effect such a sweeping change in banking powers, the Federal Reserve and the 

Treasury Department must first determine if real estate brokerage and property 

management activities are ‘‘financial in nature’’ or ‘‘incidental to a financial activity.’’ If these real estate activities fail to meet this test—as we believe to be the 

case—current federal law would clearly prohibit the proposed regulatory change. In 

addition, regulatory precedence requires that the agencies also consider the market 

consequences of such a change. If allowing FHCs and banks to engage in real estate 

brokerage and property management activities would result in reduced competition 

and fewer options for consumers—as we also believe to be the case—the proposed 

regulation should be rejected. 

In considering the market consequences of the proposed regulatory change, it is 

important to recognize the size and scope of the real estate industry and its importance to American consumers and the national economy. According to NAR calculations, real estate-related activities (both direct and indirect) account for at least 20 

percent of total GDP. Real estate brokerage and management are at the core of 

these activities, affecting every single community, both large and small. For example, the real estate brokerage industry—one of the largest and most competitive industries in the nation—serves about 12 million homebuyers and sellers in a typical 

year, generating over $1 trillion in annual sales. 

Any regulatory change that affects such a large and vital sector of the American 

economy should be viewed with considerable caution. As documented in this report, 

allowing FHCs and banks to enter the real estate brokerage and management business would lead to fundamental changes in the structure of the real estate industry. 

These changes, in turn, would affect the millions of ordinary American citizens who 

buy or sell properties in any year. Because of the proposal’s far-reaching conVerDate Jan 17 2002 11:40 Jul 31, 2002 Jkt 000000 PO 00000 Frm 00121 Fmt 6601 Sfmt 6621 G:\WORK\COMM\051602\79656.000 HJUD1 PsN: 79656
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sequences, both consumer and industry interests need to be considered in any discussion of the proposed regulatory change. 

This paper examines the role of banks and real estate firms in the real estate brokerage and home buying process. It also looks at the market consequences of permitting financial holding companies to engage in real estate brokerage and property 

management activities. The first four chapters focus on the residential real estate 

brokerage business and the role of banks in real estate. Chapter five focuses on commercial real estate brokerage and real estate property management.

• Chapter 1, The Separation of Banking and Commerce, addresses the key issue 

of whether real estate brokerage activities are financial in nature or incidental to a financial activity. The analysis begins with a historical perspective 

of Congressional intent, including a discussion of the Bank Holding Company 

Act of 1956 and the Gramm-Leach-Bliley Act of 1999. It then describes the 

critical differences between a financial activity and an activity involving the 

brokering of real property. The discussion suggests that Congress clearly indicated its intent to maintain the separation of banking and commerce. The 

analysis also indicates that real estate brokerage is not a financial activity 

or incidental to finance.

• Chapter 2, The Residential Real Estate Brokerage Business, describes the real 

estate brokerage industry as it exists today, including its size and scope, its 

competitive environment, its market efficiencies, and its ease of entry. The 

analysis demonstrates that the real estate brokerage industry, as currently 

structured, is a highly competitive and efficient market, with few opportunities for economies of scale.

• Chapter 3, The Risks of Combining Real Estate Brokerage and Banking, assesses the market consequences of allowing financial holding companies and 

banks to engage in real estate brokerage activities. Market effects are explored from three different perspectives: the impact on banks; the impact on 

the real estate brokerage industry; and the impact on consumers. The analysis concludes that the proposed regulation would reduce competition within 

the real estate brokerage industry and limit consumer choice without significantly improving the profitability of the nation’s banks.

• Chapter 4, Implications for Homeownership, looks at how the mixing of real 

estate brokerage and banking could increase the number of foreclosures and 

affect the availability of credit to low-income homeowners. This would have 

a major impact on the U.S. homeownership rate.

• Chapter 5, Real Estate Property Management, addresses the question of 

whether financial holding companies should engage in the real estate property management business. The issues examined in Chapter 5 are similar to 

the ones considered for real estate brokerage, and include: whether real estate management is financial in nature or incidental to a financial activity; 

the current size and structure of the market; the existing level of competition; 

and the inherent risks of combining real estate property management and 

banking.

The analysis presented in this report supports two broad conclusions. The first is 

that real estate brokerage and management activities are neither financial in nature nor incidental to finance. If any thing, the opposite appears to be true; obtaining financing for a real estate transaction is incidental to real estate brokerage and 

management activities. The second, more important conclusion is that allowing 

banks to enter the real estate brokerage and management industry could have wideranging, adverse market effects. Industry concentration would increase, competition 

would decline, and consumer choice would be limited with no real benefits from 

economies of scale or scope. Thus, even if such activities were allowable under existing banking laws, the market risks involved would clearly justify rejecting the proposed regulatory change. 

CHAPTER 1

THE SEPARATION OF BANKING AND COMMERCE

What is the nature of the real estate brokerage process—is it a commercial activity or is it incidental to finance? This question is at the core of the debate on expanding bank powers to allow financial holding companies and subsidiaries of national banks to operate real estate brokerage companies or participate in real estate 

property management. While the purchase of a home (or any other property) is alVerDate Jan 17 2002 11:40 Jul 31, 2002 Jkt 000000 PO 00000 Frm 00122 Fmt 6601 Sfmt 6621 G:\WORK\COMM\051602\79656.000 HJUD1 PsN: 79656
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1Thomas E. Wilson, Separation Between Banking and Commerce Under the Bank Holding 

Company Act—A Statutory Objective under Attack, 33 Cath.U.L. Rev. 163 (Fall 1983) (hereinafter ‘‘Wilson’’) (citing the National Bank Act, ch. 106, § 8, 13 Stat.99, 101(1864)(codified as 

amended at 12 U.S.C. § 38)). 2 Jonathan R. Macy and Jeffery P. Miller, Banking Law and Regulations, 22 (2nd ed. 1997). 

3 Edward L. Symons, Jr. and James J. White, Banking Law; Teaching Materials 36 (2nd ed. 

1984). 4 Ibid.

5S. Rep. No.1095, at 1 (1956), reprinted in 1956 U.S.C.C.A.N. 2482. 

6S.Rep. No. 1095, at 12 (1956), reprinted in 1956 U.S.C.C.A.N. 2482, 2493. 

most always a major financial undertaking, the actual property transaction has 

been consistently maintained in law and regulation as a commercial one. Indeed, 

the financial portion of the transaction is a relatively small part of the homebuying 

process. A review of the legislative history of banking laws as they pertain to real 

estate-related activities and an examination of both the real estate brokerage and 

homebuying process demonstrate that real estate brokerage is a commercial activity 

not financial, nor is it incidental to finance. In fact, the opposite seems to be true: 

finance is incidental to the real estate brokerage. 

A LEGISLATIVE HISTORY 

Throughout the history of the U.S. banking system, a central tenet of national 

policy has been to maintain a strict separation between banking and the various 

commercial sectors of the economy—i.e., industrial, commercial, and agricultural activities. This structural division between banking and commerce has been codified 

in several key banking laws including the Bank Act of 1933 (Glass-Steagall), the 

Bank Holding Company Act of 1956, and the Financial Services Modernization Act 

of 1999 (Gramm-Leach-Bliley Act). Collectively, these laws prohibit commercial 

firms from acquiring or operating banks and, conversely, prohibit banks from engaging in commercial activities. 

The separation of banking and commerce dates back to the inception of the nation’s banking system in 1864,1 and the federal laws regulating banking consistently 

have maintained this policy. The concern among policy makers was, and is, that 

permitting a single business enterprise to engage simultaneously in both banking 

and commercial activities would result in the misallocation of credit and extensive 

anti-competitive practices. In addition, the federal safety net established for the 

banking system (e.g., the Federal Deposit Insurance Corporation [FDIC]) could be 

exposed to risks from commercial sectors of the economy. Other concerns posed by 

the mixing of banking and commerce include violation of consumer and customer 

privacy interests, and reduction of credit availability in local communities. 

The Glass-Steagall Act 

The Banking Act of 1933, also called the Glass-Steagall Act, was passed in response to political charges that the Great Depression had been caused by widespread bank speculation in securities.2 The Act included four sections, which generally required the separation of commercial banking and investment banking.3

Under the provisions of Glass-Steagall, securities firms were prohibited from engaging in deposit-taking activities, and from being affiliated with entities so engaged. 

Commercial banks also could not participate in or be affiliated with securities firms 

that dealt in and underwrote securities.4

The Bank Holding Company Act 

The Bank Holding Company Act of 1956 (BHCA) was enacted to address concerns 

about bank holding companies and the type of assets those companies controlled. 

Underlying the Act’s provisions was the Congressional intent that bank holding 

companies should confine their activities to bank management, and not manage or 

control activities that had no relationship to banking. The legislative history of the 

BHCA shows that Congress intended to continue the separation of banking and 

commerce.5

The BHCA prohibited bank holding companies from acquiring commercial interests. It also required those bank holding companies owning interests in companies 

engaged in non-banking activities—i.e., ownership or control of any company which 

is not a bank or related to banking—to divest themselves of those interests. The Act 

also stated that a bank holding company could not engage in a business other than 

banking or managing or controlling banks or ‘‘furnishing or performing services for 

any bank for which it owns or controls 25 percent or more of the voting shares.’’ 6

The BHCA severely limited the non-banking activities of bank holding companies 

that owned or controlled two or more banks. 

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7 John Krainer, The Separation of Banking and Commerce, Federal Reserve Bank of San 

Francisco Economic Review 2000. 8 Ibid.

9 Ibid.

10Transamerica Web site, http://www.Transamerica.com. 11Pub. L. No. 91–607, Tit. 1, § 101, 84 Stat. 1760 (1970). 12 ‘‘The committee agrees that it is desirable to continue our long standing policy of separating 

banking from commerce.’’ S. Rep. No. 91–1084, at 4 (1970), reprinted in 1970 U.S.C.C.A.N. 5519, 

5522. 13 12 U.S.C. §§ 1842 &1843. 14 12 U.S.C. § 1843 (a)(2). 15 Ibid. 16 12 U.S.C. § 1843(c)(8). 17 Boatmen’s Bancshares, Inc., 58 Fed. Res. Bull. 427, 428 (1972). 18 58 Fed. Res. Bull. 652 (1972). 19Pub. L. No. 106–102

One impetus for this legislation was the case of Transamerica.7 At the time the 

BHCA was being debated Transamerica—a holding company for what would later 

become Bank of America—held an ownership interest in many banking and nonbanking activities.8 The non-banking activities included real estate, insurance, and 

commercial fishing.9 After the passage of the BHCA, Transamerica chose to divest 

itself of its banking activities.10

In 1970, the BHCA’s prohibitions against the mixing of banking and commerce 

were extended to one-bank holding companies.11 Through its enactment of the 1970 

amendments to the BHCA, Congress acted both to reinforce and expand the federal 

policy of separating banking and commerce.12

The BHCA made all bank holding companies subject to regulation by the Board 

of Governors of the Federal Reserve System. The principal regulatory powers of the 

Board of Governors concerning bank holding companies were set forth in Sections 

3 and 4 of the BHCA.13 Section 3 requires prior Board approval of any proposed 

acquisition by a bank holding company of ownership or control of a bank, while Section 4 codifies provisions regulating the separation between banking and commerce. 

Section 4 specifies that a bank holding company may not retain direct or indirect 

ownership or control of any voting shares of any company which is not a bank or 

bank holding company.14 It provides that a bank holding company may not engage 

in any activities other than (a) those of banking or of managing and controlling 

banks, and (b) those permitted under Section 4(c)(8) of the BHCA.15 This section 

of the Act states that the prohibition against non-banking activities contained in 

Section 4 (a) shall not bar ownership by a bank holding company of ‘‘Shares of any 

company the activities of which the Board after due notice and opportunity for hearing has determined (by order or regulation) to be so closely related to banking or 

managing or controlling banks as to be a proper incident thereto.’’ 16

Over the years the Board of Governors of the Federal Reserve has issued a variety 

of rulings under Section 4 (c)(8) of the BHCA, allowing that some non-banking activities are permissible for bank holding companies, while others are not. But at the 

same time, the Board of Governors has consistently interpreted real estate brokerage and management activities to be among the proscribed commercial activities for 

bank holding companies. In 1972, the Board of Governors held that real estate brokerage ‘‘is not an activity that the Board has determined to be so closely related 

to banking or managing or controlling banks as to be a proper incident thereto.’’ 17

In the same year, the Board of Governors also ruled that it did not consider property management to be a permissible activity for bank holding companies under Section 4 (c)(8) of the Bank Holding Company Act.18

The Gramm-Leach-Bliley Act 

After many years of deliberation on financial services modernization, Congress 

adopted landmark legislation that removed the constraints on banks, securities 

firms, and insurance companies affiliating and entering each other’s business. The 

Gramm-Leach-Bliley Act of 1999 (GLB Act)—as it became known—further amended 

the BHCA.19 The GLB Act delineated which activities are financial in nature. The 

Act does not include real estate brokerage and property management among those 

activities it deemed to be financial in nature. In addition, real estate development 

and investment were specifically excluded from the new activities allowed for banks 

and bank holding companies. 

The GLB Act dramatically increased the ability of banking organizations to affiliate with insurance, securities and other financial firms, and insured depository institutions by repealing prohibitions against Federal Reserve member banks 

affiliating with securities firms and insurance companies. The GLB Act also allowed 

for the creation of new ‘‘financial holding companies’’ (FHCs) with broader powers 

121

20 Cong. Rec. S4626 (1999). 21 Congressional Record, H11,529–H11,530 (1999). 

than traditional bank holding companies to engage in a wide range of financial services and activities, but not in commercial activities. 

The GLB Act also permitted financial holding companies to engage in any activity 

determined by the Federal Reserve, after consultation with the Treasury Secretary, 

to be financial in nature, or incidental to financial activities, without posing a substantial risk to the nation’s banking system or the U.S. Treasury. An application 

procedure was established for determining new financial activities. New activities 

would be determined on a case-by-case basis consistent with the purposes of the 

BHCA. 

When Congress considered the GLB Act, the Board of Governors urged Congress 

to proceed cautiously in taking any action that could impair the historical barrier 

between banking and commerce. In testimony before the House Committee on Banking and Financial Services on February 11, 1999, Chairman Greenspan stated:

As technology increasingly blurs the distinction among various financial products, it is already beginning to blur the distinctions between predominately commercial and banking firms. But how the underlying subsidies of deposit insurance, discount window access, and guaranteed final settlement through fed wire 

are folded into a commercial firm, should the latter purchase a bank, is crucially 

important to the systematic stability of our financial system.

It seems to us wise to move first toward the integration of banking, insurance, 

and securities . . . and employ the lessons we learn from that important step 

before we consider whether and under what conditions it would be desirable to 

move to the second stage of full integration of commerce and banking. The Asian 

Crises last year highlighted some of the risks that can arise if relationships between banks and commercial firms are too close . . . The Federal Reserve Board 

continues to support elimination of the unitary thrift loophole, which currently 

allows any type of commercial firm to control a federally insured depository institution.

No reasonable observer would suggest that there has been any significant change 

in the relevant technology, or in the business of real estate brokerage or management, since passage of the GLB Act in November 1999. The businesses of real estate 

brokerage and management remain the same today as they were on the date of enactment. 

The separation of banking and commerce was part of the Congressional debate 

about the scope of activities to be authorized by the GLB Act. During the debate, 

the Clinton Administration also urged the Congress to maintain that separation, expressing concerns about mixing banking and commercial activity under any circumstance. The Administration, too, cited concerns raised by the then recent financial crises in other countries (e.g., Thailand and Japan).20

The GLB Act effectively repudiates any policy authorizing the mixing of banking 

and commerce.21 As with the Bank Holding Company Act of 1956, the legislative 

history of the GLB Act indicates that Congress intended to maintain the separation 

between banking and commerce. And while the GLB Act does expand the range of 

non-banking financial activities permitted to FHCs, it maintains the distinction between banking and commercial activities. The Act maintains the long-standing principle that even though organizations engaged in banking may be permitted to expand into non-banking financial activities, they ought not to be permitted to engage 

in commercial activities. 

A strict statutory separation between banking and commerce has been maintained 

in federal law, almost without interruption, since the advent of the national banking 

system. Congress has acted on several occasions to reinforce that separation, most 

recently in the GLB Act. With the GLB Act Congress determined, yet again, that 

the separation between banking and commerce is essential to a sound banking system and a fair, competitive, and productive national economy. 

THE NATURE OF REAL ESTATE BROKERAGE 

The separation of banking and commerce, and so the exclusion of real estate brokerage as a financial activity under historical and current banking legislation, is 

based on the difference in the brokered assets of the real estate and banking industries. All the current activities of financial holding companies relate to financial instruments: loans, checking accounts, mortgages, etc. While these represent value between two parties (usually a bank and a depositor or borrower), they are not tangible goods. Indeed, they rarely take any physical form. 

122

The business of brokerage is industry neutral. The key to distinguishing between 

financial activities and commercial activities is the nature of the asset. Commercial 

activities—such as real estate brokerage—relate to transactions of tangible assets. 

And while purchasing tangible assets, such as a car, computer, or a home, may entail the use of financial instruments—cash, loans, etc.—this does not mean that 

commerce is ‘‘financial in nature’’ or ‘‘incidental to a financial activity.’’ In fact, it 

can be argued that the financial activity involved in real estate brokerage is incidental to the real estate transaction. 

Characteristics of the Asset 

The characteristics of the underlying real estate asset distinguish real estate brokerage from the brokerage and sale of financial instruments. Real estate is tangible, 

has a fixed location and is heterogeneous. Even similar structures—houses in a 

planned community that have a similar look and floor-plan—are unique in some 

way. One house may face south, another west. One house has a garage; the one next 

door merely a driveway. A property that has had extensive remodeling may be 

priced differently than the same model across the street. 

Financial instruments, on the other hand, are intangible assets. Unlike houses (or 

cars, or computers), securities and insurance are not tangible. Deposit accounts, savings accounts, credit cards, mortgages, car loans, are not tangible, either. These instruments represent value between two parties. A mortgage represents the promise 

to pay an amount that is owed to the bank. The amount is amortized through a 

schedule of principal and interest payments. Stock and bonds represent, respectively, share of ownership in a corporation and the promise to repay a debt from 

a corporation or a government. 

Bank products often exist as electronic entries on a report. They rarely take any 

physical form. A checkbook is not the deposit account. The deposit account is the 

promise of the bank to pay the depositor and the guarantee by the U.S. government 

that it will pay if the bank does not. 

Finally, bank products are not differentiated in any way. Whether a consumer 

purchases IBM stock from one bank or another, they purchase the same share of 

ownership in the same company. A key feature of the underlying financial instruments is their liquidity, a feature derived from their homogeneity. Financial instruments are easily traded and moved to locations across the country and around the 

world through electronic transactions. These instruments are not differentiated 

through location or any other characteristic. 

Those traits that characterize real property also distinguish real estate brokerage 

activities from financial activities. The heterogeneity of real estate properties make 

the real estate brokerage process distinct from markets for financial services where 

products are homogeneous. The multiple listing services developed by real estate 

agents contain over 70 data elements that briefly describe the important features 

of a property. However, even the MLS is not sufficient to capture many of the qualitative characteristics of properties. Because each property is different in some way, 

evaluating properties and educating consumers about them means that the extensive one-on-one contact between buyers and sellers and their real estate professionals is a vital part of the brokerage process. 

The Homebuying Process 

Most households that purchase homes use financing of some sort. But securing 

a loan is only a very small part of the homebuying process. The heterogeneous nature of housing and the diversity of households result in a complex matching process 

between buyers and sellers. This is where real estate professionals play their vital 

role. Homebuyers turn to real estate professionals for one main reason: to find them 

the home that best suits their resources and needs. According to the 2000 National 

Association of REALTORS Profile of Home Buyers and Sellers, what buyers most 

want from real estate professionals is help in finding the ‘‘right’’ home. 

The real estate professional also educates potential buyers about housing market 

conditions, re-sale value and the relative value of location versus amenities. Based 

on the potential buyer’s demand characteristics, the real estate professional advises 

on affordability. In addition, the professional begins to guide the potential buyer 

through the homebuying process. The typical homeowning American may purchase 

and sell a home only three or four times during his or her life. These transactions 

often occur years apart. Consequently, very few homebuyers and sellers are experienced in the many steps for these complicated transactions. Even repeat homebuyers are relative novices with housing transactions.

123


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22 In some cases, homebuyers sign agreements with real estate professionals in which the 

agent agrees to represent only the buyer. According to The 2000 National Association of REALTORS Profile of Home Buyers and Sellers, nearly half of all homebuyers in 1999 who used 

the services of a real estate professional signed a ‘‘buyer’s representative’’ agreement with their 

agent. 

While buyers represent current and potential housing demand, current homeowners and builders are the source of the housing supply. Real estate professionals 

match the supply to the demand. After selecting a real estate professional, the seller 

and the agent negotiate a listing agreement. The agent works with the seller to develop a marketing strategy. The agent’s recommendations consider the current market conditions, the characteristics of the property, and the sellers’ timing requirements. Traditionally, a real estate professional represents the seller of a property, 

and it is the seller who pays the commission when the sale is complete.22

The process of bringing together a buyer and seller to exchange a high-cost, 

unique, immovable property is both art and science. The real estate professional 

works with the buyer to draft the offer, discussing the proposed sales price and any 

conditions on the offer such as home inspections and financing. When ready, the 

buyer makes a written offer through the real estate professional to the seller. (In 

many states, the offer becomes the contract for the sale and thus includes many details such as what items will remain with the property such as washing machines 

and draperies.) The seller may accept the offer, reject the offer or may counteroffer. 

(The real estate professional also advises the seller on any other offers to buy the 

property as well as current market conditions.) If the negotiations fail, the process 

begins again. 

Once the contract is signed, the buyer and seller must arrange to fulfill the conditions of the contract. If the offer is contingent on a home inspection or financing, 

then the buyer is not obligated to complete the transaction if either condition fails. 

The seller may have to make some repairs to the property and, if necessary the 

buyer must arrange financing. Financing is but a small piece of the entire 

homebuying process. The closing itself is conducted by lawyers or other representatives of the title company, the buyer, the buyer’s real estate professional, the seller 

and the seller’s real estate agent. 

Finance is Incidental to Real Estate Brokerage 

While it is true that homes may become a primary source for building household 

wealth, real estate is not a financial instrument, nor are homes purchased primarily 

for investment or even tax advantages. The primary reason for purchasing a home 

is as a place to live. In fact, nearly 93 percent of homebuyers purchase a home for 

this reason. Selection of a home is a choice of basic shelter as well as a climate, 

a political jurisdiction and a neighborhood.

Obtaining a loan is not required for purchasing a home. However, because property is often purchased through financing, there is an erroneous perception that the 


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transaction to secure these goods is financial in nature. While it is true that many 

consumers may engage in a financial activity—obtaining a loan—in order to buy a 

home, a car, or a refrigerator, the actual purchase is a commercial activity. The financial portion of the transaction (obtaining a loan) is incidental to the primary activity (buying a house). In the homebuying process, financing is but one small part 

of the entire transaction.(See flow chart of homebuying process.) In fact, in a significant portion of home sales, financial activity is not even incidental. According to the 

1999 American Housing Survey for the United States conducted by the U.S. Department of Housing and Urban Development (HUD) and the U.S. Census Bureau, up 

to 20 percent of all home sales require no financing at all. 

In addition, real estate brokerage does not just consist of homebuying. Approximately six million home sales transactions occur in a typical year. Each of those 

sales transactions involves a buyer and a seller—the two ‘‘sides’’ of a real estate 

transaction. That totals 12 million homebuyers and sellers. Sellers have no need obtain financing for a home they are selling. That side of the homebuying transaction 

involves no financing or banking products of any kind. 

SUMMARY 

Congress has clearly indicated its intent to maintain the separation of commerce 

and banking. The legislative history of banking laws demonstrates that real estate 

brokerage has been consistently interpreted as a commercial, not financial activity. 

Real estate brokerage is not a financial activity nor is it incidental to finance. Real 

property is a unique asset. It is tangible, durable and exists in a fixed location. This 

is different in almost every respect from the financial instruments that form the 

basis of banking activities. If the asset is not financial, then the buying and selling 

of the asset is not a financial activity nor is it incidental to the financial activity. 

Rather, it is the financial activity that is incidental to the brokering of real estate 

properties.

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23There are approximately two million people who hold real estate licenses. However, not all 

of those are active practitioners. It should be noted that REALTOR, REALTORS, and REALTOR-ASSOCIATE are registered collective membership marks that identify, and may be used 

only by, real estate professionals who are members of the National Association of REALTORS

and subscribe to its strict Code of Ethics. 

CHAPTER 2

THE RESIDENTIAL REAL ESTATE BROKERAGE BUSINESS

The residential real estate brokerage industry as it exists today has large numbers of independent real estate professionals and brokerages actively competing for 

prospective buyers and sellers. Competition is fierce, efficiencies are high, and there 

are relatively few barriers to entry. These characteristics make it highly unlikely 

that the entry of financial holding companies and subsidiaries of national banks into 

the commercial real estate marketplace would benefit either business or consumer 

interests. 

By any measure, the residential real estate industry is one of the largest sectors 

of the U.S. economy. More than a trillion dollars are exchanged each year in the 

sale of both new and existing homes. These transactions provide millions of Americans with jobs and produce hundreds of billions of dollars of economic output each 

year. Further, housing represents a major source of wealth building for U.S. households—nearly seven out of ten Americans own the home in which they reside. For 

many of these Americans, their home is the largest component of their net worth. 

In addition to being a vital part of the U.S. economy, the residential real estate 

brokerage industry also operates in a competitive marketplace, where more than 

three quarters of a million REALTORS 23 and tens of thousands of real estate 

brokerages compete for customers’ business each day. The underlying cost structure 

of the industry and the relative ease of entry into the market serve as checks to 

the concentration of market power. The large number of industry players ensures 

homebuyers and sellers access to service providers who best meet consumers’ needs 

at the lowest price possible. 

STRUCTURE OF THE REAL ESTATE BROKERAGE INDUSTRY 

The structure of the real estate brokerage industry reflects the trait that real estate is a localized activity. The real estate industry consists of a set of industry players who differ in size, specialty and training. Real estate professionals are the primary point of contact for most homebuyers and sellers and typically serve as independent contractors to real estate brokerage firms. Real estate brokerages come in 

many sizes and operate under varying business models, including affiliations with 

regional or national franchise firms. Because real estate professionals and firms 

generate business primarily through referrals and personal reputations, these industry players actively compete for buyers and sellers’ business. 

Real Estate Professionals 

There is no one ‘‘type’’ of real estate professional, but in nearly all cases, they exclusively serve their local market. The more than 760,000 members of the National 

Association of REALTORS differ in experience, expertise, and training. Some focus 

primarily on homebuyers, while others prefer to list properties for home sellers. 

Some real estate professionals are experts on single-family homes in suburban locations, while others best serve customers looking for a condominium in a resort location. Some real estate practitioners hold a broker’s license. (A broker is a real estate 

professional who acts as an intermediary between the buyer and seller of a home 

for a fee.) Each real estate office must have at least one broker to operate. 

Real estate professionals bring a wealth of experience and education to the real 

estate transaction. The typical REALTOR has been serving homebuyers and sellers 

for 13 years; the typical real estate professional holding a broker’s license has been 

representing buyers and sellers for 19 years.

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24The 1999 National Association of REALTORS Profile of Real Estate Firms 25The 1999 National Association of REALTORS Member Profile 26 Ibid. 27 Ibid. 

This experience translates into better service for the consumer, as agents gain expertise not only in transactions, but also increases their knowledge about the neighborhoods they serve. Real estate professionals know the schools and other qualities 

of the area that appeal to homebuyers. They have also established contacts with 

providers of goods and services that consumers need when buying or selling a home. 

Local experience is invaluable in providing good customer service. Real estate professionals become experts on the neighborhoods they serve. 

Education enhances the experience that real estate professionals possess. New 

real estate agents take many hours of educational classes to earn the license required to practice in their state. Furthermore, many agents continue to take courses 

to stay abreast of changes in real estate laws and to learn how to better serve their 

customers. The typical residential real estate brokerage requires its agents to take 

nine hours of in-house training and education per year.24 These courses teach 

agents and brokers about many real estate related issues—from the latest developments in real estate law to the release of new technologies that enable the agent 

or broker become more productive. Further, nearly a third of all real estate professionals participate in additional coursework to earn a professional designation showing that they have expertise in specific types of real estate transactions or other real 

estate related activities.25

Most real estate professionals are essentially small business owners. Nine out of 

ten real estate professionals are independent contractors who represent a real estate 

brokerage. As independent contractors, they do not receive a base salary; rather, 

they earn income by successfully matching homebuyers with sellers. As compensation, most real estate professionals receive either a percentage or all of the sales 

commission paid by the seller of properties. Typically, real estate professionals receive approximately 60 percent of the commission paid by the home seller to the real 

estate firm. With their livelihood based on their ability to successfully match homebuyers with sellers, real estate agents have the incentive to ensure a high level of 

customer satisfaction from the home buying and selling public.26

Real estate professionals work hard to give their customers a high level of customer service and, as a result, work many hours each week. The typical real estate 

professional works 45 hours a week, with 16 percent working at least 60 hours 

every week.27

In addition to being highly motivated professionals dedicated to their clients, real 

estate professionals have an additional incentive to serve their customers well. ConVerDate Jan 17 2002 11:40 Jul 31, 2002 Jkt 000000 PO 00000 Frm 00132 Fmt 6601 Sfmt 6621 G:\WORK\COMM\051602\79656.000 HJUD1 PsN: 79656

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28The 1999 National Association of REALTORS Profile of Real Estate Firms

sumers tend to choose their real estate professional based on ‘‘word of mouth.’’

While many agents choose to market their services to homebuyers and sellers 

through advertising, most homebuyers and sellers choose their real estate agent because of a referral or from the consumer’s own personal experience in a previous 

transaction. In 1999, more than a third of homebuyers chose an agent who was currently or was previously used by either a friend or relative. Another eight percent 

of homebuyers chose their agent because of the agent’s reputation. Referrals from 

employers, real estate brokers, and membership organizations resulted in nearly another ten percent of homebuyers matching up with their agent.

Real Estate Brokerages 

Real estate brokerages are in the business of managing independent agents who 

arrange for the transfer of real property. There are tens of thousands of real estate 

brokerages throughout the United States. They range in size from a single office 

with just a few agents to multiple-office firms that serve an entire metropolitan area 

or, in a few cases, several states. As brokerages differ in size, so do their business 

models. For example, brokerages may choose to affiliate with a regional or national 

franchiser (e.g., Century-21, Coldwell-Banker, etc.). They also may offer their customers other real estate related services. 

Most real estate brokerages are small operations serving local markets, but as in 

any other industry there are a group of larger firms. Three out of five brokerages 

have five or fewer agents in their sales force and an even greater proportion—82 

percent—have just one office.28 Many of these smaller brokerages are ‘‘mom and 

pop’’ operations and they operate as either a proprietorship or partnership. Yet 


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while the typical brokerage is very small, most real estate professionals represent 

a brokerage firm with at least 20 agents. 

Brokerages of different shapes and business models are able to compete on a level 

playing field because most real estate professionals and firms share their property 

listings with other real estate professionals in their region through the multiple listing service (MLS). The MLS, a computerized database featuring detailed information of most properties offered for sale, gives all participating brokerages and their 

sales force the ability to access and show properties listed by competing brokerages. 

The MLS enables real estate professionals, whether representing large or small 

brokerages, to show the same homes to their clients. 

Both sellers and buyers benefit from this arrangement. Homebuyers do not need 

to visit multiple brokerages or even the largest brokerage in town to see the best 

selection of homes available. Buyers have choice. They are able to choose a real estate professional or brokerage that best meets their other requirements without 

worrying about access to listings. Sellers also gain a similar benefit from the MLS. 

It guarantees the widest possible audience of potential buyers for homes, as nearly 

all real estate professionals can view detailed listing information. This helps ensure 

quick sale of a property at the best price possible. 

Regional and National Franchises 

Firms can differentiate themselves from their competitors by affiliating with a regional or national franchiser. In exchange for a fee that frequently is a percentage 

of the firm’s revenues, the franchiser provides the firm with a recognized name 

brand and advertising abilities, training materials, and assistance in recruiting 

sales agents and acquiring new technologies. In 1999, 22 percent of real estate 

firms, including more than half of all firms with more than 50 agents, held a franchise agreement. These firms represent approximately 38 percent of the real estate 

agents in the industry. Among the most widely known real estate franchisers are 

those owned by Cendant (Century 21, Coldwell Banker, and ERA), RE/MAX, and 

GMAC Realty Services.


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Franchised brokerages are still independent local brokerages. Brokerages that 

have an affiliation with a national franchiser are owned and operated by a local 

broker, who makes final decisions on firm policies and prices. Further, real estate 

franchisers do not produce the output sold by real estate brokerages, unlike franchised fast food restaurants and gasoline stations that purchase much of their products from the franchiser. Consequently, the national franchiser cannot even indirectly influence prices of real estate services through the wholesale pricing of the 

goods sold; therefore, franchised brokerages are truly local independent firms. 

INDUSTRY PERFORMANCE 

The residential real estate brokerage industry is characterized as an efficient and 

competitive one, with little concentration of market power. The key to this industry 

is the relative ease of entry for new professionals and real estate brokerages. With 

some education and a bit of entrepreneurship, new firms and agents are able to provide new choices for consumers. 

Ease of Entry 

Real estate brokerage is one of the few businesses where it is relatively easy to 

enter the business as a real estate professional. It has also been open to entry from 

larger corporate organizations as well. Becoming a sales agent requires an individual to pass a state licensing exam and then finding a broker who will ‘‘hang’’ that 

individual’s license. Many of the largest brokerage companies provide the training 

required to pass the exam for a modest fee, which the brokerage would wholly or 

partially refund if the licensed agent starts to work with that company. 

On the brokerage side, it also is relatively easy to enter the industry as start up 

costs and regulatory hurdles are relatively lower than they are for other businesses. 

The costs of renting office space and furniture, along with the necessary accounting, 

insurance and legal services do not compare with the costs of entering a manufacturing, technology, or even medical/dental practice with their substantial capital requirements. Furthermore, since the individual agents are largely the producers of 

the services and receive compensation only when a commissioned sale is closed, the 

broker does not have the equivalent of ‘‘inventory carrying costs’’ that a large retail 

or manufacturing enterprise must maintain. 

Traditionally, real estate companies have expanded by opening new offices or acquiring existing firm offices in new locations. The locational aspect of real estate 

prior to computerized listing and viewing of properties made this the necessary approach. The growth of metropolitan areas in the 1950s through the 1980s made 

opening new offices the way to go. With the real estate cycles of the 1980s and increasing costs of computerization, litigation, and other factors that have squeezed 

profits, the larger, more successful companies have been able to acquire other companies’ assets and locations as a means of expanding. However, there have not been 


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29The 1999 National Association of REALTORS Member Profile 

significant economies of scale realized. Each new office essentially just replicates the 

cost structure of other offices in the firm. The traditional economies of scale from 

large plant manufacturing or large distribution centers or marketing capabilities do 

not accrue to the real estate firm. The implication is that this industry is a competitive industry of relatively small firms. (See below for discussion of efficiency and 

economies of scale in the real estate industry.) 

Level of Competition 

Today’s real estate industry consists of over three quarters of a million REALTORS, representing tens of thousands of real estate firms, as well as many other 

real estate licensees. It is a competitive industry providing a wide array of choices 

and a high level of service to both the homebuying and homeselling public. Residential real estate brokerage embodies several characteristics of a competitive market, 

including the existence of many buyers and sellers, freely available information, and 

the ease of entry and exit by firms. 

Real estate firms tend to compete actively for business in three different arenas. 

First, firms compete for the best real estate professionals. Second, firms compete for 

sellers’ listings and homebuyers with other real estate firms in their market area. 

Finally, real estate firms and professionals compete against other homebuying and 

selling options, including For Sale by Owner (FSBO). The result of this threepronged competition is excellent service provided efficiently by real estate firms and 

real estate professionals for both buyers and sellers. But this competition also results in revenue and cost pressures that limit profitability for most real estate 

brokerages. 

Competition for Agents 

More than nine out of ten real estate professionals are independent contractors 

of the firms they represent. Typically, they neither receive a guaranteed salary nor 

do they receive benefits such as health insurance or paid vacation. Agents frequently switch firms to receive a better commission split or other benefits. The typical agent has been affiliated with their firm for five years, with over a third of 

agents representing their firm for fewer than two years.29 As agents become very 

successful, they often seek better compensation terms from either their present firm 

or from a firm that is seeking their services. 

To attract or keep top agents, firms may raise the commission split paid to those 

agents or provide additional marketing assistance. As agents gain more experience 

and generate a loyal clientele of buyers and sellers, they tend to earn a greater percentage of the commission paid by home sellers. Agents with fewer than five years 

of experience tend to split half of the commission with their firm, while agents with 

between 16 and 25 years of experience tend to get 60 percent of the commission 

split. In some cases, agents will receive 100 percent of the commission paid by the 

seller of a property, instead of a commission split.

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30The 2000 National Association of REALTORS Profile of Home Buyers and Sellers 31 Each real estate transaction consists of two sides, where both the buyer and seller each represent one side. 32 As stated earlier, franchised firms are managed independent of the franchiser. The local 

ownership makes the final decisions on firm policies and on pricing. As a result, franchised 

firms are treated individually for these calculations.

Typically, the firm’s portion of the commission split is a major source of revenue 

that covers the firm’s overhead and marketing costs as well as its profit margin. 

Under a 100 percent commission compensation arrangement, agents pay their firm 

‘‘desk costs’’ that covers the firm’s costs and profit margin. Given the relative high 

expense of desk costs, only top agents—approximately 20 percent of agents in 

1999—have 100 percent commission agreements with their firms. 

In addition to better compensation, brokers may make commitments to their best 

agents to make investments in new technologies and advertising campaigns. The 

rise of the Internet has increased costs spent on new technologies. To keep and attract the best agents, firms will continue to invest heavily in the Internet and other 

computer technologies. 

Competition Among Firms for Consumers’ Business 

Consumers are able to choose their real estate firms based on many factors—the 

commission rate charged by the firm, the firm’s area of expertise, or the firm’s sales 

force, among a few. Large real estate firms aggressively advertise on TV and in 

newspapers, promoting their brand name to future homebuyers and sellers. More 

recently, in an attempt to attract customers on the Internet, many firms have developed Web sites to attract homebuyers and new listings. With 37 percent of 1999 

homebuyers using the Internet in their home search, those firms that have been 

slow to invest in the Internet have had trouble competing.30

Real estate brokerage is an industry that is not particularly concentrated. According to data published by Real Trends in 2000, the top 500 firms ‘‘employ’’ 26.8 percent of the nation’s real estate agents and brokers. These firms also account for 28.9 

percent of transaction sides 31 in 1999.32 However, even this figure exaggerates the 

level of market concentration in the real estate industry. The nation’s largest real 

estate firm is NRT, which owns numerous, locally managed real estate brokerages. 

NRT has just over four percent of the nation’s REALTORS, while the second largest firm—Homeservices.com (Minnesota)—has less than one percent. Among the 

rest of the top 500 firms, the vast majority has between 50 and 100 agents and 

serves relatively small geographic regions, such as a single metropolitan area. With 

few large firms accounting for a relatively small proportion of the market, consumers are able to choose among a large number of real estate brokerage firms to 

find the one that best suits their specific needs. 


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33 Residential Real Estate Brokerage: Income, Expenses, Profits (1997), National Association of 

REALTORS

The result of this fierce competition is relatively low profit margins for real estate 

brokerages. The real estate brokerage industry faces continued low profitability, as 

revenues are not able to rise as quickly as expenses. The typical firm earned profits 

of just 2.3 percent of the firm’s gross revenue in 1996.33 The two largest areas of 

expenses paid by firms are sales commissions and bonuses, which represent more 

than half of all gross revenue, overhead, and advertising. 

Competition with Other Methods of Buying and Selling a Home 

Both homebuyers and sellers have choices when making a real estate transaction. 

While the vast majority choose to use a real estate professional for their housing 

needs, approximately one out of every five consumers choose to conduct their housing transactions without one. 

Some home sellers eschew the use of a real estate professional when they put 

their home on the market. They can place a ‘‘for sale’’ sign outside their home or 

buy advertisements in the newspaper. More recently, some sellers have placed detailed information about their home on the Internet. In 1999, 16 percent of home 

sellers sold their home without the assistance of a real estate professionals. Another 

seven percent of home sellers disposed of their home through a variety of methods, 

from selling the property to a home buying company to selling the home to family 

or an ex-spouse.


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Many homebuyers also choose not to use the services of a real estate professional 

when purchasing their home. While real estate professionals are still the most popular source of information about homes, homebuyers have a variety of information 

sources available to them while they conduct their home search, including newspapers, the Internet, yard signs, home magazines, and open houses. Over a quarter 

of homebuyers learned about homes on the market from friends, neighbors, or relatives or directly from the seller. Eleven percent purchased their home directly from 

a builder and another nine percent purchased their home directly from the seller.

In spite of these other resources, 79 percent of 1999 homebuyers purchased their 

home through a real estate professionals. But because homes can be bought and sold 

without a real estate professional, agents and brokers must earn their customers’

business each day during every step of the housing transaction. Consumers’ ability 

to complete transactions without the assistance of real estate professionals provides 


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34Leonard Zumpano, ‘‘The Possible Consequences of Allowing Banks into the Real Estate Brokerage Industry,’’ Consultant Study for the National Association of REALTORS, April 2001. 35Leonard Zumpano, ‘‘The Possible Consequences of Allowing Banks into the Real Estate Brokerage Industry,’’ Consultant Study for the National Association of REALTORS, April 2001. 

agents and brokers with one of their greatest sources of competition, as well as the 

additional impetus to better serve their current and future clients. 

EFFICIENCY 

The current structure of the brokerage industry—large numbers of relatively 

small, local firms—is quite efficient. Analyses of the underlying cost structure of the 

real brokerage function reveal that there are few, if any efficiencies to be gained 

by the entrance of larger, more highly capitalized firms, including commercial 

banks. This could explain why the brokerage industry has seen relatively little 

movement towards increased concentration over the past 20 years. 

Average Costs 

One way to measure the efficiency of the real estate brokerage business is to examine its underlying cost structure. Zumpano 34 describes a study that used financial data from 279 real estate brokerage firms to estimate a cost function relating 

the average unit costs of the brokerage to its number of sales agents (see below). 

For the most part, the curve was relatively flat. Although they found modest economies of scale for smaller brokerages, they also found that average costs begin to rise 

once the firm has reached a certain size (in this case, 1800 sides). Their analysis 

suggests that real estate brokerage firms can operate over a broad range of sizes 

without experiencing an appreciable change in average costs. More important, their 

findings suggests that ‘‘large [real estate brokerages] do not command any competitive advantages over smaller [brokerages], at least as far as unit costs are concerned.’’ If anything, very large brokerages are less efficient than their smaller competitors. 

These findings are not surprising given the composition of the typical real estate 

brokerage’s operating costs and the contractual relationship between the agent and 

the brokerage. The single largest component of operating costs is salesperson compensation, which accounts for over 60 percent of total expenditures. Since the majority of sales personnel are essentially independent contractors who work on a commission basis, unit costs remain relatively constant with increases in output, or 

sales. 

These general results were corroborated in a study that drew upon a sample of 

real estate firms to measure what economists call ‘‘X-efficiencies.’’ 35 Such efficiencies are related to the management of resources used in the production of a 

product or service, such as offices, agents, and administrative support. The study 

found that the average real estate brokerage operates close to its ‘‘efficient frontier,’’


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confirming that today’s brokerage firms are quite efficient in managing their resources. In fact, smaller brokerages appear to be somewhat better in this regard 

than either their medium-size or larger counterparts. Again, this finding is consistent with the conclusion that the real estate brokerage industry would have little 

to gain from the entrance of large-scale organizations like commercial banks. 

Indirect Cost Measure 

Another way to test for the existence of economies of scale, which is used by the 

Federal Trade Commission and the Department of Justice, is through a simple tool 

called the ‘‘survivor technique.’’ In principle, the ability of a firm to survive over 

time can be viewed as de facto evidence of its efficiency. For example, if firms of 

a given size continue to operate over an extended period of time while others lose 

market share, the size of the surviving firms can be considered optimal. Likewise, 

if the firms that survive are the ones that grow while smaller firms decline, then 

economies of scale are most likely present. 

Despite this important caveat, an analysis of trends in the size of real estate 

brokerages over the last 20 years suggests that the industry does not have significant economies of scale. For the most part, the size distribution of brokerages has 

remained relatively constant since 1983. Brokerages with a sales force of five or less 

currently hold 60 percent of the real estate market, up from about 55 percent in 

1983. In contrast, brokerages with a sales force of more than 50 agents have yet 

to reach even a five-percent market share. These patterns are consistent with the 

analyses of unit costs described above, and again suggest that the real estate industry has little, if any, to gain from potential economies of scale.

One can find a similar result by analyzing the market concentration of the real 

estate industry. As mentioned earlier, an analysis of 1999 Real Trends data shows 

that the real estate brokerage industry is not particularly concentrated. Our bottomline calculation is that in 1999, the Real Trends Top 500 account for about 28 percent of the national market, based on sides (28 percent) and agents (26.8 percent). 

Furthermore, in the 1997 Economic Census, the U.S. Bureau of the Census found 

that there were an estimated 60,620 individual establishments in the residential 

real estate brokerage business. Given that it is hard for even 500 of the biggest, 

richest firms to dominate production, the industry is clearly is competitive and efficient. 

SUMMARY 

With more than 760,000 REALTORS (as well as other real estate licensees) and 

over 60,000 real estate brokerages competing for the business of homebuyers and 

homesellers, today’s residential real estate brokerage industry provides a vast array 


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36 E. Gerald Corrigan, President, Federal Reserve Bank of New York. Testimony before the 

U.S. Senate Committee on Banking, Housing and Urban Affairs, May 3, 1990, p.5. 37 Ibid., p.6. 38 Bernard Shull, Real Estate Brokerage and Management Services as Permissible Activities for 

Banking Organizations: An Evaluation of the Agencies’ Proposal of December 2000. Consultant 

study for the National Association of REALTORS, April 25, 2001. 39Kroszner, Randall S. ‘‘The Economics and Politics of Financial Modernization’’ in the Federal Reserve Bank of New York Economic Policy Review Oct 2000 6(4), pp. 25–37. 

of choice for consumers. Real estate brokerages compete each day on three different 

fronts: for agents, for consumers’ business against other brokerages, and for consumers’ business against other methods of buying or selling homes. Further, there 

is little evidence that a further increase in market concentration could generate a 

market structure that is more efficient. Finally, the relative ease of entry into real 

estate brokerage acts as a check on market power that may be generated through 

market concentration. 

CHAPTER 3

THE RISKS OF COMBINING REAL ESTATE AND BANKING

Ten years ago, the modern assault on what became financial services modernization began. E. Gerald Corrigan, then president of the Federal Reserve Bank of New 

York, testified before the Senate Banking Committee on the separation of banking 

and commerce. Corrigan identified the risks historically associated with mixing 

banking and commerce: increased concentration, conflicts of interests, unfair competition and breaches of fiduciary responsibilities.36 Corrigan also identified a second group of risks associated with the merger of banking and commerce: ‘‘the danger that such arrangements will involve the de facto extension of parts of the safety 

net to any firm that would own and control banks.’’ 37 These same factors, and others, are relevant to the current debate on the advisability of allowing banks to engage in the real estate brokerage activities. 

This chapter describes the risks involved in combining banking with real estate 

brokerage. The first section examines the expansion of bank powers, the resulting 

concentration of the industry and the likely impact on the banking industry of further expansion into real estate brokerage activities. The second section examines the 

impact of the expansion of bank powers on the real estate brokerage industry, including the effect on competition, market concentration and market performance. 

The third section examines the consequences for American housing and banking 

consumers, including the potential for increases in real estate and banking fees, limits on consumer choice and service to consumers, and violations of consumer privacy. Based on these analyses, we conclude that the unprecedented expansion of 

banking powers into the real estate brokerage industry would have little, if any 

positive effects for either the banking or real estate brokerage industries. On the 

contrary, the proposed regulation poses significant risks to the banking industry, 

the real estate brokerage industry, and American consumers. 

THE EXPANSION OF BANKING POWERS 

Since the 1864 National Banking Act imposed limits on allowable activities of 

banks, history records a continual expansion of bank powers 38 through legislation, 

regulation or court decisions, including the recently passed Gramm-Leach-Bliley Act 

of 1999 (see Chapter 1 for details). However, the expansion has not resulted in 

meaningful or improved banking industry profitability and performance. The most 

significant result has been an increase in market concentration. There is little evidence demonstrating that the addition of real estate brokerage activities to the powerful banking arsenal would meaningfully improve bank profitability or performance, either. Clearly, banks do not need the addition of real estate brokerage activities to remain competitive. In fact, there could be risks to expanding the power of 

banks to own real estate brokerages. 

Expansion of Banks into Insurance and Securities 

Traditionally banks have been limited to a narrow range of activities, often excluding several financial activities such as insurance and securities brokerage. For 

instance, the National Banking Act of 1864 placed strict limits on national bank involvement in insurance: banks could sell insurance only in small towns (less than 

5,000 people).39 The justification for this exception was based on the economic market failure argument that small towns could not support specialists in both banking 

and insurance and thus the functions needed to be combined. 

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40 Ibid. 41Lown, Cara S., Carol L. Oster, Philip E. Strahan, and Amir Sufi. ‘‘The Changing Landscape 

of the Financial Services Industry: What Lies Ahead?’’ in the Federal Reserve Bank of New York 

Economic Policy Review Oct 2000 6(4) pp. 39–54. 42Lang, Gunter and Peter Welzel, ‘‘Technology and Cost Efficiency in Universal Banking a 

‘‘Thick Frontier’’—Analysis of the German Banking Industry,’’ Journal of Productivity Analysis, 

10(1), July 1998, pp. 63–84. 43Kwast, M.L., ‘‘The Impact of Underwriting and Dealing on Bank Returns and Risks,’’ Journal of Banking and Finance, 13(1), March 1989, pp. 101–125. 44Lown, Cara S., Carol L. Oster, Philip E. Strahan, and Amir Sufi. ‘‘The Changing Landscape 

of the Financial Services Industry: What Lies Ahead?’’ in the Federal Reserve Bank of New York 

Economic Policy Review Oct 2000 6(4), pp. 39–54. 45 Berger, Allen N., Gerald A. Hanweck and David B. Humphrey, ‘‘Competitive Viability in 

Banking: Scale, Scope and Product Mix Economies,’’ Journal of Monetary Economics, 20(3), December 1987, pp. 501–520. 46 Historical Statistics in Banking, Federal Deposit Insurance Corporation, various years.

In 1986, the Office of the Controller of the Currency (OCC) ruled that national 

banks could sell insurance anywhere if one of its branches was in a town of less than 

5,000 people. The economic basis for the provision was completely lost in this expansion of bank powers. The limits on banking involvement in insurance crumbled further with the elimination of restrictions on interstate bank branching in 1994. These 

regulatory and legislative changes were inspired by the experience of the 1980s 

when the failure of banks and savings and loan institutions cost taxpayers billions 

of dollars. While the causes of the crisis in banking were many, the solution involved support for the diversification of financial institutions.40

A similar pattern developed for securities sales by banks. In 1987, the Federal Reserve allowed ‘‘subsidiaries of a small group of holding companies to underwrite certain previously prohibited securities—such as municipal revenue bonds, commercial 

paper, and mortgage-related securities—on a limited basis.’’ 41 The desire to expand 

the liquidity and provide service to markets that were small and served social purposes, such as the funding of sewers and affordable housing, was a wedge that allowed banks to expand their powers without regard for economic justification. They 

based their authority on Section 20 of the 1933 Banking Act language that prohibited affiliation with firms ‘‘engaged principally’’ in securities. Thus they limited the 

bank revenues from securities to five percent. Two years later this authority was 

expanded to include corporate debt and equities. The revenue limit was raised to 

10 percent in 1989, 25 percent in 1996 and eliminated by 1997. 

Available evidence also indicates that the integration of insurance and securities 

brokerage activities has added little, if any, to bank profitability and performance. 

Examination of German universal banking finds mostly diseconomies and inefficiencies associated with combining lending and investment brokerage services.42 Research on U.S. banks has also found little potential diversification gains from combining securities brokerage and bank lending.43 While simulation analyses of mergers between holding companies and other firms reveal that mergers between bank 

holding companies and life insurance firms would likely decrease bank holding company bankruptcy risk, mergers with all other types of financial firms would likely 

increase risk.44 Other research also finds bank economies of scope to be overall insignificant.45 It is clear that more time and more data is needed to effectively gauge 

the impact of the integration of insurance and securities brokerage on bank profitability and performance. 

Consolidation in the Banking Industry 

The U.S. commercial banking industry is highly concentrated. Even before the 

passage of GLB, banks began to consolidate. Banking is increasingly dominated by 

a few large firms. Between the 1930s and the 1980s the number of commercial 

banks in the United States ranged from 13,000 to 15,000. From 1985, the number 

of banks quickly declined to 8,581 in 1999.46 Mergers continued during periods of 

poor profitability and high profitability. Industry concentration has increased along 

with mergers and acquisitions. From 1980 to 1998, approximately 64 percent of 

bank mergers were made by bank holding companies or their bank subsidiaries. The 

25 largest banking organizations accounted for 29.1 percent of the assets in 1980, 

34.9 percent in 1990, and 51.2 percent in 1998. 

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47Pillof, Steven J. and Anthony M. Santomero, ‘‘The Value Effects of Bank Mergers and Acquisitions,’’ in Amihud, Yakov and Geoffrey Miller (eds.), Bank Mergers and Acquisitions. New 

York University Salomon Center Series on Financial Markets and Institutions, vol. 3, pp. 59– 78. Boston. Dordrecht and London: Kluwer Academic, 1998. 48Smith, Roy C. and Ingo Walter, ‘‘Global Patterns of Mergers and Acquisition Activity in the 

Financial Service Industry,’’ in Amihud, Yakov and Geoffrey Miller (eds.), Bank Mergers and 

Acquisitions. New York University Salomon Center Series on Financial Markets and Institutions, vol. 3, pp. 21–36. Boston. Dordrecht and London: Kluwer Academic, 1998. 49 Chamberlain, Sandra L., ‘‘The Effect of Bank Ownership Changes on Subsidiary-Level 

Earnings,’’ in Amihud, Yakov and Geoffrey Miller (eds.), Bank Mergers and Acquisitions. New 

York University Salomon Center Series on Financial Markets and Institutions, vol. 3, pp. 137–

172. Boston. Dordrecht and London: Kluwer Academic, 1998. 50Mester, Loretta J., ‘‘Efficient Production of Financial Services: Scale and Scope Economies,’’

in Anthony Saunders, Gregory F. Udell, Lawrence J. White, Bank Management and Regulation: 

A Book of Readings. Under the general editorship of Alan S. Blinder. Mountain View, CA: 

Mayfield, 1992, pp. 27–37. (Previously published 1987.) 

Concentration of control over aggregate U.S. bank deposits among the largest 

banks increased substantially from 1980 to 1998. The 100 largest banks today control almost 71 percent of deposits. In contrast, the 100 largest real estate firms control roughly 18 percent of the real estate market. 

The unprecedented level of consolidation in the banking industry has been associated with a belief that gains can accrue through expense reduction, increased market power, reduced earnings volatility, and economies of scale and scope.47 Value 

gains have not been verified by empirical findings, whether looking at accounting 

data or the stock market returns. Economies of scale apply only to very small 

banks.48 Research on the mergers of bank subsidiaries between 1981 and 1987 

found that bank mergers do not improve net profits. Any gains in efficiency were 

negated by increases in management fees, director fees, and data processing 

charges.49

Research has shown that increased bank acquisition of non-bank companies has 

not improved bank profitability. In addition, a variety of studies have indicated that 

increasing the scope of permitted activities of bank holding companies has also increased the volatility of bank returns.50 Banking is a highly concentrated industry 

whose vertical integration into other lines of business has shown little propensity 

to increase competition or benefit consumers. 

Since 1997, banks have acquired 140 insurance agencies and by the end of 2001 

banks will own 40 of the nation’s 100 largest insurance agencies. Overall, insurance 

agencies acquired by banks have performed poorly. In terms of growth, the average 

insurance agency is growing at an annual rate of roughly five percent in total commissions and fees, while bank-owned agencies are actually shrinking at a 0.3 percent rate. If banks do not fare better in real estate than they have in insurance, 


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51Stiroh, K., ‘‘Are Bigger Banks Better?’’ The Conference Board, Research Paper, March 1999. 52Scholtens, Bert, ‘‘Competition, Growth and Performance in the Banking Industry,’’ Working 

Paper Series 00–18, The Wharton School, Center for Financial Institutions, University of Pennsylvania, February 2000. 53The 2000 National Association of REALTORS Profile of Home Buyers and Sellers 54 Residential Real Estate Brokerage: Income, Expenses and Profits, National Association of 

REALTORS, 1997. 55Federal Deposit Insurance Corporation, Quarterly Banking Profile, fourth quarter 1996. 

large-scale entry into the real estate business could weaken some financial holding 

companies’ standing, and place in jeopardy their federally insured operations. 

Additional research 51 found that the largest bank holding companies are not necessarily more profitable nor more efficient than smaller banking firms are, indicating a lack of scale or scope economies in banking. A separate study examining 

profit performance of the banking industry in an international context 52 concludes 

that there are very limited economies of scale, but substantial X-inefficiencies in the 

banking industry, suggesting that increases in scale and scope could pose additional 

inefficiencies for the banking industry. 

Banks Expanding into Real Estate Brokerage 

The banking industry’s search for increased profits through expansion into real 

estate brokerage activities is likely to prove futile. Real estate brokerage firms, on 

average, are not highly profitable. Banks are unlikely to benefit from economies of 

scale, cross-selling or diversification. 

As demonstrated in Chapter 2, real estate brokerage contains no identifiable 

economies of scale to exploit. Entry costs are quite low, suggesting that additional 

capital and increases in average firm size that would accompany bank entry into 

real estate brokerage would add little, if any, efficiency gains because there are no 

economies of scale to exploit. 

Bank entry into real estate brokerage would generate few additional profits for 

banks from their cross-selling of financial products and services. Real estate firms’

experience with the packaging of real estate related services has demonstrated that 

consumers prefer to retain choice among the various components and services surrounding the home sale or purchase. Neither homebuyers nor sellers choose a real 

estate firm specifically because of the firm’s comprehensive service package. Just 27 

percent of homebuyers said they would choose a real estate agent in the future 

based on the availability of a menu of real estate related goods and services. Another third of respondents said such goods and service would play no factor.53

Costs savings and additional efficiencies could occur if combining real estate brokerage and banking offered banks greater risk diversification. However, diversification opportunities are low since real estate brokerage volatility is low and will not 

offset the more volatile banking cycles. Non-brokerage real estate related activities 

such as real estate investment may have played a significant role in bank crises and 

failures. These activities are very distinct from real estate brokerage. In fact when 

a bank is likely to see its mortgage portfolio weaken, due to increased defaults and 

delinquencies, it is also likely to see any fee income derived from real estate brokerage decline. 

Without economies of scale, cross-selling revenue or diversification, the synergies 

from combining banking with real estate brokerage activities are severely limited. 

In fact, the profit of the average real estate brokerage firm is low compared to that 

of BHCs. In 1996, the typical real estate firm earned profits of just 2.3 percent of 

the firm’s gross revenue.54 Banks, by comparison earned a profit of more than $52 

billion in the same year.55 In contrast to insurance, securities dealing, and banking, 

profit opportunities from real estate brokerage activities would be few. 

Ability to Compete in the Mortgage Market 

Nationally chartered financial holding companies contend that the current law 

preventing the FHCs from entering into real estate brokerage business puts them 

at a significant disadvantage in gaining access to the real estate related financial 

activity, primarily in mortgage loan originations and mortgage loan servicing. Further, they argue that under the current law some financial institutions already engage in real estate brokerage and property management activities. According to the 

Conference of State Banking Supervisors, 17 states allow state-chartered banks to 

engage in real estate brokerage activities. The Office of Thrift Supervision (OTS) 

also has permitted the service corporation subsidiaries of federal savings associations to provide general real estate brokerage services. FHCs believe that they must 

extend their powers to include real estate brokerage activity to adequately compete 

with these banks and thrifts. 

142

56 American Banker, Top 150 Holding Companies by Assets, as of September 30, 2000. 

But whatever non-banking activities may be authorized under state law does not 

alter the analysis of whether real estate brokerage is commercial or financial in nature, anymore than it would alter the analysis of whether television manufacturing 

was commercial or financial. Further, the determination of the OTS to permit 

thrifts’ service corporations to engage in an activity does not have anything to do 

with the nature of the activity in question, and has no relevance to the issue at 

hand. 

The data, however, do not support the view that FHCs are at a disadvantage. 

Comparative data is meager, and inexact, but a query to OTS determined that there 

are 107 diversified thrift holding companies with real estate development subsidiaries and agency subsidiaries. Real estate development subsidiaries among these institutions totaled 229; there were only 14 real estate agency subsidiaries among 

these institutions. We would note that total assets among the 107 thrift holding 

companies equals $429.3 billion. 

A simple comparison of the assets of diversified thrift holding companies to those 

of the FHCs petitioning the Federal Reserve Board is revealing. Third quarter, 2000 

assets of selected FHCs among the top 150 FHCs reported by the American Banker 

revealed that Citigroup had assets of $804 billion, BankOne $284 billion, FirstUnion 

$247 billion, Wells Fargo & Co. $241 billion, FleetBoston Financial $179 billion.56

Clearly the financial holding companies have little to fear from thrifts. 

The data, in fact, show that FHCs have made large inroads into mortgage origination and servicing business. Furthermore, the market share of thrifts has declined 

and the influence of a few real estate brokerages engaged in mortgage lending has 

been minimal. 

Mortgage Originations are Dominated by Commercial Banks 

According to 1999 Home Mortgage Disclosure Act data (HMDA), commercial 

banks and the subsidiaries of commercial banks accounted for the largest market 

share with 44 percent of the mortgage originations. Independent mortgage companies, which are not depository institutions and therefore do not lend depositors’

monies, accounted for 28 percent of the market. Savings institutions and mortgage 

companies who are subsidiaries of savings institutions accounted for 26 percent of 

all residential mortgage originations. Credit unions held two percent of the market. 

Not only do commercial banks dominate mortgage originations, but according to 

The REALTRENDS 500, those real estate brokerage firms engaged in mortgage 

lending accounted for a minimal amount of mortgage lending. In 1999, the top 25 

real estate brokerage firms accounted for only 78,708 mortgage closings or 0.8 percent of total originations. The top 75 accounted for only 1.1 percent.

143

The thrift share of originations may include those mortgages originated through 

real estate brokerage operations. However, only eight thrifts engage in direct real 

estate brokerage activities of helping customers buy and sell real estate.


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57 Inside Mortgage Finance, 2000. 

Mortgage Originations and Servicing Are Dominated by the Largest Firms 

There is a significant concern arising from increased concentration in the mortgage origination and mortgage servicing markets. In 1999, the top 25 mortgage 

originators represented 54.4 percent of total mortgage originations and the top 25 

mortgage services account for 55.9 percent of mortgage servicing outstanding.57

While real estate brokerage markets are local, financial markets are national and 

are supported by international capital markets and so can benefit from economies 

of scale in financial transactions. Thus there is potential for the largest firms to continue to grow. It is not surprising that the market shares of the top 25 mortgage 

originators and the top 25 servicers have increased dramatically during the 1990s. 

The share of originations for the top 25 originators rose from 28.4 percent in 1990 

to 54.4 percent in 1999. The servicing share of the top 25 servicers has an equivalent leap, rising from 20.2 percent in 1990 to 55.9 percent by 1999. Projections from 

the Mortgage Bankers Association indicate that the shares for the top 25 in both 

originations and servicing could be greater than 90 percent by 2008. (The projections shown assume a continued rate of growth in market concentration based on 

recent years.)

Most of the increase in concentration is occurring from the merger and acquisition 

activities of FHCs. Not only do banks dominate mortgage originations, but BHCs 

also dominate when one considers the largest firms in the industry. Originations by 

BHCs represent 60.1 percent of originations by the top 25 mortgage originators, and 

servicing by BHCs a similar proportion—59.4 percent of the servicing held by the 

top 25 servicers.


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Econ18.eps
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The fourteen BHCs in the top 25 group originated $421 billion in mortgages, and 

represented 33 percent of total mortgage originations. Similarly, the 15 BHCs in the 

top 25 servicers held $1,577 billion, or 33 percent of mortgage servicing outstanding. 

These statistics and trends are confirmed by others sources. From 1990 to 1999, 

banks’ holding of mortgage debt grew from $373 billion to $879 billion. Thrifts’ holdings fell from $669 billion to $549 billion during the same period. There appears to 


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58 Bernard Shull, Real Estate Brokerage and Management Services as Permissible Activities for 

Banking Organizations: An Evaluation of the Agencies’ Proposal of December 2000. Consultant 

Study for the National Association of REALTORS, April 25, 2001. 59 Boyd, John and S. Graham, ‘‘The Profitability and Risk Effects of Allowing Bank Holding 

Companies to Merge with Other Financial Firms: A Simulation Study,’’ Federal Reserve Bank 

of Minneapolis, Quarterly Review, 12 (2), Spring 1988, pp. 3–20. 

be no end in sight for the increases, as indicated by estimates from Inside Mortgage 

Finance; the share of mortgage originations by FHCs continued upward to 41.4 percent of total mortgage originations in 2000 from 38 percent in 1999. The holdings 

of servicing followed the same pattern rising to 43.1 percent of mortgage servicing 

held. With the major provisions of the GLB Act still being implemented, the end 

is not in sight. 

Safety and Soundness Concerns 

The historic separation of banking and commerce rests primarily on the fear of 

unfair competition arising from banks’ federally chartered competitive advantages. 

Another concern is the extension of the federal safety net, and hence taxpayers’ liability, to non-banking affiliates of bank holding companies. Classifying real estate 

brokerage as a financial activity would further blur the line between finance and 

commerce, possibly opening other lines of commercial brokerage, such as automobile 

sales, to bank activity. Further, bank entrance into commerce would likely extend 

federal supervision and guarantees to greater and greater segments of the economy. 

Real estate brokerage is fundamentally a commercial activity. Brokering the sale 

of a house or an office building is a vastly different transaction than selling homogeneous financial instruments, like Treasury bonds. While commerce, other than 

through barter, inevitably entails the use of financial instruments such as currency, 

this does not transform a commercial activity into one that is ‘‘financial in nature’’ or ‘‘incidental to a financial activity.’’ If real estate were accepted as ‘‘financial in 

nature’’—a possibility raised in the Federal Reserve/Treasury proposal—then how 

far behind could commercial operations that are real estate intensive be, e.g., real 

estate development and farming? 58 Allowing banks to broker real estate would undermine arguments for separating banking and other lines of commercial brokerage. 

Without drawing a clear bright line between commerce brokerage and banking, federal regulators risk extending the full faith and credit of the federal government to 

wide variety of commercial activities. 

Federal guarantee of commercial companies should be left to Congress. In 1981 

when Chrysler Corporation was on the verge of failure, Congressional guarantees 

of its debt and credit extensions from the Federal Reserve were provided. Importantly, Federal Reserve assistance was not provided until after Congressional support for Chrysler was established. Chairman Volker characterized Chrysler as 

‘‘under government protection.’’ This protection was not extended until after Congress had an opportunity to debate its merits. If Chrysler at the time had been 

owned by a bank holding company, Federal Reserve protection could have been extended without the benefit of Congressional debate. 

Risk of Bank Failure 

As discussed above, bank expansion into real estate brokerage would provide little 

opportunity for diversification of risk. Research at the Federal Reserve Bank of Minneapolis suggests that combining bank holding companies with real estate firms 

would increase the volatility of returns and increase the risk of failure.59

While bank failures are relatively rare events; since 1934, there have been 2,133 

bank failures. But bank failures do not occur only in economic recessions or depressions. In the Great Depression decade, the yearly average was about 70 bank failures for a decade total of about 800, including a number of non-FDIC-insured banks. 

There were 1,127 failures during the 1980s, and in the 1990s decade, when the 

economy grew at a robust pace, there were 440 bank failures. 

Threats to the Federal Safety Net 

There is also the concern that the federal safety net for the nation’s banks would 

be at risk. If banks or bank holding companies are permitted to engage in real estate activities, the federal safety net for banks would de facto extend to affiliated 

real estate brokerages. This would expose the nation’s payment and monetary systems to additional risk, potentially undermining the safety and soundness of the nation’s banking system. It is likely, in times of stress, that financial holding companies will attempt to extend this safety net to their affiliated businesses, when these 

businesses are in distress. 

The Federal safety net can be extended to banks of any size. Even allowing only 

small banks to engage in real estate brokerage would not insulate the financial sysVerDate Jan 17 2002 11:40 Jul 31, 2002 Jkt 000000 PO 00000 Frm 00151 Fmt 6601 Sfmt 6621 G:\WORK\COMM\051602\79656.000 HJUD1 PsN: 79656
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60FDIC, History of the Eighties: Lessons for the Future, Washington, DC, FDIC, 1997. 

tem from possible distress. Approximately 217 small Texas banks went belly-up 

from 1987–1989. And large banks can benefit as well. In the mid-1980s, the FDIC 

sought to contain the bailout of Continental Illinois to its deposits and creditors. 

However, because of the holding company structure, the FDIC payment benefited 

the bondholders of the holding company and thus the other affiliates—not just the 

depositors and creditors.60 If Continental Illinois had owned a real estate brokerage, 

it, too, would have benefited from the federal safety net. 

Bank failures were not isolated in a single region. Similar events transpired in 

New England. In late 1989, the Bank of New England declared a major loan loss 

provision. There were 108 bank failures in New England between 1989 and 1992. 

This same pattern was repeated along the mid-Atlantic and even in Washington, 

D.C. 

Real estate has not only been the cause of banking problems in the U.S. but also 

in other countries. Japan is a prime example. Beginning in the early 1980s, bank 

lending to the real estate industry grew rapidly, doubling its share of bank portfolios between 1982 and 1988. Following a rise in discount rates, Japan’s real estate 

bubble burst in 1989, leaving many banks burdened with worthless loans. While 

American banking has seen its share of nonperforming real estate loans, the close 

relationship between Japanese banks and their commercial borrowers, particularly 

real estate companies, exacerbated the crisis. Since many Japanese banks held equity in the companies they had lent to, banks were reluctant to write-down loans 

or refuse to continue lending to insolvent clients. Such a system only prolonged a 

banking and economic crisis that has yet to be resolved. Allowing American financial holding companies to extend their activities down this path could have serious 

consequences for the safety of U.S. banks and the U.S. economy. 

THE IMPACT ON THE REAL ESTATE INDUSTRY 

The expansion of banking powers that would permit FHCs to engage in real estate brokerage activity will have a detrimental effect on the real estate brokerage 

industry. As discussed elsewhere, the real estate brokerage industry today is a highly efficient, competitive market. It is comprised of many firms competing to best 

serve the housing needs of Americans. 

The banking industry, by contrast, can best be described as an oligopoly, with a 

few dominant firms controlling a significant share of the total market. FHC entry 

into the real estate brokerage business would introduce unfair competition to the 

marketplace, increase concentration, and could pose particular danger to small real 

estate firms which make up a large portion of the real estate brokerage industry. 

As banks increase their role in the real estate brokerage business, the industry 

would change from a localized, highly competitive industry to one that is dominated 

by nationwide, federally chartered firms. 

Unfair Competition 

The real estate brokerage industry has welcomed competition from all players regardless of size, type of organization or level of capitalization as long as the competition is conducted on a level playing field. But FHCs bring with them inherent advantages through the potential upstreaming of the advantages held by their federally insured bank subsidiary. These advantages could be used to undercut real estate brokerage firms and have the potential of making the government a player in 

the real estate brokerage market. 

Advantages of the Banking Charter 

The federal banking charter offers a wide variety of advantages to federally insured banks and not offered to real estate brokerage firms. 

(For a more detailed discussion of the advantages of the federal bank charter, see 

Appendix A.)

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Implications for Banks 

Most of the advantages of the bank charter directly add to bank profitability via 

a reduced cost of borrowing and guaranteed sources of borrowing. A guaranteed and 

subsidized source of funds offers banks a significant competitive advantage over 

other firms that would be competing in the same market. 

Our fractional reserve banking system allows banks to maintain both small 

amounts of equity and reserve funds in order to maintain profitability. Researchers 

at the Federal Reserve Board find that on average banks carry 2.5 percent less equity relative to total assets then do non-bank financial holding companies. Not only 

do banks have relatively less capital, they also have low levels of capital on an absolute basis. Compared to non-farm non-financial corporations, the Federal Reserve’s 

Flow of Funds data indicates commercial banks hold only a penny of equity for 

every dollar of financial assets, while non-farm non-financial corporations hold 50 

cents in equity for every dollar of assets. This greater leverage allows banks to have 

both a much smaller amount of their own money at risk and receive a much greater 

return on equity.

Implications for Bank Holding Companies 

The advantages described above accrue to banks—not to bank holding companies. 

In addition, while not explicitly stated, many financial institutions are viewed by 

the public as being too big to fail. Quite simply the capital markets and depositors 

believe that the failure of some institutions would have such a dramatic impact on 

the nation’s financial and payments systems that the federal government would not 


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61Federal Reserve Bulletin, June 1999. 62 Ibid., p. 422. 

let these institutions fail. All debt issuances, whether private or government, are 

priced to account for the probability of default. One possible reason for defaulting 

on a debt issuance is the failure of the issuer. The likelihood of default is one of 

the reasons for the large difference in debt prices between government and private 

issued debt. While bank debt issuances are not viewed as safe as U.S. Treasury 

bonds, the implicit backing of large banks that are ‘‘too big to fail,’’ does allow these 

banks to borrow funds at reduced cost. 

These advantages are reflected in the reduced cost of debt, not only to the banks, 

but also to the bank holding company as well. According to research by the Federal 

Reserve, banks have a cost of capital 20 to 30 basis points below that of non-banks. 

Bank holding companies have a smaller, but still significant funding advantage, perhaps as much as 18 basis points.61

Before passage of the GLB Act, the Chairman of the Federal Reserve Alan Greenspan warned that ‘‘Losses in financial markets—large losses—can occur so quickly 

that regulators would be unable to close the failing operating subsidiary . . . before 

the subsidiaries’ capital ran out.’’ 62 Based on this testimony and Mr. Greenspan’s other concerns, changes were made in the GLB Act to prevent activities in a bank 

subsidiary that are now being contemplated in the proposed regulation. Regulatory 

controls are inadequate to prevent the use of subsidies to finance real estate brokerage. 

Implications for Competition in Real Estate Brokerage 

Because of the advantages inherent in the banking charter, financial holding companies would have an unfair advantage in the real estate brokerage marketplace. 

Banks are in a position to undercut existing, mostly small, real estate brokerage 

firms, posing a threat to competition and quality of service. The combination of 

banking and real estate brokerage provides an incentive for predatory pricing behavior, and would result in increased concentration in the real estate industry with 

no efficiency gains. Independent real estate brokerage firms could be eliminated 

from the market. 

Impact on Market Concentration 

Allowing banks to expand their powers to engage in real estate brokerage activities would reduce the level of competition in the real estate brokerage industry. 

There is likely to be a significant decline in the number of firms and, specifically, 

the number of small firms that represent a key segment of the industry. 

The level of competition could decline due to increased concentration and vertical 

integration. The banking industry would enter the real estate brokerage industry 

with a history and tradition of using mergers and acquisitions to expand leading to 

a highly concentrated industry. As discussed in detail above, the number of banks 

has declined and continues to do so, and the largest banks are getting larger. In 

addition, banks have a business model that defines market coverage in terms of 

states and regions. 

Contrast this with the profile of the real estate brokerage industry which is made 

up of large number of real estate brokerage firms of varying sizes (although predominantly small) and operates on a business model that defines markets in terms 

of localities. FHCs could purchase existing real estate brokerage firms using their 

advantages of a low-cost-of-funds and the imprimatur of a federally supported institution. These bank brokerages could increase in size and come to dominate the real 

estate brokerage market, thus increasing the concentration of the industry. Smaller, 

independent real estate brokerage firms would be forced to merge in an attempt to 

compete. In addition, potential changes to the typical real estate brokerage business 

model—from a commission compensation structure to a salaried work force, for example—could disrupt the incentive structure and lead to further concentration to 

cover the higher fixed costs associated with salaried employees. 

The obvious increase in vertical integration of the homebuying and home financing markets could have the predictable effect of magnifying the market power of the 

integrated firms. One of the key aspects of this market power is the ability to raise 

barriers and limit the entry of new firms. The fact that the integrated firm includes 

a bank whose barriers to entry are high by government fiat only increases the ability of bank brokerages to limit the level of competition. 

If the proposal to expand banking into real estate brokerage activities is approved, 

any structural change that has adverse affects on the more efficient sector—real estate brokerage—undoubtedly will be adverse to the interests of consumers of real 

estate brokerage services, and is bound to result in an overall decline in efficiency. 

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Impact on Small Local Firms 

The increased concentration that would follow from FHC expansion into the real 

estate brokerage activities could reduce the number of independent, local real estate 

firms offering services and expertise tailored to local needs. Large national corporations are less likely to provide the range of services and expertise available today. 

The local market-specific knowledge that real estate agents possess and convey to 

their clients would be lost if real estate agents became employees of large national 

financial holding companies. Entry by FHCs into real estate brokerage activities 

hurts small real estate brokerage firms and changes the nature of real estate brokerage from a competitive local business reflecting the needs and supporting the demands of America’s communities to a market dominated by federally subsidized institutions. 

Cross-subsidies and Pricing 

Cross-subsidization is when a firm is able to take the profits from one activity to 

finance the losses from another operation. As will be described later, banks have 

been able to use banking fees or even profits from their mortgage operations both 

to increase profitability and to subsidize their entry into insurance and other financial services. Real estate activities of FHCs are no different. FHCs entering the real 

estate brokerage industry would be able to take these income streams from other 

operations to finance their entry into real estate brokerage. Consequently, all banking customers, whether or not they purchase or sell a home, would be financing the 

entry of FHCs into real estate brokerage. The cost to those customers—actually a 

wealth transfer from American consumers to financial holding companies—could be 

substantial. Appendix B describes a scenario where the ten-year cost of this crosssubsidy could be $48 billion. 

Further, FHCs’ ability to cross-subsidize their new real estate brokerages tilts the 

playing field towards FHCs. Few traditional real estate brokerages have access to 

outside income streams to subsidize the real estate brokerage business. Because of 

the advantages of the federal charter, FHCs brokerages would be able to make 

greater investments in their real estate brokerages compared to owners of independent real estate brokerages. The final result could be the exit of numerous real 

estate brokerages as they are unable to respond to their well-financed new competitors. In the worst case scenario, these cross-subsidies could finance years of predatory pricing designed to eliminate competition from traditional real estate 

brokerages. 

The basic definition of predatory pricing is where a firm prices their good or service below the cost of production for the sole purpose of eliminating competition. Once 

the predator is successful in eliminating its competition, the firm with increased 

market power could raise prices well above competitive levels. Traditional models 

of predatory pricing rest upon the ability of predator firms to under-price their competitors, or potential competitors. The sustainability of predatory pricing depends 

upon the ability of the predator to sustain losses in the short run. This can be accomplished through the ability to cross-subsidize from other subsidiaries of the 

FHC. However, incumbent firms would not have access to capital or outside income 

streams to defend itself from a predator. 

The entry of FHCs into real estate brokerage appears to be a prime candidate for 

predatory pricing behavior. As described above, FHCs have access to numerous subsidies and outside income streams that could finance a sustained period of belowcost pricing. At the same time, few real estate brokerages have access to outside 

revenue streams or capital that can help it defend itself against a well-financed 

FHC. As a result, traditional real estate brokerages would be forced to exit the industry—but not because of an inability to provide efficient quality service to the consumers. Rather, the exit of these players would be the result of below-cost pricing 

designed to eliminate viable competition and to allow monopoly pricing over the long 

run. By reducing choice, the detrimental impact of predatory pricing on consumers 

would be considerable. 

IMPACT ON CONSUMERS 

Combining real estate and banking services will impose significant costs to consumers. The costs will come in the form of higher prices and fees paid by consumers, 

reduced level of real estate brokerage services, limited consumer choice, and discomforting intrusion into consumer privacy. Rather than seeing consumer costs go 

down, as claimed by the FHCs, the cost, even in the best scenario, will likely increase. 

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63 National Association of REALTORS and Public Opinions Strategies 

Impact on Prices and Fees 

Allowing banks to enter the real estate brokerage industry will not lead to lower 

costs for consumers. If anything costs could rise. The increase cost will be from two 

fronts: real estate brokerage services fees and banking fees. 

As demonstrated above, the current real estate brokerage industry can best be 

characterized as a competitive industry. Entry barriers are low and little start-up 

capital is needed. Continued entry and exit of firms into and out of the industry 

assure that prices will remain at the lowest economically feasible level. 

It is unclear what FHCs could bring to the market that would increase competition or efficiency. Any additional entry will not necessarily lower costs. FHCs’ claim 

that consumer costs will go down, but those lower costs can only be realized by introducing economies of scale or scope, cross-subsidization, or predatory pricing. The 

latter two reasons are not permanent benefits for consumers. Only the first—economies of scale—enhances consumer welfare. Without an increase in efficiency, there 

would be no cost savings to pass along to consumers. But as demonstrated earlier, 

there are limited economies of scale in the real estate brokerage industry. Furthermore, FHCs made the same claims of economies of scale in expanding into newer 

markets such as investment security brokerage and insurance underwriting. But the 

initial claims of economies of scale have never materialized. 

Any reduction of real estate services costs will be made up for in other FHC lines 

of business. Such cross-subsidization would be anti-competitive to many independent real estate brokerages that would be unable to compete effectively. Similarly, predatory pricing is a potential option open to FHCs (see above). Predatory 

pricing is not possible in the currently competitive real estate brokerage industry. 

Even if real estate services fees were reduced temporarily through predatory pricing, increased concentration would result in increased fees due to the industry being 

less competitive. The end result could be that more and more independent real estate brokerage firms are driven out of the market. With fewer competitors and a 

fundamental industry shift away from a competitive market structure, a price rise 

for real estate services fees is likely. 

Even if banks were able to reduce real estate brokerage fees temporarily, any savings to homebuyers would be offset by higher costs for bank customers. Absent 

economies of scale, lower real estate brokerage fees can only come via cross-subsidization from other business arena. The higher banking fees are likely to become 

permanent features of the banking system, given barriers to entry and concentration of market power, while reductions in real estate brokerage fees could be temporary as firms start to exit the industry. According to a recent poll, nearly two 

thirds of consumers believed that bank fees would rise if FHCs entered the real estate brokerage industry.63

This is not the first experience of holding companies entering new fields and using 

their banking and credit card operations to subsidize their entry. Over the last couple of years as BHC entered both the insurance and securities brokerage industries; 

consumers experienced an increase in ATM fees, checking account fees, and bounced 

check fees, with the latter reportedly the most profitable activity for a bank. According to a 1998 Consumer Federation of America report, consumers pay $25 billion 

a year on checking and bank card fees each year.

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64Federal Deposit Insurance Corporation, Quarterly Banking Profile, 2000. 65Weston Edwards and Associates, Changes in the Ways Homes Are and Will Be Bought and 

Sold, Consultant Study, 1998. 

Banks are able to shift these costs to banking customers because they do not compete aggressively for the deposits of average customers. Therefore, rather than lowering fees and offering competitive interest rates on deposits, banks have been able 

to hike fees to generate new revenue streams. Banks, over the past 10–20 years, 

have relied on non-deposit sources, including new bank fees, for an increasing proportion of their revenues and profits. Some examples include fees for ATM usage, 

banking with a teller, bounced checks, and late credit card payments. In a five-year 

span between 1996 and 2000, the share of BHC income from all non-interest income 

rose from 29.9 percent to 40.5 percent.64

Elsewhere, banks have lowered interest rates on customers’ deposits and have 

raised interest rates on some loan products. Consolidation of the banking industry 

has lessened the number of alternatives for consumers to avoid these new fees. This 

consolidation has enabled banks to raise fees without fear of customer retribution. 

In addition, to undercut non-bank-affiliated real estate brokerages, banks may use 

real estate brokerage as a loss leader, later recouping their costs via higher mortgage servicing and origination charges. This could ultimately cost consumers as 

much as $48 billion over ten years (see Appendix B.) 

Impact on Consumer Service 

Combining real estate brokerage and banking services would also decrease the 

level and type of services real estate customers would receive, because the incentives to ‘‘serve the customer first’’ would be diminished. Homebuyers rely on their 

real estate professional to guide them to other real estate related service providers 

such as home inspectors, lenders, and moving companies. A recent study by Weston 

Edwards shows that 73 percent of real estate professionals recommend two or more 

mortgage lenders to their clients.65 This is the kind of one-stop shopping consumers 

value, not the scenario where one-stop shopping means obtaining their mortgage 

from the same place they get their home. 

Many bank mergers have attempted to achieve cost savings via workforce reductions. While reducing staff redundancies, layoffs in bank staff have also reduced customer service. Typical is the recent acquisition of Core States by First Union. While 

costs were slashed by reducing staffing levels, customer service suffered. Since there 

is little overlap in staff between banks and real estate brokerages, cost savings via 

staff reductions would mostly serve to reduce consumer service. 


Econ22.eps
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66The 2000 National Association of REALTORS Profile of Home Buyers and Sellers 67 Ibid. 68Weston Edwards and Associates, Changes in the Ways Homes Are and Will Be Bought and 

Sold, Consultant Study, 1998. 

In addition, holding companies may provide less attention to those housing consumers who need high-touch customer service the most, such as first time homebuyers and lower income consumers. High-income customers may be more attractive, as they would be more willing and able to purchase the bank’s other services 

and they purchase more expensive homes. Repeat homebuyers are similar. In 1999, 

the typical repeat homebuyer purchased a $150,000 home while a first-time buyer’s home cost $104,000.66 Higher priced homes represent higher commission rates and, 

perhaps more importantly, larger, more profitable mortgages, both of which would 

add to the bottom line of the BHC. 

Impact on Consumer Choice 

It has been demonstrated that the expansion of banking powers that would permit 

financial holding companies into the real estate brokerage business will result in increased concentration and decreased competition in the industry. But it will also 

limit consumer choice in selection of a real estate professional and other real estate 

related service providers. 

Homebuyers and sellers rely on their real estate agents for advice on a wide variety of real estate related goods, services and advice. In fact, three quarters of homebuyers receive advice about related services from their agents, and 90 percent of 

those buyers use at least one of their agent’s recommended providers.67 The inherent parent/child relationship between FHCs and their subsidiary real estate brokerage business will likely steer consumers to the FHCs’ subsidiaries. Agents working 

for an FHC-owned real estate brokerage firm would have less incentive to find a 

loan provider or other real estate settlement service vendor that best fits their customers’ needs. 

It is also probable that the typical ‘‘brokerage model’’ would change. Banks entering the real estate brokerage industry would likely retain their real estate agents 

as salary-based employees, rather than commission based independent contractors. 

Their real estate ‘‘employees’’ would focus on the FHC’s profits, attempting to crosssell the holding company’s other services to increase its profits. Consequently, consumers would not receive valuable, impartial advice when they most need it. This 

shift in focus from the client to the FHC’s profitability would limit the agent’s incentive to ensure that customers find the home and real estate services best suited to 

their needs. 

For instance, real estate agents have traditionally suggested several different 

lenders to their clients, helping their clients find the lowest rate available.68 Real 

estate agents tied to a particular financial institution would be less likely to recommend getting a mortgage with a financial institution other than their employer. 

The immediate result would be a reduction in competition among mortgage originators, thus limiting consumer choice in financing. If banking powers expand to allow 

FHCs to engage in real estate brokerage activities, there would be implicit, if not 

explicit, disincentives for real estate professionals to recommend that homebuyers 

seek financing from unaffiliated banks, and real estate brokerage firms’ practices or 

policies of recommending multiple financing sources would be far less prevalent if, 

indeed, such practices are not entirely eliminated. 

As discussed above, bank-affiliated brokerages would have an unfair advantage 

also in the listing of properties, and thus would limit consumer choice of lenders. 

A prospective homeseller would naturally want to increase his/her likelihood of having prospective purchasers qualify for financing. The sellers’ selection of a real estate professional almost always occurs prior to any direct discussions with a bank. 

Thus, even assuming that a bank with a real estate brokerage affiliate were to 

make disclosure that the availability of mortgage financing provided by it could not 

be affected by whether the property to be financed were listed with its affiliated brokerage company, so listing the property would create no greater likelihood of credit 

approval, the seller selection of a broker will have already taken place prior to such 

disclosure. As a result, the disclosure will have come too late in the process to affect 

the selection of the broker. The anti-competitive advantages enjoyed by the bankaffiliated real estate professional will already have succeeded in obtaining additional 

listings before any disclosure has been made to the listing party—that doing business with a bank-affiliated broker will not improve the chances that a prospective 

buyer can readily obtain credit approval from the broker’s affiliated bank. 

Increased concentration that would follow from FHCs’ expansion into the real estate brokerage industry would reduce the number of independent, local real estate 

155

69 Yankelovich Partners, Inc. A Study about REALTORS, March 22, 2001. Yankelovich Partners conducted an omnibus study on behalf of the National Association of REALTORS. A regionally representative sample of 2,049 Americans aged 18 or older were interviewed by telephone using an unrestricted Random Digit Dialing technique that significantly reduces serial 

bias and ensures that respondents with both listed and unlisted numbers are reached. Only one 

interview was conducted per household. Interviews were conducted between March 15 and 

March 19, 2001. To ensure a reliable and accurate representation of the total national adult population, completed interviews were weighted to know proportions for age, gender, geographic region, and race. The margin of error for the total sample was +/- 2.2%. 70 Ibid. 

brokers offering services and expertise tailored to local needs. The local market-specific knowledge that real estate agents possess and convey to their clients would be 

lost if real estate agents became employees of large national financial holding companies. Ownership of real estate brokerages by bank holding companies would directly reduce the competition among brokerages in a local real estate market, effectively reducing consumer choice along with possible increases in consumer costs. 

Privacy Concerns 

In addition to the risks to the marketplace, potential bank failures, and the spectre of another ‘‘taxpayer’’ bailout’’ of financial institutions, there are concerns about 

consumer privacy, especially the ability of ever expanding FHC to use private financial information on a client of another business unit and obtain a competitive advantage and unique price setting power. Access to information regarding real estate 

brokerage customers’ home purchases or indebtedness is increasingly a source of 

concern as financial companies have access to vast databases of credit and payment 

history records. Merging of financial and real estate value/credit records would help 

centralize private information holdings with the largest banks. 

Financial institutions are permitted to share information with their FHCs and 

subsidiaries. The Gramm-Leach Bliley Act of 1999 only requires financial institutions to notify consumers of the institution’s policy on sharing nonpublic personal 

information to those third parties not affiliated with the institution. 

Recent research demonstrates that consumers are concerned about financial information privacy and the use of their nonpublic information. Four out of five (81 percent) of Americans are worried that their bank could use their private information 

to sell real estate services to them.69 Americans who have bought or sold a home 

in the past ten years are significantly more concerned than those who have not (84 

percent vs. 79 percent, respectively) about their bank using their private financial 

information to sell real estate services to them.70

The proposed expansion of bank powers which would allow financial holding companies to own real estate brokerages and property management companies could expose consumer information normally kept private to a much larger group. Bank 

owned real estate brokerage and property management firms would have access to 

even more nonpublic information that could then be shared among third parties 

under the stated exceptions of the GLB Act. 

With the opportunity for extensive information-gathering on a consumer’s demographic profile, purchase habits, and individual preferences, FHCs will be better positioned to extract consumer surplus via price discrimination strategies. With the 

continued and drastic reduction in computing cost, the use of data mining software 

by large corporations is becoming a common practice. Data mining is a process of 

analyzing massive databases to automatically ‘‘mine’’ the data for potential relationships between variables using regression, neural networks, artificial intelligence, 

fuzzy logic, and other mathematically sophisticated techniques. As one large software vendor (Oracle) puts it, the use of this software will ‘‘improve customer retention and acquisition.’’ By analyzing data such as joint account status, age, when a 

home was purchased, how many calls were made to call centers, the time lag between mortgage rate changes and inquiries regarding refinance, and endless combination of variables, data mining software allows companies to anticipate likely behavioral outcomes. For instance, it would enable a company to expect a 40 percent 

probability of customer defection within a month of a price increase, and compute 

present discounted value of profits of each individual customer. It also allows companies to better identify those customers less likely to switch even with a price increase. FHC-operated real estate brokerage operations could have access to seller/

client financial records and use that private credit information to the detriment of 

a home seller to affect the commission rate on a future listing. 

SUMMARY 

There are substantial risks of combining banking with real estate brokerage. Financial holding companies, through legislation, regulation and court decision, have 

156

71DiPasquale, Denise and Edward Glaser, ‘‘Incentives and Social capital: Are Homeowners 

Better Citizens,’’ Journal of Urban Economics, 45, 1999, pp. 354–384. 

expanded their powers to conduct insurance and securities brokerage with little 

positive effect on earnings and/or performance. The most troubling change in banking over the last two decades has been the dramatic increase in the concentration 

of economic power through mergers and acquisitions. The 25 largest banks now represent more than 50 percent of the assets in the banking industry. 

While real estate brokerage is not a profit opportunity, it is also not a threat to 

the dominance of banking in mortgage finance. Indeed, there is more concern over 

the lack of competition in the mortgage market than too much competition. Commercial banks already have the largest market share—44 percent—of mortgage 

originations, compared to 1.1 percent market share for mortgage companies affiliated with real estate brokerage firms. And the top 25 financial holding companies 

account for more than 41 percent of total mortgage originations and 43 percent of 

mortgage servicing. Projections by the Mortgage Bankers Association indicate that 

the share of the top 25 mortgage originators and servicers could rise above 90 percent in the next decade. 

Another concern is the blurring of the line between commercial and financial activities. If financial holding companies are permitted to engage in real estate brokerage activities, then it is quite possible that real estate development could also be 

added to the list of permissible activities. With the federal safety net for banks extending to affiliated real estate firms, there is the potential for undermining the 

safety and soundness of the nation’s banking system. 

In the meantime, the competitive and efficient real estate brokerage industry 

could be facing unfair competition from FHCs where weak firewalls could provide 

access to the federal subsidy. Banks are in a position to undercut existing real estate brokerage firms, and increase their dominance through predatory pricing. 

The expansion of bank powers to allow financial holding companies and subsidiaries of national banks to engage in real estate brokerage activities also poses risks 

to consumers in the form of potentially higher fees for both banking and real estate 

services. Without any source for increased efficiencies, reduced real estate services 

costs could come temporarily only from cross-subsidization or predatory pricing and 

would result in higher banking fees. Higher bank fees could become permanent 

given the barriers to entry and concentration of market power in banking. 

In addition to higher bank fees, the current high level of customer service provided by real estate professionals would decline. Not only would real estate customers lose their own agent, but there would be limits to a consumer’s ability to 

select a real estate professional and other real estate service providers. Finally, combining real estate brokerage and banking under one corporate roof would allow 

banks to exploit customer-specific information without giving the consumers the opportunity to restrict the sharing of their private data. 

CHAPTER 4

IMPLICATIONS FOR HOMEOWNERSHIP

Homeownership is key to achieving the American dream and has both social and 

economic benefits. Homeowners are more likely to vote and participate in our political institutions.71 Long-term commitment of homeowners to their primary residence, limits the volatility of home prices. Given the value of homeownership in 

American life, federal housing policy as well as that of many states and localities 

has consistently supported the growth of homeownership. 

The expansion of bank powers that would permit financial holding companies 

(FHCs) and subsidiaries of national banks to engage in real estate brokerage activities is likely to have a long-term negative impact on homeownership in the United 

States, particularly through increased foreclosures. It could also effect a reduction 

in service to low-income buyers—a group which represents a high potential increase 

in homeownership. These threats should be considered seriously given the central 

role of homeownership to both economic and political stability in the United States, 

and any negative impact of the proposal on homeownership in our society should 

be heeded.

157

After stagnating and sometimes even declining for some years in the 1970s and 

1980s, the U.S. homeownership rate has grown throughout the 1990s to an all-time 

high of 67.4 percent in 2000. However, not all groups in the population have 

achieved this high rate of homeownership. While the percentage increases in homeownership rates for Black and Hispanic households were than that of White households for the last several years, their overall rates remain well below that of White 

households. Making changes in the path to homeownership by radically restructuring the real estate brokerage market could create unnecessary barriers just as 

some households are beginning to achieve the American Dream.

INCREASED FORECLOSURES 

If banks or financial holding companies are allowed to expand their powers to include real estate brokerage activities, then homeowners could be more likely to face 

foreclosure in the event of financial difficulties. Many households struggle to achieve 

homeownership and most of those who purchase a home find it necessary to arrange 

for a mortgage to finance the purchase. They work hard to save money and establish 

a good credit record so they can fulfill the stiff requirements of banks to qualify for 

financing. 


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However, the struggle to achieve homeownership pales in comparison to the implications of foreclosure. Losing one’s home, and eliminating the possibility of purchasing another home for as long as five years, are devastating for the households 

involved. The repercussions can impact neighborhoods as well. 

The mortgage agreement provides an initial payment by the bank to purchase the 

home in exchange for the timely repayment of principle over 15 or 30 years. The 

house serves as collateral for the mortgage. The typical mortgage contract amortizes 

the mortgage debt with fixed payments that combine a large initial interest payment with a small initial principle one. Over time, the interest payment declines 

and the principle payment increases while the total payment remains the same. 

There are benefits to this amortization. The homebuyer benefits from an immediate 

tax break from the mortgage interest deduction. The bank benefits from front-loaded 

interest payments. 

But, one disadvantage is that, initially, the owner’s equity builds slowly. If the 

owner decides to sell the home early in the life of the mortgage, transaction fees 

can result in a financial loss. For instance, if an owner faces some financial difficulties and a monthly payment is late, interest charges and penalties accrue. Even if 

the home is sold, the owner is still responsible for these fees. If the owner does not 

sell the home, the bank may begin foreclosure proceedings to satisfy the debt. The 

bank can sell the home, but often the new buyers of the foreclosed property work 

with an independent real estate professional. Should the buyer needs financing, the 

real estate professional may or may not recommend the bank that foreclosed on the 

property. 

When selling the home, the bank faces high transaction fees and often loses 

money in the early years of a mortgage due to the high loan balance and the accumulated interest and penalty fees. These fees can easily overwhelm the small 

amount of equity in the foreclosed property. In such cases, it is not unusual for a 

bank to develop a plan that allows the homeowners to keep their homes and also 

minimizes losses for the bank. The bank’s and the owner’s incentives are therefore 

aligned. By the time a foreclosure becomes profitable for the bank, the owner could 

sell the property to recover from the debt without incurring the financial penalty 

of bad credit. 

If regulators approve the proposal allowing the expansion of bank powers into real 

estate brokerage, the alignment of homeowner and bank interests would be eliminated and so a perverse set of incentives could be substituted. These new incentives 

could increase the incidence of foreclosure. Owners will continue to become delinquent with the same frequency as they do now. If FHCs and their subsidiaries are 

permitted to engage in real estate brokerage activities, the FHC would benefit from 

other revenue derived from their non-banking subsidiaries that have profited from 

the foreclosure. Thus, the bank is less likely to accommodate the delinquent owner. 

The bank will refer the foreclosed property to the bank brokerage that will promote the property so as to eliminate a non-performing asset from the books of the 

FHC. The revenue generated from the sale of the property will accrue to the FHC. 

If the new owner requires financing, the bank broker—most likely an employee of 

the FHC—will encourage the homebuyer to arrange financing through the bank. 

The revenues from the real estate brokerage fees and the higher probability of replacing the delinquent loan with a performing loan increase the profitability of foreclosure. Recent research by Capital Economics demonstrates that the bank would 

have a larger incentive to foreclose on delinquent borrowers. The perspective of the 

owner has not changed so the bank is now willing to foreclose before sufficient payments have been made to allow the borrower to sell the house and retain the equity. 

(See chart below.)

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72The 2000 National Association of REALTORS Profile of Home Buyers and Sellers 

While the bank and the FHC profit from the transaction, the owner is likely to 

receive two penalties: first, the loss of her home, and second, derogatory information 

in her credit history that would make it difficult to finance the purchase of a home 

in the near future. The neighborhood faces a rapid turnover in ownership. The society as a whole suffers from the social cost of foreclosure and the likely decline in 

homeownership. 

SERVICE TO LOW-INCOME AND FIRST-TIME HOMEBUYERS 

The expansion of banking powers into real estate brokerage activities could also 

reduce the incentive of banks to serve low-income and first-time homebuyers, and 

possibly lead to credit restrictions or misallocations of credit. First-time homebuyers 

account for a significant portion of the total homebuying population. In 1999, firsttime homebuyers were 42 percent of all homebuyers.72 First-time buyers play an important role in a real estate professional’s business, since real estate professionals 


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73 Ibid. 74Frieder, Larry and Peter Sherrill, ‘‘Customer Value Management: Decision Support and 

Knowledge Management as the Missing Links,’’ Conference on Bank Structure and Competition, 

Federal Reserve Bank of Chicago, Proceedings, May 1997, pp. 76–85. 

often build their business through referrals and repeat business, First-time homebuyers are tomorrow’s repeat buyers. Independent real estate professionals seek out 

first-time homebuyer transactions as an investment in their future. These buyers 

are also an investment in the nation’s economic health. 

But many first-time buyers have lower incomes than repeat homebuyers do. In 

1999, the median income for first-time buyers was $49,700; repeat buyers’ median 

income was $68,600.73 It is already more difficult for lower-income buyers to acquire 

the downpayment and establish a good credit record. Changing long-standing policy 

that may limit the opportunities of potential first-time buyers to achieve homeownership could have serious implications for home sales and homeownership. 

The business of FHCs is to sell financial products and services. They seek to 

maximize sales and thus profits by selling these products and services to current 

customers of the FHC (cross-selling). Customers who already purchase multiple 

products and services (checking accounts, on-line banking, trust services, life insurance, a mortgage, mutual funds, etc.) are more likely to have sufficient resources 

and thus demand additional products from the bank. These customers are the higher-income customers. The profitability of the FHC depends on attracting customers 

to these business lines with higher profits. According to researchers at the Federal 

Reserve Bank of Chicago, profitability at large banking organizations is derived 

from ‘‘less than 20 percent of the customers.’’ 74 To induce—and to reward—purchases, banks are likely to provide a higher level of service to the customer with 

multiple points of contact with the FHC. 

Lower-income customers are less likely to require all of these products and services, therefore the incentive to invest in the future homebuyer evaporates when the 

when the real estate professional is employed by an FHC. As an FHC employee, the 

real estate professional need not develop relationships in the community and develop an independent reputation for customer service. Business will come because 

of the reputation of the FHC and the reputation for customer service will accrue 

to the FHC, not the real estate professional. 

The benefits to the FHC would come from referrals and repeat business with the 

original, higher-income customer when other sales of FHC products and services 

occur months or years in the future. Because the benefits of the transaction accrue 

to the bank, not the real estate professional, the bank real estate professional will 

target and encourage buyers who are important to the bank holding company: those 

who can afford many services. The benefits from working with first-time homebuyers come from referrals and repeat business only in real estate, but those benefits do not occur immediately. Thus, doing business with first-time buyers would be 


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75 Nothaft, Frank and Brian Surrette, ‘‘The Industrial Structure of Affordable Mortgage Lending,’’ presented at the Symposium on Low-income Homeownership as an Asset-building Strategy, 

Joint Center for Housing Studies at Harvard University, November 14–15, 2000. 76Miles, Mike and N. Tolleson, ‘‘A Revised Look at How Real Estate Compares with Other 

Major Components of Domestic Investment Universe,’’ Real Estate Finance Journal, Spring 

1997, pp. 11–20.

less valuable to FHCs, and so lower-income buyers may not receive the same level 

of service or even the same price for real estate brokerage services. 

Another concern is the potential impact of FHCs on mortgage lending for underserved areas and populations. Nothaft and Surrette 75 examined the period 1993 to 

1999 for the effects of consolidation of the financial services industry on mortgage 

loan originations to low-income and traditionally underserved families. They concluded that ‘‘large organizations tend to do less affordable lending.’’ Thus, increased 

concentration of FHCs with vertical integration may produce some socially undesirable lending outcomes, including credit restrictions for low-income households. 

SUMMARY 

The expansion of banking powers that would permit financial holding companies 

and subsidiaries of national banks to engage in real estate brokerage activities may 

cause unintended consequences that reduce the nation’s homeownership rate. 

Lower-income buyers and potential buyers are not likely to receive the same level 

of service from FHC as higher-income, more profitable customers. In the extreme, 

access to credit may be denied to this important sector of our society and our economy—the first-time homebuyer. 

For those households who have accomplished the difficult task of saving money 

and establishing a good credit record, FHC-owned real estate brokerage firms may 

make it more difficult for those households to buy and keep a home. An increase 

in the number of foreclosures is likely if the revenue stream from real estate brokerage is retained by FHCs. Merely redirecting the revenue stream from an independent real estate professional to an FHC may be enough to increase foreclosures. 

The importance of homeownership requires a thorough analysis of the consequences, 

intended and unintended, that could result from the proposed radical change in the 

interpretation of the nature of real estate brokerage. 

CHAPTER 5

REAL ESTATE PROPERTY MANAGEMENT AND COMMERCIAL BROKERAGE

The joint proposed rule by the Federal Reserve and Treasury Department also includes real estate management and commercial brokerage to the list of activities 

permissible for financial holding companies (FHCs). The activities involved in real 

estate management and commercial brokerage are disparate from financial activities. This chapter examines the activities involved in property management and 

commercial brokerage and explains their lack of synergy with banking operations. 

In addition, this section will delve into the risks arising from combining real estate 

management and banking. 

THE COMMERCIAL REAL ESTATE INDUSTRY 

Commercial real estate plays an integral role in the U.S. economy. Total commercial real estate in the U.S., including office, retail, industrial, lodging, multifamily 

and other special-purpose properties, is valued at $4.0 trillion as of year-end 1999. 

An estimated $1.9 trillion of commercial real estate is held by institutions for investment purposes, while the balance is owned by corporations used for conducting their 

business activities. Institutional companies typically include pension funds, life insurance companies, real estate investment trusts (REITs), commercial mortgagebacked securities (CMBS) issuers, foreign investors, saving associations, and commercial banks. Retail and multifamily properties account for the largest share of 

commercial properties—at least in dollar value.76

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77DiPasquale, Denise and W. Wheaton, ‘‘The Markets for Real Estate Assets and Space: A 

Conceptual Framework,’’ Journal of American Real Estate and Urban Economics Association

1992, 20(1), pp. 181–197.

It comes as no surprise that commercial real estate is a significant component of 

national wealth. Commercial real estate constitutes roughly 21 percent of the nation’s wealth.77 This large base of assets was accumulated by devoting about two 

percent of each year’s GDP to the construction and renovation of commercial properties. This is also substantiated by the consistently high value of new construction 

put in place. 


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The sustained investment in commercial real estate is attributed to the substantial amount of capital provided by institutional lenders and equity investors for development and maintenance of these assets. Loan volumes grew at a compound annual average of four percent between 1989 and 1999, while overall equity contributions increased at a compound annual rate of eight percent over the same period. 

The importance of commercial real estate to the national economy is also reflected 

in national employment figures. According to the Bureau of Labor Statistics, about 

353,000 worked as property managers in 2000 with two-thirds managing residential 

properties. Total wages paid to both residential and commercial property managers 

reached nearly $9.0 billion in 2000. Managers of commercial properties received a 

higher compensation, averaging $31,944 per year as compared to the annual average of $21,904 paid to residential property managers. Aggregate revenues generated 

by these property management firms totaled $21 billion in 2000, with more than 

60 percent contributed by residential property management firms. 

COMMERCIAL REAL ESTATE BROKERAGE IS NOT FINANCIAL 

The role of commercial brokers encompasses a wide range of activities, which are 

clearly commercial and not financial in nature. While the process of bringing buyer 

and seller together is the same for whatever type of property, the operations of commercial brokerage firms are different from their residential counterparts.

• Commercial real estate brokerage firms that encompass more than one market segment (retail, office, etc.) tend to be organized in divisions that focus 

on those segments. Similarly, individual commercial real estate professionals 

often specialize in a particular segment

• Commercial brokers deal with a variety of buyers, sellers, landlords and tenants. This requires them to determine their clients’ precise objectives in order 

to ‘‘match’’ them with the appropriate property

• Transactions involve both the lease and sale of commercial space, and can be 

completed in a few months and even extend to years especially for complex 

ones

Space was the commercial broker’s primary concern in an earlier time. The key 

to a successful transaction was knowing what commercial space was available and 

what pricing the owner was seeking. Success also hinged on finding a suitable tenant to fill that space before someone else did. 

However, the role of a commercial broker today de-emphasizes the ‘‘matchmaking’’

aspect of the profession. Clients now regard their commercial real estate brokers 

(and their teams which include lawyers, CPAs, architects, and computer and technology consultants) not just as transaction brokers but as strategic advisers and 


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consultants. They use their brokers for advice and counsel on myriad issues ranging 

from technology utilization to employee commuting patterns and even corporate acquisition strategies. 

Not only are clients demanding that brokers play a bigger role in business strategy, but also are looking for brokerage firms to provide a bigger role in business 

services. Hence, it is increasingly common to find brokerage firms building expertise 

in specific industries such as telecommunications and call center operations as a 

means to capture new business. 

Commercial brokers often take part in the due diligence process as ‘‘strategic adviser and consultant’’ by providing financial analyses to the ‘‘client’’ and in the 

search for financing. Today’s brokers are expected to have a thorough understanding 

of financial analysis and financing. But this is only a minute component of their job. 

REAL ESTATE PROPERTY MANAGEMENT 

The contribution of commercial real estate to the national economy suggests the 

constant need for effective real estate management for both maintaining and enhancing the value of these assets. Again, the detailed nature of property management indicates that it is clearly a commercial activity and thereby requires a 

thoughtful and structured approach. 

Property management’s goal is to preserve and enhance the value of property 

through good management on a daily basis. This can best be done by trying to 

achieve the highest and best economic use for the property.

The varied responsibilities involved with property management focus on the operation and maintenance of real property. The basic functions of property management include:

• Early involvement with the property development process, including establishing a management plan

• Creating a budget tied to that plan

• Marketing and leasing space, collecting rent

• Monitoring and responding to tenant issues

• Maintaining accounting and operating records

• Directing and performing preventive and remedial building maintenance


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• Supervising staff and contract personnel

• Evaluating regulatory issues

• Addressing risk management-related issues

• Coordinating insurance, managing real and personal property tax valuations

• Procuring inventories and supplies

The level of management varies widely depending on the type of property and its 

size. Generally, the more services required and the more often space turns over, the 

higher the degree of management is needed. But regardless of the type of property, 

financial activity plays little part in real estate management. While maximizing the 

economic value of the property through increased revenues and decreased expenses 

is a financial goal, the actual activities entailed in professional property management are not financial in nature. 

The complex issues facing property management underscore that managers need 

expertise in a variety of areas and the flexibility to continuously adapt properly new 

skill sets due to changing market conditions. An examination of the main management functions for each property segment supports this view. 

Residential 

It is common among property managers of apartments, for example, to manage 

intensively. Apartments require interior-exterior maintenance, and for some types, 

the additional amenities such as clubhouse, pool and sports facilities require additional maintenance and monitoring. Given the short term nature of residential 

leases, property managers strive for a high renewal rate in order to prevent vacated 

units that must be repainted, repaired, and re-leased in as short a time as possible. 

Most large apartment managers now have sophisticated tenant marketing and retention programs. 

Office 

Service is particularly important in office building management because that 

many office tenants regard the amount of rent as secondary to the efficient provision 

of services. Office buildings are also managed intensively. Property managers are 

responsible for ensuring that premises are kept clean and secure, that elevators run 

reliably, that utilities work, and that the structure looks and is well maintained. 

In class A space, the service may be more intense as the buildings feature better 

HVAC, cleaning, landscaping and other maintenance along with valet services and 

telecommunications. 

Industrial 

Industrial properties typically require minimal amount of management because 

they are frequently leased on a net basis, that is, the tenant is responsible for operating expenses and sometimes, real estate taxes and insurance. The most critical 

function of management is to identify the appropriate tenant, with the objective of 

minimizing the cost of tenant improvements. 

Retail 

The management of retail centers depends on the sub-property type. In free 

standing and big box retailers, management has little involvement with the tenant. 

In community centers, management may or may not participate in tenant association activities such as advertising and common area maintenance. In regional malls, 

the management is very involved in the tenant business as tenant mix and common 

area maintenance is part of the marketing that draws business to the center. 

Hotels 

The most important function of hotel management is marketing the hotel. Hotels 

require constant management given the high frequency of guest turnover and the 

significant number of service offerings. The lease period is very short (i.e. one night) 

so that management must find tenants for vacated space. Typical initiatives to boost 

bookings and maintain the hotel property’s appeal include promotions, offering of 

loyalty programs and corporate discounts, and the addition of services. 

Health Care Facilities and Other Special-Purpose Facilities 

Service is a crucial factor for special-purpose facilities so they require very specialized management talent, frequently recruited from the professions involved. 

REAL ESTATE MANAGEMENT IS A COMPETITIVE INDUSTRY 

Like residential real estate brokerage, real estate management is a fiercely competitive industry. To evaluate the competitiveness in the industry we assessed the 

degree of concentration for the top 75 real estate management firms in 1999. Data 

166

on real estate properties managed by the top 75 property managers were obtained 

from a survey conducted by the Commercial Property News publication (http://

www.cpnrenet.com) in August 2000. The Herfindahl-Hirschman Index will be used 

to determine the level of concentration among the top real estate management 

firms. 

The Herfindahl-Hirschman Index is defined as:

where Si is the percentage of total square footage (market share) by the ith firm and 

N is the number of large firms in the industry. Thus, the index is the sum of the 

squares of the market share percentages of the top real estate management firms 

in the industry. A value of 1, or 100%, for the index would indicate only one real 

estate management firm, or a pure monopoly market structure. The HHI is often 

presented as an integer where 100% is equivalent to 10,000. The index value declines as the number of firms increase and increases as inequality among a given 

number of firms increases. The HHI weights the market shares for large firms more 

heavily than the small ones as indicated by the squaring of market shares. 

The Justice Department’s merger guidelines suggest that industries with HHI values below 1000–1800 are competitive. Real estate management firms have an average HHI value of 387, which is clearly below the threshold set by the Justice Department. Based upon this guideline, we conclude that the level of concentration for 

the leading real estate management firms should not be a significant concern. There 

is no dominant firm even among the largest 75 real estate management firms. If 

data on smaller firms are included in the sample, the HHI value is expected to be 

lower. 

One possible explanation of the low concentration is the relatively low barriers to 

entry with numerous real estate management firms offering what is perceived to be 

essentially the same service. Moreover, the abundance of information, especially 

through the Internet, allows property owners to easily engage property managers, 

therefore leading to a higher level of competition with a lower level of concentration 

for real estate management firms. 

However, the entry of FHCs in the real estate management industry could erode 

the healthy competition among existing firms and thereby generate a misallocation 

of resources. It is possible that FHCs can exploit their federally chartered advantages to establish a dominant position given their access to capital. They can drive 

down management fees in the short term, subsidized by their other operations, and 

eliminate small property managers. This could then lead to higher concentration of 

firms in the long run, which may push up management fees. 

THE RISKS OF COMBINING REAL ESTATE PROPERTY MANAGEMENT 

AND BANKING 

The apparent lack of synergy between real estate property management with 

FHC’s existing operations as explained earlier should translate into more risks that 

could ultimately harm the FHCs and impose increased potential claims on the deposit insurance fund and the safety net in general. 

Allowing FHCs to enter real estate management and commercial brokerage may 

also have negative consequences for real estate markets and consumers. The risks 

include:

• Increased concentration in real estate property management and commercial 

brokerage industries

• Conflicts of interest

• Safety and soundness issues 

Market Concentration 

Commercial banks continue to dominate the commercial real estate lending landscape, accounting for nearly 40 percent of total mortgages in 1999. However, this 

share does not accurately reflect the entire influence of banks in the commercial 

real estate debt market. Banks also provide substantial amounts of short-term credit to a number of commercial mortgage-backed securities (CMBS) originators and 

other real estate-related businesses. 

The role played by banks in financing commercial real estate activities underscores their massive lending power and influence. Consequently, allowing banks or 

FHCs to enter into real estate property management and commercial brokerage 

could eliminate the healthy competition among firms and result in concentration in 


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these industries. Banks could then use predatory pricing tactics by offering property 

management services as a loss leader to cross-sell other financial products, i.e. gain 

control of the demand deposit accounts of income producing property owners.

Conflicts of Interest 

Conflicts of interest constitute another major concern when banking is integrated 

with commerce. For instance, compensation of property managers is typically a percentage of effective gross revenue receipts (often three to five percent) and operating 

profits. However, it can also be a fixed amount particularly when the services require a predictable amount of time (for example, maintaining property records) or 

when the owner deems that incentives for extraordinary effort is unnecessary. 

Property managers may also receive equity shares in the company that owns the 

property as shown in the case of public REITs such as Host Marriott and MeriStar 

Hospitality. J.W. Marriott, Jr., an equity shareholder and a member of the Board 

of Directors of Host Marriott, serves as an officer of Marriott International, a public 

company that manages the properties of Host Marriott. Similarly, MeriStar Hospitality shares four members of its board of directors with its management company, 

MeriStar Hotels. 

It raises potential problems when FHCs are allowed to manage properties and receive equity stakes in the corporations that own the property. In acting as manager 

and owner at the same time, there would be conflicts of interest when making decisions relating to the management agreements. 

Other potential conflicts of interest are listed below:

• Banks may restrict the supply of credit to the competitors of its real estate 

property management and commercial brokerage firms, showing preferential 

credit treatment towards their affiliate firms. Notably, any disruption to the 

financial flows may have harmful effects on real estate property management 

and commercial brokerage industries as well as harming consumers by offering low deposit rates and high loan rates.

• Banks may use their lending powers to tie customers, such as property owners to their affiliate real estate management firms and corporate clients to 

their affiliate commercial brokers. Economic theory is very clear in specifying 

that the market conditions under which tying arrangements are profitable are 

extremely limited. In particular, if a firm has market power in one market 

and attempts to tie a customer to product sold in another competitive market, 

e.g. by price cutting, its overall profits may well decrease.


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78See Chapter 3 for a more complete explanation of how FHCs could exploit the advantages 

their bank subsidiaries have from their federal charter. 79 Elasticity of demand measures the relationship between price and quantity demanded. 

When the demand for a good is highly elastic, people are willing to reduce their consumption 

significantly in response to a given price increase. This is most likely when a good has many 

close substitutes. 

• Banks may continue to make loans to failing affiliate real estate property 

management and commercial brokerage firms. Such practice might ultimately 

threaten the safety of the banks.

• Banks have access to financial information about a property (which would be 

disclosed during the loan application process), including the underlying economic assumptions of the property, the length of leases and lease terms, as 

well as tenant information. This information is often valuable to its affiliate 

real estate management company so that a fear exists that there would be 

a transfer of information that could be used to undermine the leasing and 

marketing of the property by another real estate management firm. 

Safety and Soundness 

The affiliation of a bank with real estate property management and commercial 

brokerage firms could raise the risks of bank failure and thus impose greater costs 

on the federal safety net. The federal safety net may be defined as encompassing:

• The deposit insurance system

• The payments system (especially Fedwire—the wholesale payment system)

• The lender of last resort (discount window) facility78

Central to this fear is that FHCs will alter the competitive environment in which 

their subsidiaries operate. Consider the example where the FHC controls the bank 

and real estate property management and commercial brokerage firms and exports 

the bank’s funding subsidy to its affiliates. The affiliation of real estate property 

management and commercial brokerage firms with the bank should cause them to 

pass on lower costs to their customers through lower prices. Of course, the amount 

of subsidy that leaks out will depend on the demand for their services. If demand 

is elastic,79 then a drop in price will result in a demand for more services from these 

real estate property management and commercial brokerage firms, which creates an 

unleveled playing field. In addition, allowing the safety net subsidy to trickle out 

of a bank will result in an enlarging of the absolute value of the subsidy passed 

on from the government to the private sector. 

FINAL THOUGHTS

It is plain that real estate brokerage and management are activities that are inherently commercial, and that authorizing financial holding companies to engage in 

such activities not only would contravene the longstanding judgment of Congress 

that the mixing of banking and commerce is not in the best interest of the American 

people, but would represent nothing less than a sea change in the Board’s consistent 

determination to ensure that commercial activities are kept separate and distinct 

from financial activities. 

The proposal, if adopted, could involve financial institutions in commerce to an 

extent that manifestly could threaten the public interest. Allowing bank affiliates 

to engage in business as real estate brokers and managers would create an unprecedented potential for excessive concentration of economic resources, and for business 

combinations uniquely suited to gain advantage from anticompetitive practices in an 

industry with which million of the nation’s consumers and businesses transact business annually, all to the detriment of public interest. 

No regulatory framework, and no mandated regimen of disclosures, would be sufficient to prevent or avoid the potential conflicts of interest that would be created 

by permitting business organizations that finance real estate transactions to engage 

at the same time in brokering such transactions and in managing real estate. The 

governmental subsidies that benefit FHCs would be available to benefit their affiliates that are engaged in real estate brokerage and management and that compete 

in those fields against firms that enjoy no such subsidies. 

169

APPENDIX A 

THE ADVANTAGES OF THE FEDERAL BANK CHARTER

1. The Federal Reserve’s payment system guarantees allow banks to borrow funds at 

rate far below that available to firms outside the payment system. The payment 

system allows banks to borrow funds at a low cost in exchange for offering demand deposits—accounts with payment on demand used by millions of households to purchase goods and services. In addition to the interest rate spread 

earned on demand deposits, depository institutions also receive interest income 

during the time between the request to withdraw funds and the payment to the 

third party.

2. Being part of the nation’s payments system also allows banks access to the Federal Reserve District Banks’ Fedwire system. Fedwire reduces the risk facing 

banks by offering a Federal guarantee of inter-bank fund transfers. The Federal 

Reserve provides overdraft protection to banks similar in nature, but lower in 

cost, to the protection banks provide to their account holders. Access to the 

Fedwire system allows banks to maintain fewer reserves thus enabling banks to 

lend more and generate greater revenues.

3. One of the largest advantages offered to depository institutions is federally guaranteed deposit insurance. The existence of deposit insurance allows banks to operate with less capital for any given level of risk and thus lowers the cost of capital relative to any nonbank competitor. Conversely, at a given level of risk, 

banks can borrow funds at rates below what they would have to pay in the absence of federal insurance. In a competitive market, this subsidy would largely 

pass to consumers (depositors), however the tightly controlled entry of firms into 

banking could allow much of this subsidy to remain with the bank and its holding company.

4. Bank access to the Federal Reserve’s discount window reduces a bank’s probability of failure, and hence, its cost of capital and borrowing. While solvent 

banks facing temporary liquidity problems have to provide collateral to access the 

Federal Reserve’s discount window, the discount window does serve as a ‘‘lender 

of last resort’’ that is unavailable to non-banks. This source of liquidity allows 

depository institutions to take greater risks and hold less in liquid assets—creating the potential for greater losses. Hence even banks that never use the discount window, still receive a substantial benefit from having the option available.

5. Membership of the Federal Home Loan Bank System is open to all depository institutions purchasing stock in one of the Federal Home Loan Banks. Members 

have direct access to advances (loans) from the Federal Home Loan Banks that 

allow depositories to fund mortgages at lower costs. In addition, members can 

sell conforming mortgages to a Federal Home Loan Bank. The ability of banks 

to sell loans from their portfolio to the FHLB system greatly increases bank liquidity which encourages both higher volume and higher risk lending. Banks 

have joined the Federal Home Loan Bank system as the lower costs and ability 

to expand lending help to increase profitability.

6. Debt instruments issued by federally insured depositories also receive lower risk 

weights for risk-based capital requirements at other depositories. This preferential 

treatment provides a ready source of demand for bank debt and allows banks to 

pay a lower yield on debt since these securities provide a benefit to the buyer 

through lower capital requirements.

7. In addition to subsidies received via government backing and guarantees, banks 

also receive a substantial benefit from government-imposed barriers to entry into 

the banking market. To operate, depository institutions require either a state or 

federal charter. One variable used in deciding whether a charter is issued is 

whether the market in question is currently being served or not. If there are already several depositories in a market, the safety of those existing institutions 

can weight against the issuing of a charter to a potential competitor. This limiting of direct excess competition allows existing depositories some relief from 

competitive market pressures. These limits on entry can have substantial positive impacts on the profitability and pricing schemes of depository institutions. 

170

80This estimate of $48 billion is based on the following assumptions:

• FHCs enter the market with 10 percent market share

• FHCs gain 5 percentage points in market share each of the following nine years

• FHCs drop commission rates below market rates by two percentage points

• 2000 EHS and Census home sales data is the baseline

APPENDIX B 

AN ESTIMATE OF CONSUMER COSTS IF FINANCIAL HOLDING COMPANIES ENTER THE

REAL ESTATE BROKERAGE INDUSTRY

The ultimate cost to consumers if financial holding companies (FHCs) enter the residential real estate brokerage industry could total $48 billion over ten years, as 

FHCs raise revenue elsewhere to cover for revenue shortfalls in the brokerage industry. More importantly, the costs would be borne not only by homebuyers and 

sellers, but by all consumers of commercial banks. This section describes one scenario by which all banking customers would pay for the FHCs entry into the residential real estate brokerage industry. 

To quickly gain market share in residential real estate brokerage, an FHC may 

choose to drop commission rates. The bank will be able to subsidize the resulting 

losses at the real estate brokerage by raising new revenues from their banking customers. In the past, banks have been able to raise additional revenues through the 

implementation of new and increased fees and the raising of other fees. As a consequence, all bank customers—whether or not they are recent homebuyers or sell- ers—will bear the burden of FHC’s attempts to quickly gain market share. 

THE METHOD 

Arguably one of the quickest methods for a FHC holding company to gain market 

share in the real estate brokerage industry is to significantly reduce commissions 

paid by home sellers. Typically, home sellers compensate both real estate agents—

the one representing the buyer and the one representing the seller—involved in a 

transaction. Rarely does the buyer of the home compensate either agent. The compensation, which is negotiable between the home sellers and the real estate agent, 

is usually in the form of a percentage of the final sales price of the home. 

A bank holding company wanting to gain market share quickly may choose to 

lower these commission rates. One issue that a FHC would encounter with discounting the commission rate is the motivation of buyer agent’s to show the home 

to their clients. Typically, a commission is split 50–50 between the buyer’s agent 

and the seller’s agent. If the overall commission rate is relatively low, then, naturally, the buyer’s agent’s split is also low. Some argue that real estate agents may 

be less likely to show homes where the commission is low. 

FHC brokerages can overcome the hurdle by changing the traditional split between the agent’s from 50–50 to a ratio that results in the buyer’s agent receiving 

a commission split approximating what he/she would have received previously. For 

example, if commission rates were typically six percent before discounting, where 

both the buyer and seller’s agents received three percent each, then adjusting the 

split would give three percent to the buyer’s agent and one percent to the seller’s 

agent. As a result, the buyer’s agent has the same incentives as before to show the 

FHC’s listings. 

THE COST 

Note that reducing commission rates and changing the traditional split will be a 

costly transformation. Most real estate agents are independent contractors and rely 

on sales commissions for their compensation. To motivate their sales staff, the FHC 

will have to compensate their listing agent for the drop in commission. 

The FHC may consider paying the agent directly for lost commission dollars. So, 

in the example presented above, the FHC will pay the agent the two percentage 

points lost by the discounted commission. Or, the FHC could shift the agent from 

independent contractor status to paid employee with a set salary and benefits. With 

either option, the FHC will have to tap other revenue sources to cover the commission shortfall. 

Further compounding the costs of this transformation is the fact that real estate 

brokerage is not a highly profitable business. In 1996, the typical real estate brokerage earned a profit of just over two percent of the firm’s gross revenue. Facing already slim profit margins, FHCs will need to recover the commissions lost from 

other sources, such as its banking customers. Over a ten-year period, the present 

value of the lost commissions that FHC must recover from other sources may total 

as much as $48 billion, or roughly $500 per American household.80

171

• Usage of real estate agents by buyers, as reported in 2000 Profile of Home Buyers and Sellers, remains constant.

• Future revenue losses are discounted at an annual rate of 5.1 percent, equivalent to the 

yield on ten year Treasury bonds

The overall consumer impact of decreased commission rates paid by the bank is 

a transfer of wealth from banking customers to home sellers and the FHCs. Increased banking fees, in combination with lowered interest rates on deposits and increased interest rates on many loans and credit cards, will pay for the FHC’s belowmarket commission rates on real estate brokerage services. 

However, these below market commission rates will harm even home sellers (and 

buyers, too) over the long-run. The goal of this predatory pricing is to reduce competition from traditional real estate brokerages. As traditional real estate firms exit 

the industry, unable to compete with the subsidized FHC brokerages, FHC 

brokerages will be able to raise commission rates to levels above current market 

rates. At this point, with higher rates along with lowered customer services, even 

home sellers would lose. 

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174

THE POSSIBLE CONSEQUENCES OF ALLOWING BANKS INTO THE REAL ESTATE

BROKERAGE INDUSTRY

PREPARED FOR:

THE RESEARCH DIVISION OF THE NATIONAL ASSOCIATION OF REALTORS

BY LEONARD V. ZUMPANO

CHAIR OF REAL ESTATE, EXECUTIVE DIRECTOR OF THE ALABAMA REAL ESTATE

RESEARCH CENTER, AND PROFESSOR OF FINANCE

THE CULVERHOUSE COLLEGE OF COMMERCE AND BUSINESS ADMINISTRATION

THE UNIVERSITY OF ALABAMA

APRIL, 2001

INTRODUCTION

The Board of Governors of the Federal Reserve System and the Secretary of the 

Treasury have requested comment on the possible consequences of permitting financial holding companies and financial subsidiaries of national banks to engage in real 

estate brokerage, brokerage management, and property management. Such a proposal has been advocated by the American Bankers Association (ABA) and the Fremont National Bank and Trust Company. 

The principal rationale for this recommendation is that it will preserve and enhance the competitive ability of financial holding companies and national banks. 

Part of the justification for allowing banks entry into the real estate brokerage market hinges, at least in part, on whether real estate brokerage, brokerage management, and property management activities are financial activities or incidental to 

a financial activity and, therefore, permissible activities for financial holding companies and financial subsidiaries of national banks. Much less attention has been directed at what is arguably the far more important question: What will be the impact 

on the consumer if financial institutions are allowed into the real estate brokerage 

market? Will entry increase competition within this industry and result in more efficient allocation of resources and lower real estate brokerage commissions or, alternatively, lead to even greater concentration within the industry, a reduction in 

allocative efficiency, and higher fees and commissions? These are the some of questions this paper seeks to address. 

The primary objective of this study is to identify and explore the possible consequences of bank entry into the real estate brokerage market. This paper is not 

meant to be an exhaustive study of this issue, nor, necessarily, will it provide definitive answers to all of the questions posed above. Rather, it is intended to help readers assess whether the potential benefits of bank provided real estate brokerage 

services outweigh the potential risks to the consumer. At the very least this study 

should be food for thought for regulators contemplating whether to allow banks into 

this market. Admittedly, the scope of this paper is limited. It does not address the 

possible benefits that may accrue to the banking sector from entry into the real estate market. I will leave it to the banking experts to make those arguments. 

Because the emphasis here is the effects of bank entry into the real estate brokerage market on the consuming public, this study will examine three specific areas 

of concern: the effect on competition within this market, the impact on market efficiency, and, finally, how the types and quality of services provided to the consumer 

may be effected. 

This study is organized as follows. In the next section we present an overview of 

the structure of the real estate brokerage industry and the type of competition that 

characterizes this market. This overview includes a review of the relevant research 

on the market for real estate brokerage services, which outlines what we do and 

do not know about this market. It will also provide us with a framework wherein 

we can analyze and assess the possible consequences of bank supplied real estate 

services. 

This evaluation is followed by an assessment of the market efficiency implications 

of bank entry into the real estate brokerage market. This will allow us to then examine the changes taking place in this industry and identify the reasons for these 

changes. Part 5 will examine how bank provision of real estate brokerage services 

may affect the types of brokerage relationships entered into by homebuyers and sellers. The last section of this report will summarize the findings and conclusions of 

this research. 

175

1The concept of market efficiency is very closely related to the nature of the competition that 

characterizes a market. When talking of efficiency we are concerned with how efficiently resources are allocated within a market and the extent to which prices reflect all the relevant 

information about a product or service. In general, it is only perfectly competitive markets, 

where all participants are presumed to have full knowledge of supply and demand conditions 

and know the costs of all alternative activities, that are truly efficient. That is, perfect competition is a necessary condition for market efficiency. To highlight the different implications of market structure and market efficiency, however, we will treat efficiency issues in the next section 

of this paper. 

MARKET STRUCTURE AND COMPETITION

During the last five decades the market for real estate brokerage services has 

been the subject of intense scrutiny by various government agencies, attorneys, 

academicians, and consumer groups. Over the years this attention and the research 

it has engendered have led to claims that this market is operationally inefficient 

and suffers from excess capacity (Yinger, 1981). Others have characterized this market as a cartel where various types of entry barriers, such as licensing requirements, the MLS, or collusive arrangements allow existing participants to enjoy monopoly power (Maurizi, 1974; Owen, 1977; FTC, 1984). Crockett (1982) and Miller 

and Shedd (1979) argued that the industry was characterized as monopolistic, where 

firms can differentiate their products and realize short-run excess profits. Wachter 

(1985) argued that percentage commissions are a form of price discrimination and 

market imperfection. 

Other researchers, examining this same market have concluded just the opposite; 

that this market is highly competitive (Schroeter, 1987; Knoll, 1988) that the multiple listing services improve market efficiency (Turnbull and Sirmans (1993), licensing improves the quality of brokerage services (Shillings and Sirmans, 1988) and 

percentage commissions reduce agency costs (Caroll, 1989). With all these differing 

opinions, Zumpano and Hooks (1988) noted the need to resolve these issues by directly examining the underlying production function for firms within this industry. 

Up until relatively recently many of these discussions and arguments remained 

theoretical, with little empirical evidence in support of the numerous and often conflicting hypotheses regarding the performance of this market. However, during the 

late 1980s and 1990s a great deal of empirical research appeared which has significantly advanced the state of our knowledge of this market. Knowing what type of 

competition characterizes a market is important because it allows researchers to assess how efficiently markets operate as well as predict the effects of changes that 

occur in markets. What follows is a review of these different types of market structures and what the empirical research says about the performance of the market 

for brokerage services. 

Perfect Competition 

The performance standard as far as market structure is concerned is perfect competition. In general perfect competition can only exist in markets where very specific 

conditions are satisfied. Specifically, there must be a large number of buyers and 

sellers, none of whom are large enough to exert control over price, entry to and from 

the industry is free and unencumbered, the products sold in such markets must be 

homogeneous, and market participants possess all the relevant information about 

the product or service being traded.1 Entry, by increasing market supply, causes 

price to fall. Since products are homogeneous consumers shop only on the basis of 

price. When these conditions prevail, excess profits are competed away as firms continue to enter the industry, until only normal profits are being earned. This, in turn, 

forces firms to operate at the most efficient level of output and sell their products 

at the lowest price. In reality these conditions rarely prevail and can only closely 

be approximated in the markets for unprocessed agricultural products and in the 

equity markets of publicly traded corporations. All other markets are said to be 

characterized by imperfect competition. 

Monopolistic Competition 

Most alternative characterizations of the market for real estate brokerage services 

rely explicitly or implicitly on the model of monopolistic competition. As with perfectly competitive markets, monopolistically competitive markets are atomistic, 

made up of a large number of small firms, with relatively easy entry and exist of 

competitors. Here, however, firms produce differentiated products and services so 

that each firm faces its own, downward sloping demand curve. If economic profits 

are being generated by existing firms within the industry, this will encourage entry 

by new competitors. In contrast to pure competition, however, entry causes the demand curve facing individual firms to decline as existing demand is being distribVerDate Jan 17 2002 11:40 Jul 31, 2002 Jkt 000000 PO 00000 Frm 00179 Fmt 6601 Sfmt 6621 G:\WORK\COMM\051602\79656.000 HJUD1 PsN: 79656
176

2 Because firms are forced to produce at output levels where they cannot take advantage of 

economies of scale, unit production costs are higher. Yinger (1981) develops an alternative hypothesis that generates a similar outcome. Using a search model under conditions of uncertainty 

Yinger defines the market for brokerage services as one where home buyers and sellers seek 

each other out with brokers acting as match makers. If the total number of matches is fixed, 

entry of additional brokers into the market will spread existing listing among more brokers reducing the probability that a buyer will find a match with any given broker. 3See Owen (1977), Crockett (1982), and Miller and Shedd (1979). 

uted among a larger number of firms. If the original firms had previously been operating at optimal plant size, reduced demand would result in a new long-run equilibrium for individual firms at output levels below those that minimize their average 

costs. If total demand remains unchanged then firms in this market compete for 

market share through various forms of non-price competition. Entry stops once all 

excess profits are eliminated. The ultimate effect of entry into such monopolistically 

competitive markets is excess capacity with existing firms producing less output and 

at higher cost.2

The monopolistic competition model has been criticized on a number of theoretical 

grounds. Harrod (1952) questions the excess capacity result, which is obtained because firms are assumed to equate long-run marginal costs and short-run marginal 

revenue in determining output. If long-run demand is more elastic, the use of longrun marginal revenue results in greater firm output. Becker (1971) questions the 

generality of the normal profit result. Firms in this situation would have the incentive to merge in the hope of capturing more market share and reducing costs in 

order to increase profits. Cohen and Cyert (1965) challenged the behavioral assumptions of this model. If firms learn from experience and cease their myopic behavior, 

then some other market model such as monopoly, oligopoly, or even perfect competition is more appropriate, depending upon the extent to which barriers to entry exist. 

Another consideration is relevant here. The welfare loss associated with imperfectly competitive market conditions may be the price we pay for more choice—a larger market basket of new, innovative, and better quality goods and services to 

choose from. So long as the welfare losses are small relative to the gains from enhanced consumer choices no market intervention or corrective actions are warranted. 

How then do these various models of economic behavior stand up to the light of 

reality and actual business practice within the real estate brokerage industry? In 

so far as the axioms and assumptions underlying these models are truly descriptive 

of reality, then the deductions and policy prescriptions that logically flow from these 

models have some validity. On the other hand, to the extent that these models fail 

to explain market reality and/or market outcomes, their use as policy guides become 

questionable. 

WHAT THE EMPIRICAL RESEARCH TELLS US

Charges that the real estate brokerage industry is a cartel or collusive oligopoly 

can be easily dismissed. First, it has been shown by Shillings and Sirmans (1988) 

and Johnson and Loucks (1986) that pre-license educational requirements and testing have little effect on limiting entry into this industry, a major requirement for 

an oligopolistic market structure. Instead, the major impact of licensing requirements was to reduce the number of complaints against real estate brokers. Stated 

differently, state license laws accomplish what they are intended to do; enhance the 

operations of markets where the quality of products or services is difficult for consumers to evaluate. Certainly the large number and relatively small size of most 

full-service brokerage firms are not characteristic of an oligopolistic market. Whether this state of affairs can be expected to continue is addressed later on. 

Other researchers 3 looked to the Multiple Listing Service (MLS) as evidence for 

collusion and cartel pricing. The argument here was that the MLS was an implicit 

mechanism for fixing prices. For cartels to survive, cartel members must be able to 

catch price-cutters and drive them out of the industry. With the MLS brokers pool 

their listings and agree to split commissions on cooperative sales. In the past, the 

total compensation per listing was also published which facilitated both price coordination and a means to detect price-cutting activity. A price-cutter would be quickly 

identified and lose the cooperation of other brokers within the MLS. The resulting 

loss in revenues to price-cutters (or even the threat of loss) would insure the stability of the cartel. 

While this argument may have had some merit in the past, policy changes by 

NAR have made it all but impossible to detect price concessions by MLS participants. Since 1980 local multiple listing services have been prohibited from publishing the total commission on MLS listings. Now only the selling portion of the 

177

4See the April 1980 issue of NAR’s Executive Officer. 5This study also used the number of salespersons as a measure of firm size. The results were 

the same no matter how a firm’s size was quantified. 

commission can be reported on multiple listings. The stated purpose of this policy 

change was to eliminate any ‘‘conscious parallelism’’ in the establishment of fees for 

the sale of real estate through multiple listing services.4

Well, if the market cannot be characterized as oligopolistic or collusive, what type 

of competition does this market exhibit? Certainly, many of the attributes of monopolistic competition and to a lesser degree, perfect competition)many firms, relative 

small firm size, freedom of entry and exist, differentiated products, and non-price 

competition—are present in this market. The only unresolved issues are which of 

the market outcomes, associated with the model of monopolistic competition actually 

characterize the market for real estate brokerage services. 

The starting point for such an assessment is estimation of the underlying production and cost functions of the industry. Such a determination is important if we 

want to ascertain whether entry into the real estate brokerage industry will result 

in more efficient production and less costly output or lead a situation where a very 

few large firms control output and pricing decisions. This latter scenario can occur 

when output is characterized by economies of scale throughout the relevant range 

of production. In this case, unit cost curves would be downward sloping; the more 

production the lower the unit costs. The outcome here is eventually monopoly as the 

largest firm ends up being the low cost provider driving other competitors out of 

the market. Alternatively, and most commonly, the cost curve is U-shaped. As output increases firms can take advantage of economies of scale, with the result that 

unit costs fall. At some point, however, if firms continue to produce they encounter 

diseconomies of scale, which causes unit costs to rise; hence, the U-shaped cost 

curve. Here, there is no threat of monopoly as large firms do not have a competitive 

advantage over smaller firms, at least as far as costs are concerned. 

Zumpano, Elder, and Crellin (1993) were the first to estimate the production function for the real estate brokerage industry. Employing a national database from the 

NAR’s Survey of Residential Brokers (Income, Expense, and Profits), the authors estimated a translog cost function to model the underlying production function. Firm 

size was measured on the basis of revenue transactions (the number of listings and 

sales),5 which for the sample ranged from as few as 10 for the smallest firms to over 

40,000 transactions for the largest firm in the sample. 

The Zumpano, Elder, and Crellin study found the presence of modest economies 

of scale throughout almost the entire range of firm sizes. Not surprisingly, scale 

economies were strongest for the smallest firms, became less pronounced as firms 

got larger, and turned negative, indicating diseconomies of scale, for the largest 

firms. The construction of a cost curve, which was calculated using actual output 

levels matched to input prices fixed at their sample means, is the best way to visualize the effects of firm size on production costs. It can be seen from Figure 1 that 

after an initial and substantial decline, average total costs remain essentially unchanged over a very wide range of output. Minimum average cost occurs at approximately 1,800 transactions, with a gradual increase in unit costs of less than $50 up 

to 8,000 transactions. Although not shown in the graph, above this level, unit costs 

rose much more sharply. It is worth noting that the mean revenue transactions for 

the sample was 850 units, and less than 15 percent of the firms surveyed registered 

output levels of 1,000 or more transactions.

178


Zump7.eps
179

6 Economies of Scope refer to cost savings that result from the utilization of sharable inputs 

that can be used to produce multiple products. One classic example is railroad track that can 

support both passenger and fright traffic. 7Technically, what is being measured are deviations from what is called the ‘‘efficient frontier.’’

What was apparent from this study was that despite the presence of scale economies many of the real estate firms surveyed in 1988 were too small to take full advantage of the cost savings possible with a larger scale of operation. Many of the 

firms in the sample could have realized cost savings by increasing the scale of their 

operations. 

Just as importantly, it was also determined that the larger firms did not command a competitive advantage over smaller firms, at least as far as unit costs were 

concerned. The ‘‘U-shaped’’ industry average total cost curve indicating the presence 

of diseconomies of scale at high output levels would work to discourage monopoly. 

Consequently, growth in firm size, within limits, would not pose a threat to competition or result in increased market power. 

While the authors expected to see average firm size grow over time if their estimations were correct, they also speculated as to why more firms weren’t taking advantage of scale economies. Transactions costs associated with extended market 

areas such as multi-state licensing requirements and multiple board memberships 

could inhibit the growth of firm size, especially for firms whose market area split 

over into neighboring states and political jurisdictions. Alternatively, many markets 

may simply be too small or thinly populated for large firms to operate efficiently. 

The authors also suggested that economies of scope might be present in this market 

which were not revealed in the data or captured by the cost function estimations, 

which might allow firms to operate efficiently at a smaller sizes. 

Since the publication of this study, a number of state real estate commissions 

have authorized reciprocal licensing agreements for out-of-state brokers and boardof-choice multiple listing arrangements have reduced transaction costs. A follow-up 

study by Zumpano and Elder (1994) did find the presence of significant economies 

of scope 6 within the residential real estate brokerage industry. As firms grow in size 

they may be better able to exploit sharable inputs to produce multiple outputs. 

Treating listing and sales as distinct outputs, Zumpano and Elder estimated a 

multi-product translog cost function. The results of this study suggested that the 

composition of output is an important source of the scale economies reported in the 

earlier study. The most important finding of this study was that a balanced output 

mix of listing and sales was more cost efficient and that specialization in either listing or sales was sub-optimal under the institutional arrangements then present in 

the market. Once firms get large enough, individual agents within the firm can specialize in listing or sales activities and better utilize sharable resources, with the 

consequent result that the firm produces both more efficiently. In effect, the presence of scope economies allows firms to achieve economies of scale in production. 

This finding maybe one reason for the growth in the use of dual agency and nonagency transaction brokerage arrangements. 

More recent empirical research not only lends additional support to the finding 

of economies of scale within the real estate brokerage industry, but have generated 

more inclusive estimates of overall operational efficiency of residential real estate 

brokerage firms. Although firms can take advantage of economies of scale, when 

present, by changing the size of the firm, firms can still be operating sub-optimally. 

A firm may utilize the same allocation of resource inputs as other firms, but produce 

still produce less output because it fails to utilize its resources efficiently. The difference between how a firm could potentially utilize its resources versus its actual 

utilization is termed X-inefficiency. Stated differently, to be X-efficient requires that 

the firm is able to operate at the lowest possible cost, given current prices and output levels. Leibenstein (1996) argues that the majority of X-inefficiency losses can 

be attributed to inadequate motivation by firm management, which, he suggests is 

directly linked to the structure and competitiveness of the market in which the 

firms operate. 

Using a stochastic frontier approach, Anderson, Lewis, and Zumpano (2000a) estimate X-inefficiency 7 levels in the Residential Real Estate Brokerage Market from 

a national sample of real estate firms taken from the 1990–91 NAR Income, Expense, and Profit survey . The results of this study indicate that real estate brokerage firms were shown to be operating efficiently. In fact, the mean efficiency score 

of 88% is higher than the scores reported in most banking and financial institution 

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8For representative studies of the banking industry see Ferrier and Lovell (1990), Berger and 

Humphrey (1991, 1992), and Berger, Hunter, and Timme. (1993). 9These results are also consistent with an earlier study by Anderson, Zumpano, Elder, and 

Fok (1998) that estimated firm efficiency using a different technique called Data Envelope Analysis or DEA. Most of the inefficiency found in the sample of residential real estate firms was 

related to scale inefficiencies, reflecting the fact that the majority of firms in the industry were 

relatively small. These same firms, however, were found to be efficient as far as resource utilization was concerned. 10 In contrast to the earlier study, this paper presented efficiency estimates based upon both 

traditional stochastic frontier estimations using maximum likelihood and a Bayesian statistical 

model, where parameter estimates are expressed in terms of a probability distribution function. 11For example, consider a firm operating in an exclusive neighborhood where property owners 

do not wish to compromise their privacy by having signs in their yards or advertisements in 

the newspaper. The brokerage firms may be forced to employ more expensive marketing techniques such as advertising in select magazines, prescreening prospects, and special home 

showings. 

studies.8 As noted earlier Leibenstein states that high efficiency scores are related 

to the competitive environment in which firms operate. Therefore, it can be argued 

that these findings suggest that the market for residential brokerage services is relatively competitive. 

This study also examined the relationship between firm size and efficiency levels. 

Smaller firms were found to operate closer to their efficient frontier than their larger counterparts. These results suggest that thee are limits to the benefits from increasing firm size. Beyond certain output levels, economies of scale may be offset 

by a loss in productive efficiency.9

This study has to be interpreted with some caution since it is based on 1990–91 

data. Although the firm size categories used in this study—small (less than 194 revenue transactions), medium (196–525 revenue transactions), and large (525 revenue 

transactions and over), were a reasonable representation of the size differences in 

the sample and the industry, firm size has grown appreciably since then. Many of 

the firms that were included in the large category would be considered relatively 

small by today’s standards. 

A study by Anderson, Lewis, and Zumpano (2000b) 10 using somewhat more recent 

data (1995–95) provides updated efficiency estimates that also includes the more inclusive measure of profit efficiency. A brokerage firm with relatively high input 

costs may appear to be inefficient if only costs are examined, but may be relatively 

efficient from an overall profitability perspective.11

Using cross-section data collected from the 1994–95 NAR Income, Expense, and 

Profit Survey, the authors found that mean X-efficiency levels for real estate brokerage firms ranged from 72 to 84 percent, which suggests that firms, on average, could 

reduce costs by approximately 16 to 28 percent if they operated on their efficient 

frontier. Although still high, in comparison with other industries, these are lower 

scores than the mean score of 88.7 percent reported in the study using 1990–91 

data. Profit efficiency levels, not calculated in the earlier study, ranged from 49 to 

67 percent, suggesting that, despite high cost X-efficiency levels, additional profit 

gains could be realized by re-examining input and production mix decisions. 

The lower efficiency scores reported using the 1994–95 data may also reflect differing market conditions. In the prior study that used 1990–91 data, the economy 

was in recession and the residential housing market was relatively depressed. The 

market in 1994–95 was much stronger and the economy was expanding rapidly. As 

pointed out earlier X-efficiency levels are closely linked to market conditions. When 

the economy is strong, brokerage firms may operate less efficiently and still survive 

because they are under less competitive pressure. Decreased efficiency levels can 

also reflect technological and structural changes taking place in the market place 

as well increased concentration in the industry. Larger firms tend to be less efficient 

than smaller firms and some may be producing at levels where unit costs are rising 

due to diseconomies of scale. Unfortunately, this study did not estimate or categorize X-efficiency levels by firm size. However, other industry research does shed 

additional light on these issues by offering a longer-term view of industry performance. 

In ‘‘The Residential Real Estate Brokerage Industry: An Overview of Past Performance and Future Prospects’’ (2000), Zumpano, Elder, and Anderson examine the 

performance of the residential real estate brokerage industry over a ten year time 

interval, 1987 through 1996. This period was chosen so that the industry performance could be studied over a complete business cycle. During the study period, the 

economy moved from an expansion in 1987 to recession in 1990 and back again in 

one of the longest sustained recoveries in the history of this county. Fundamental 

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12 In contrast, the smallest firms experienced a much smaller increase in variable cost which 

reflects the increase in agent productivity that occurred during the study period. 

changes in the structure of the economy and the nature of the real estate business 

also emerged during this period. 

The empirical analysis relied upon an extensive financial data base which was collected from literally thousands of real estate brokerage firms in the form of nationwide Income, Expense, and Profit surveys regularly conducted the NAR. This data 

was analyzed using statistical procedures to isolate trends in firm size, output, income, costs, and overall performance. 

Following the relatively prosperous late 1980s, the analysis reveals that real estate brokerage profits fell during the recession of 1990. While the decline in profitability could be attributed, at least in part, to the downturn in the business cycle, 

the average real estate brokerage firm has continued to be less profitable even as 

the economic moved into a strong expansionary phase. The principal culprit was the 

dramatic increase in costs that occurred during the period, which, in turn, triggered 

a period of consolidation in the industry. Firms consolidate as a way of adjusting 

to higher levels of costs by taking advantage of economies of scale in the production 

of output. 

As Table 1 shows that a strong housing market coupled with growth in firm size 

made for impressive gains in agent productivity during the study period. The average firm in 1996 had more output than in 1998 (also a year with a strong housing 

market) by nearly seventy-five revenue transactions, yet this output was produced 

with fewer salespersons. On a transactions basis, gross revenues and margins increased over the entire period, both up approximately 27%. In contrast, profits did 

not follow this pattern. Despite a healthy increase in revenues over the period and 

a reduction in the average sales force, profits per transaction were lower in 1996 

than they were in 1988. These results are consistent with the cost and profit efficiency estimates noted earlier. 

Part of the explanation can be found on the cost side. Total costs per transaction 

increased 42% between 1988 and 1996. The increases in costs, which is reflected in 

both fixed and variable costs, can be attributed to a number of factors. Compliance 

costs have risen as more states passed both agency disclosure and property condition disclosure statutes and the reliance on caveat emptor has declined. The marketing process has also changed with the introduction and increased use of Internet 

marketing techniques and online multiple listing services. In addition, the very 

strength of the housing market may have hurt residential brokerage firms, as competition for productive salespeople dramatically raised compensation costs. While 

the average total cost curve characterizing the industry remains U-shaped, there 

has been a substantial increase in unit costs at every level of output. 

The severity of the impact of these regulatory, industry, and structural changes 

varies with firm size. Tables 2 through 5 summarize the financial performance of 

residential brokerage firm on the basis of size. The smallest firms have been especially hard hit. The increasing requirements of technology as well as regulatory demand have increased their overhead, and smaller size means higher fixed costs per 

unit of output. Between 1988 and 1966 these fixed costs increased by almost 46 percent.12 This compares to only a 5.9% increase in fixed cost for the largest firms. 

These findings also provided the rationale for the merger activity that took place 

during this period. As a result there are fewer firms in this size category and those 

that remain are smaller. Anecdotal evidence suggests that these firms survive by 

finding niche markets that require specialized knowledge and marketing skills. 

At the other end of the spectrum, the largest firms are being squeezed by increasing variable costs. In particular, competition to maintain and increase market share, 

and still operate a leaner workforce, means, that productive sales personnel come 

at a premium. The evidence of this is especially noticeable when commission incomes and payouts are compared. As Table 6 illustrates that for the largest firms, 

the increase in commission payment has far outstripped the increase in revenues. 

A trend toward larger firms will not ease the pressure on commission costs. These 

firms have remained the most profitable of all the firms in the sample only because 

their size has allowed them to spread their fixed costs. However, continued growth 

in firm size could prove counter-productive as greater output will increasingly come 

at the cost of less efficient production. Agent productivity levels fall as firm size increases and, since the industry cost curve is U-shaped, there are limits to economies 

of scale in production. 

Will these trends continue into the 21st century. Unfortunately, 1997 was the last 

year that NAR conducted the Income, Expense, and Profit survey of its membership. 

However, there has been some subsequent research and online surveys by NAR that 

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13See Baen and Guttery (1997) and Tuccillo (1997) for similar arguments. 

allows for some enlightened speculation. The biggest change to effect the real estate 

brokerage industry during the last 10 years has been the Internet. 

As with many other industries, real estate firms have been implementing this 

technology into their day to day business operations. NAR’s On-line Technology surveys, conducted in 1999 and the 2000 National Association of REALTORS Profile 

of Home Buyers and Sellers provide some revealing information regarding the pace 

of technological innovation taking place in this industry. These surveys reveal that 

23% of all potential homebuyers have searched for a home on-line. Such activities 

include virtual tours of listed properties, obtaining neighborhood and quality of life 

data, and determining affordable price ranges and loan amounts using home price 

and mortgage calculators. Although the most on-line shoppers were using the Internet to find a home rather than a broker, the vast majority of Internet searchers ultimately ended up using a real estate broker in consummating the sale. These surveys also revealed that 67% of the REALTORS surveyed in 1999 accessed the 

Internet for business purposes. The recent approval of electronic signatures should 

also make it more likely that much of the paperwork associated with home purchase 

and sale transactions will be completed on-line. 

There is certainly no question that the implementation of on-line technology has 

and will continue to change the cost structure and marketing operations of firms 

in the real estate brokerage industry. 

Technological innovations such as the fax, cell phone, digital cameras, and, most 

important, the world wide web created new opportunities for broader, much more 

effective, and less costly dissemination of market information to consumers. The 

interactive nature of this new technology also allows both real estate professionals 

and the consumers with whom they work to respond much more quickly to new 

market information. 

The technological innovations noted above are also associated with significant 

economies of scale, that involve substantial introductory costs, but lower operating 

costs once these systems are up and running. It is not coincidental that agent productivity has increased during the last decade. 

Not only will the growing use of Internet real estate applications reduce information and transaction costs and speed transactions, they may also work to reduce the 

demand for real estate brokers and lower commissions.13 At a time when there are 

probably no more gains to be made by further consolations or growth in firm size, 

banks are considering entering the real estate brokerage industry. 

THE CONSEQUENCES OF BANK ENTRY

Greater Industry Concentration 

What might be the consequences for consumers and the economy if banks do enter 

the market for real estate brokerage services? In the ideal scenario bank entry 

would improve the delivery and quality of brokerage services and reduce commission 

costs to consumers. Such an outcome, however, is unlikely given the findings of the 

research described earlier. While the entry of banks into the real estate brokerage 

market could be affected either through acquisition of existing firms or by establishing new brokerage operations, the market outcomes will likely be the same. 

If bank entry into the industry is by way of acquisition of existing firms, this will 

not increase competition, but could instead, lead to even more concentration within 

the industry. If the real estate brokerage industry becomes dominated by a few very 

large firms the result will be less rather than more competition. With fewer firms 

in the industry, what was a relatively competitive market would quickly become oligopolistic. The survival of smaller firms could be threatened by predatory pricing 

and new firms may be discouraged or even prevented from entering the industry. 

We know from the research cited earlier that much of the early consolidation that 

characterized this industry in the early 1990s was triggered by the increasing realization that most firms were simply too small to take advantage of economies of 

scale in production. As competitive pressures increased firm size, firms were better 

able to improve their cost efficiency, a result predicted by the earlier economies of 

scale research. 

The presence of scope economies also indicates that a real estate brokerage firm 

does not have to grow into a super regional firm in order to realize cost savings. 

By taking advantage of sharable resources, firms, once they grew large enough to 

allow individual agents to specialize in listing and selling, could produce more coop 

and in-house sales. In contrast, firm production that is heavily weighted towards either listing or sales is more costly, on a per unit basis, than a more balanced output 

of both listing and sales. If follows from this analysis that institutional changes 

183

which allow more effective utilization of sharable inputs and a more balanced output of listing and sales will be more cost effective for the industry. If bank-owned 

real estate companies concentrate on the buying side of the real estate transaction 

because this facilitates loan origination these scope economies may not be realized. 

The research also showed that very large firms are less efficient than smaller 

firms in terms of resource utilization. Revenue transactions per agent fall as firm 

size increases. For the very largest firms in the residential brokerage industry, the 

expression ‘‘making it up on volume’’ appears to be true, at least so far. For the majority of firms in the industry the presence of scale economies have helped offset the 

reduction in agent productivity as they grew in size. However, the research also indicates that the industry cost curve is U-shaped; beyond some output level, 

diseconomies of scale will work to increase costs. After a significant fall in average 

total costs that occurs at a relatively small output level, average total costs remain 

relatively constant over a substantial range of output. However, beyond that point, 

costs begin to rise. Further consolidation could result in a situation where firms become so large that they are producing in the range were diseconomies of scale prevail as well as suffer from inefficient resource utilization. Consequently, continued 

consolidation and growth in average firm size may not be result in increased market 

competitiveness or improved operational efficiency. 

Unfair Competitive Advantage? 

Alternatively, if bank entry initially results in the addition of new firms in the 

market, their ability to tie financing to the sales transaction could drive out independent brokers, which again could result in increased concentration within the industry, fewer firms, and monopoly power. Where then would the competition come 

from? 

Historically, limited barriers to entry meant that brokers had to differentiate their 

product in order to maintain market share. This is reflected in advertising campaigns that emphasize the quality of broker services, the use of cable TV programs, 

Internet marketing strategies, franchising, and the provision of referral and relocation services. Would not banks be expected to do the same? 

The ability to market both real estate brokerage services and mortgage loans, 

even in the absence of a coercive or formal tying agreement, gives banks a major 

competitive advantage over independent real estate brokerage firms. Will not consumers feel that they may stand a better change of being approved for a loan if they 

use bank provided brokerage services? 

Research has shown that brand name capital represents an important asset to 

real estate companies and is strongly linked to the success of real estate companies. 

Will consumers perceive that bank supplied real estate brokerage services are somehow superior to the services provided by other brokers, even when that is not the 

case, because banks are larger and have statewide, regional, or even national name 

recognition? If so, such perceptions, even if untrue, would give bank-owned brokerage firms an unfair advantage over independent brokers. 

Market Structure Problems 

If banks are found not to have a competitive advantage, there still could be major 

dislocations resulting from their entry into the real estate brokerage market. Although there are still a large number of firms within the industry and entry is relatively easy, competition is not perfect because the services of brokers are not homogeneous. The residential real estate brokerage market is characterized by advertising and other forms of non-price competition. Consequently, each firm faces its 

own downward sloping demand curve for its services. In such a market entry of 

banks could result in excess supply and reduced allocative efficiency. If more firms 

come into a monopolistically competitive market, it would result in a reduction in 

market share for everyone. In the classic case, the demand curve facing individual 

firms would decrease forcing firms to operate further up on their average total cost 

curve. The end result would be an equilibrium where that are more firms in the 

industry, each producing less output than before at more costly output levels, which 

in turn, could put upward pressure on commissions. 

Even if one questions some of the underlying assumptions of the monopolistic 

competition model, there will still be market dislocations, some temporary and some 

possibly permanent, that could result from bank entry into real estate brokerage. 

The industry has already experienced upward pressure on commission splits as a 

result of the competition by the larger firms for productive salespeople. Bank entry 

could further exacerbate this problem. Even if this was a temporary problem, ameliorated by the eventual entry of more salespeople attracted by the higher compensation, by the time conditions improve, many of the smaller real estate firms 

may no longer be in existence. 

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14This is the market outcome Yinger (1981) hypothesizes when he examines the market for 

real estate brokerage services within the context of a search model. 15 Agent is used in the strictly legal sense where the broker is the legal fiduciary of a home 

buyer or seller. 

An increase in the number of salespeople without a corresponding increase in the 

demand for their services simply spreads the number of listing across more and 

more brokers, thereby decreasing the probability that any individual salesperson 

generates a sale. The result is a net reduction in salesperson productive efficiency, 

excess capacity in the industry, and a serious misallocation of resources for the 

economy.14

A Moral Hazard Problem 

There is also the question of conflict of interest. Are bankers into real estate as 

a way to make more loans or provide more consumer services? What is it that banker-brokers will bring to the table that can’t already be supplied by traditional, independent brokers? If it’s primarily to make more loans, then the interests of the 

homebuyers and sellers may be subordinated to this goal. Consumers might feel coerced into using a bank-affiliated broker even if the quality of the services provided 

by the broker were sub-par. What about the situation where a bank affiliated broker 

is acting as an agent 15 of the buyer and knows that his client could get a better 

loan deal from a competitor. How likely would it be that this broker would send his 

client to another bank? Failure to direct the client to the bank offering the superior 

loan package would constitute a breach of the broker’s fiduciary responsibility to the 

principal. This moral hazard problem would extend to other real estate related services provided by banks such as appraisals. This could certainly be the case if the 

real estate brokerage component of their business is ancillary to the marketing of 

loans. Alternatively, if bank affiliated brokers view mortgage financing as a way to 

generate more home sales, would loan underwriting standards and the validity of 

property appraisals be comprised by pressure to sell houses? In an economic downturn, the integrity of our financial system could be jeopardized if the foreclosure of 

mortgage loans resulted in substantial loan losses because of inflated appraisals or 

under-collateralized mortgages. 

It is markets where information is difficult, costly, and time-consuming to collect 

that institutionalized intermediaries evolve. These intermediaries, by taking advantage of economies of scale in information gathering can generate benefits for the 

consumers they represent by reducing information and transaction costs. Real estate 

is such a market. Traditionally real estate brokers served as agents of home sellers. 

One of the problems endemic to markets for intermediaries is how to align the interests of the agent with the interests of the client. Because the typical home seller 

is an infrequent participant in the market, the seller may be unable to accurately 

assess the quality of the information or value of brokerage services received. Nor 

are consumers generally able to effectively monitor the performance of their agent. 

Hence the moral hazard problem of insuring that the best interests of the client are 

being served by the agent. This is the reason that incentive compatible employment 

contracts are commonly used in such markets. In the case of seller agency a percentage commission based upon selling price is an example of just such a contract because it encourages the broker maximize the selling price. Developing incentive compatible compensation arrangements has become more difficult in today’s real estate 

market because the use of disclosed dual agency, buyer agency, and non-agency, 

transaction brokerage have become more common. This problem will become even 

more difficult to resolve in the case of broker-lenders. 

Just what type of brokerage arrangements will be used or favored by bank-affiliated brokers? If bank affiliated brokers work mostly with buyers then exclusive 

buyer agency might be most appropriate. Would they avoid using exclusive or single 

agency arrangements because of possible conflicts of interests, even if this type of 

brokerage arrangement might be best for the consumer? The use of disclosed dual 

agency might make the problem worse. This arrangement has already been criticized for the potential conflict of interest inherent in its structure. If, instead, banker-brokers act as non-agency transaction brokers, then who will represent consumers when they need help? Some critics charge that the use of transaction brokerage arrangements is simply a way for brokers to work both sides of the real estate 

transaction without the legal liability problems that might attach to a agency situation. Consumers, both buyers and sellers, are demanding more services from their 

brokers than in the past that goes way beyond marketing—partly because of greater 

agency disclosure, partly because the real estate transaction has become more complex. Our research suggests that this trend will continue and brokers will have to 

become far more service oriented than in the past. It seems to me that banks would 

185

be hard pressed to claim that all the services associated with a modern real estate 

sales transaction are primarily financial in nature. 

CONCLUDING COMMENTS

Over the last 20 years we have witnessed a major transformation of the residential real estate brokerage industry. What was once characterized as a low tech 

‘‘Mom and Pop’’ industry made up of very small firms that included many part-time 

salespersons, has now become what the Department of Commerce ranks as one of 

the most information technology intensive sectors in the economy. 

Firm size has grown over time and real estate brokers and salespersons, increasingly drawn from the ranks of college graduates, are full-time professionals, required to take continuing education courses in order to maintain their licenses. As 

this research has shown, part of the explanation for the growth in firm size is the 

recognition that there are substantial economies of sale in the provision of information and market intermediation services. Other factors also played a part in the 

transition of this industry and accelerated the move to larger firms. The extremely 

strong housing market of the 1990s increased the demand for the most productive 

salespersons, increasing commission splits and compensation costs to broker-owners. 

The growth in the Internet and on-line real estate applications have created new 

opportunities for broader and less costly dissemination of market information to consumers. The interactive nature of this new technology also allows both real estate 

professionals and the consumers with whom they work to respond much more quickly to new market information. 

The technological innovations noted above are also associated with significant 

economies of scale, that involve substantial introductory costs, but lower operating 

costs once these systems are up and running. It is not coincidental that agent productivity has increased during the last decade. It is also important to remember 

that it has been the smaller firms that have benefited most from the increase in 

agent productivity. 

This research also suggests that continued growth in firms size and further consolidation of the residential real estate brokerage industry that could be triggered 

by bank entry would be counter-productive. Now that the up-front costs of technological implementation have been largely absorbed, the prospects for the survival of 

the smaller and mid-sized real estate firms have improved. Market forces may now 

be a work that actually discourage further consolidation and growth in firm size. 

How then will bank entry into this industry improve the overall operating efficiency 

of this industry? 

The cost curve of the typical real estate firm is U-shaped; beyond some output 

level diseconomies of scale will work to increase unit costs of production. If bank 

entry results in additional concentration within the real estate industry, the real estate brokerage business could easily become dominated by a few, very large firms. 

There is no question that the ability of banks to tie the provision of mortgage loans 

to the provision of brokerage services, even in the absence of formal tying agreements, will, if only in the consumer’s mind, give banks an insurmountable competitive advantage over independent real estate firms. Such a competitive advantage 

would allow bank-owned or affiliated real estate firms to operate beyond the range 

of achievable scale economies and extract monopoly profits. Their shear size would 

then constitute an additional and even more significant barrier to the entry of new 

and competing firms. Large firms, facing higher operating costs, have little incentive 

to lower commission rates. Bank induced industry consolidation could actually reduce current competitive pressures that would otherwise work to reduce commission 

costs to consumers. 

It is no doubt true that real estate salespeople have a major impact on where consumers go to get their mortgage loans. In a market that is estimated to be worth 

over $5 trillion, the ability to influence where consumers shop for loans constitutes 

a very strong incentive for bank entry into the real estate brokerage industry. Will 

then the interests of homebuyers and sellers be subordinated to loan origination if 

they work with bank controlled real estate brokerage firms? The very real possibility that consumers may feel coerced into using a bank-affiliated broker in order 

to procure a mortgage loan, even if the quality of broker services was sub-par, constitutes a serious moral hazard problem. Consider the situation alluded to earlier 

in this study of a bank affiliated broker acting as the legal fiduciary of a buyer who 

knows that a competing bank offers a better loan package. How likely is it that the 

consumer would be directed to the bank with the better loan terms? 

Alternatively, if bank-owned brokerage firms offer liberal mortgage financing as 

a way to market their real estate listings, loan underwriting standards could be 

compromised, thereby threatening the solvency of the banking system. Allowing 

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banks into the real estate brokerage industry is to invite these conflict of interest 

situations. 

Ideally, the decision to allow banks entry into the real estate brokerage market 

should be based upon whether bank provided real estate brokerage services will increase consumer welfare. Normally, ease of entry into an industry works to increase 

efficiency through enhanced competition. Both the industry and the consumer benefit. However, in the case of financial institutions, entry into the real estate industry 

could have just the opposite effect, as outlined in this paper. Bank provided real estate brokerage services should only be permitted if advocates can offer compelling 

evidence that the potential benefits outweigh the potential risks to the consumer.


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AN ECONOMIC ANALYSIS OF THE PROPOSAL TO ALLOW NATIONAL BANKS TO COMPETE

IN THE REAL ESTATE BROKERAGE MARKET

BY

CAPITAL ECONOMICS

1299 PENNSYLVANIA AVENUE, N.W.

WASHINGTON, DC 20004

APRIL-2001

I. INTRODUCTION

The Board of Governors of the Federal Reserve System and the Secretary of the 

Treasury have jointly proposed amending the rules that prevent federally chartered 

banks from offering or owning real estate brokerage and management services. The 

proposal calls for reclassifying real estate brokerage and management as one that 

is either ‘‘financial in nature or incidental to a financial activity’’ and therefore permissible for national banks. 

The Gramm-Leach-Bliley Act of 1999 amended federal law by allowing national 

banks to engage in activities that are considered either financial in nature or incidental to a financial activity. As a direct result there has been an explosion of new 

products and services offered by federal banks into markets from which they had 

previously been barred. If the proposed reclassification is enacted national banks 

would similarly be allowed to enter and compete with real estate agencies in the 

provision of real estate related services. Pursuant to the proposed rule change the 

Federal Reserve and Treasury have officially sought comments from interested parties regarding their opinion as to the legitimacy of reclassifying real estate brokerage and management as a financial activity. 

We do not intend to comment directly on whether or not real estate brokerage is 

a financial activity, we will leave that for others to decide. What does concern us 

however, is the ramifications if the proposal is enacted as described. Currently the 

separation of agent and lender prevents the bank from gaining financially in the 

event a borrower defaults on their loan. As a result banks typically go to great 

lengths to screen for credit worthy customers, and if those customers do fall behind 

on their payments banks generally only chose foreclosure as a remedy of last resort. 

Additionally, the separation between the broker and lender has provided the valuable benefit of constraining potential conflicts of interest between a homebuyer and 

their agent. Because agents are normally compensated as a percent of the sale price 

they stand to gain by placing their client into a more expensive home. But because 

the bank is eager to prevent default they are not willing to grant a loan beyond 

what the customer can afford. Therefore a stand alone lender balances out the adverse incentives facing real estate agents. 

The Fed proposal to allow the combination of agent and lender would remove 

these valuable benefits and create new incentives that run counter to the public welfare. Our analysis reveals that by creating integrated agent/lenders (IALs), banks 

would have a positive, vested, financial interest in seeing homeowners default on 

their loans. As a consequence there would likely be an increase in predatory type 

behavior whereby banks would engage in unscrupulous practices in order to facilitate default and eventual foreclosure of the borrower’s property. Similarly, the creation of IAL banks would remove the existing forces that offset the incentives for 

agents to place potential homebuyers into homes outside of their price range. Based 

on the negative incentives that would be created by the rule change we strongly 

urge that the Federal Reserve and Treasury consider all the costs and benefits of 

the proposal and not just concern themselves with the financial definition of real 

estate brokerage and management. Absent substantial efficiencies or other benefits 

resulting from the new rule we would recommend against the proposed action. 

II. ANALYSIS

A. Allowing Integrated Agent/Lenders (IALs) Changes the Existing Incentive Structure to the Detriment of Consumers 

Allowing mortgage lenders to act as real estate agents fundamentally alters the 

relationship between lender and borrower. Traditionally the lender stands to gain 

financially only when the borrower faithfully repays their loan commitment. This 

is because the loan payments (and any associated fees) generate the entirety of the 

lender’s income. When these payments are missed and the borrower stumbles into 

default the bank looses its only source of income. At this point the bank can attempt 

to recoup their investment by starting the foreclosure process in order to take posVerDate Jan 17 2002 11:40 Jul 31, 2002 Jkt 000000 PO 00000 Frm 00199 Fmt 6601 Sfmt 6621 G:\WORK\COMM\051602\79656.000 HJUD1 PsN: 79656
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1 According to the National Home Equity Mortgage Association equity lenders lose money in 

93 percent of foreclosures. http://www.nhema.org 2 Assuming a rate of property value appreciation does not materially alter the implications 

drawn from the example as it both increases the value of foreclosure but also increases the rate 

of equity appreciation for the property owner. 

session of the home for eventual resale. But due to the time and expense of such 

an effort only rarely does this fully compensate the lender.1 Therefore, in the vast 

majority of cases the lender has no incentive to foreclose on the property, and in 

fact will likely take proactive steps to work with the owner to prevent default. The 

lender’s incentives, or lack thereof, regarding default can be seen in table 1. 

Table 1 shows the actual gains/losses for the lender from a foreclosure for each 

year during a 30 year fixed mortgage at 8%. The hypothetical example is for a home 

valued at $250,000 that does not appreciate for the life of the mortgage.2 The lender’s gain/loss from foreclosure is calculated by taking the value of the property, less 

foreclosure costs (10% of the property value), less the forgone revenue (the present 

value of the remaining mortgage payment). That is, the bank gains the value of the 

property (less the cost of foreclosure) but suffers the loss equal to the future stream 

of mortgage payments. As can be seen from the table for the first 14 years the lost 

income from the mortgage payments exceeds the gain from the taking of the property. Therefore the lender would incur a real loss from a foreclosure initiated during 

the first half of a 30-year mortgage. 


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3The present value of the remaining payments decreases as the loan is paid off and there 

are fewer payments remaining. 4The owners equity is calculated by: Value of the house—10% loss (to sell quickly)—6% closing costs—remaining balance on the mortgage loan. 5 Note that we are implicitly assuming in this situation that the homeowner is under financial 

duress and unable to meet their mortgage payment obligation. As a result we assume that they 

would not have sufficient cash in the event of negative equity to complete a quick sale. 6This assumes the size and rate of the loans are equivalent.

Only when the present value of the remaining mortgage payments has fallen sufficiently when compared to the property value is there any benefit to the lender 

from foreclosure.3 This does not occur however until year 15 (where it is marginal) 

and beyond. Once this point is reached the lender would gladly foreclose on a property owner with late payments since it would result in a net gain for the bank. But 

at this stage in the mortgage the property owner has built up sufficient equity in 

the house that, if needed, they could sell the property to prevent foreclosure.4

The property owner builds up equity in their home over time as they make mortgage payments that exceed the value of the accumulated interest. As the loan matures the borrower slowly pays down the outstanding debt, which in effect translates 

into owning a greater portion of their home. As most homeowners know well, the 

pace of debt reduction is slow for the early part of the loan as the bulk of the payment goes to interest rather than debt reduction. As a result the pace of equity accumulation is slow as well. This fact however, can prevent the homeowner from selling their home (or at least force them to come up with additional monies at closing) 

if they chose to sell in the early years of the loan. To see this remember that there 

is a cost associated with selling ones home, (the seller pays the agent’s commission, 

typically 6%) in addition to the necessity of paying off the remainder of the loan. 

When these costs are greater than the sale price of the home the seller must come 

up with additional cash in order to consummate the sale. This requirement can be 

prohibitive for cash strapped individuals, and is further exacerbated by those having 

financial difficulty that need to rapidly sell their home. In order to have a high probability of quickly selling their home in the event of financial duress the seller must 

be willing to absorb a significant discount. We estimate that such a discount would 

be in the range of 10% of the value of the home, although there is certainly room 

for argument that it could be more or less than our amount. In table 1 we show 

the remaining equity available to the seller in the event that they need to quickly 

sell their home in order to stave off foreclosure. The seller equity is calculated by 

taking the home value less the 10% quick sale discount, less 6% agent fees, less the 

remainder of the loan. When this value is negative the homeowner would be unable 

to complete a ‘‘quick sale’’ as they would have to come up with additional cash in 

order to do so.5

Therefore, according to table 1 for the first 12 years of the loan the homeowner 

would be unable to stave off pending foreclosure by undertaking a quick sale to pay 

off the remaining loan balance. But note, more importantly by year 13 they are able 

to do so, which is two years before the bank would find it profitable to foreclose on 

the home. This is a crucial point; that by the time the lender would find it profitable 

to foreclose the homeowner would have sufficient equity to prevent such an event. 

This shows why property foreclosures are such an infrequent event and typically 

only occur in situations where the borrower can not meet their financial obligations 

and does not take advantage of work outs offered by the lender. 

This eminently desirable outcome is reversed for banks however, if they can serve 

as both real estate agent and lender. Because an integrated agent/lending bank 

upon foreclosure can re-list that same property for sale they are able to generate 

two additional sources of income that they otherwise would not have. First they get 

the commission for the real estate transaction, which generally ranges around 3% 

of the sale price of the property. The second, and more important source of income 

derives from the fact that the IAL bank will likely provide the loan to the buyer 

of the foreclosed property. Thus, while the IAL bank loses the current payment 

stream this is more than replaced by a new mortgage which has an even higher 

present value of payments. The present value of the new loan is higher of course, 

due to the fact that there are more years remaining compared to the partially paid 

down existing loan.6 Therefore the IAL bank does not merely replace the lost mortgage with one of equal value, they replace it with one of greater value. Adding this 

to the sales commission gives the additional income from foreclosure for the IAL 

bank above that received by a traditional bank. This scenario is shown in table 2. 

198

The net gain/loss from foreclosure for the IAL bank is the gain/loss for the traditional bank as shown in table 1 plus the sales commission and present value of the 

new mortgage. Not surprisingly the additional income dramatically changes the payoff structure. Under the new scenario the IAL bank earns a positive return from 

foreclosure by year 6, 7 years before the property owner has sufficient equity to prevent default. Over the course of this 7 year span the IAL bank not only gains from 

foreclosure, but the borrower is unable to prevent such an occurrence through a 

quick sale of their home. The 7-year period therefore represents a window of opportunity during which an IAL bank would be able to profitably complete a foreclosure. 

But even more importantly the window represents a radical realignment of the incentive structure facing an IAL bank. During this period instead of desiring to work 

with troubled borrowers the incentives push IAL banks toward initiating a speedy 

foreclosure. Figure 1 shows the change in financial incentives graphically for the 

first 15 years of the mortgage.


Cap2.eps
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As can be seen from figure 1 the payoff from default for the IAL bank is positive 

far sooner, and before positive equity for the consumer, than compared to the traditional bank. The appendix contains several additional iterations of figure 1 that 

vary key variables. Attachment 1 assumes that the value of the home rises by 2% 

per-year. Notice that while this rapidly accelerates the rate of equity appreciation 

it does not alter the incentive structure regarding foreclosure. Attachment 2 responds to potential criticism that the IAL bank could not expect a 100% guarantee 

that a homebuyer going through them would also use them as their mortgage provider. Therefore the bank would adjust its expectation downward based on the probability that the buyer would not use the full service of products. To calculate a reasonable probability we turn to data compiled by the National Association of REALVerDate Jan 17 2002 11:40 Jul 31, 2002 Jkt 000000 PO 00000 Frm 00203 Fmt 6601 Sfmt 6621 G:\WORK\COMM\051602\79656.000 HJUD1 PsN: 79656

Cap3.eps
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7The National Association of REALTORs, ‘‘Profile of Home Buyers and Sellers.’’ 2000, at 

25. 8We actually expect that IAL banks would provide mortgages on the house they list much 

closer to 100% of the time than 75%. This seems logical given that buyers take their agents 

advice 3 out of 4 times. An IAL bank would have similar input as the agent, plus would have 

the advantage that they could serve the buyer then and there, as opposed to the buyer having 

to actively follow their agents advice in contacting the lender. 9There is considerable debate as to exactly what constitutes predatory lending and how pervasive it really is, if at all. Some have called for immediate reform to crack down on what they 

consider predatory behavior, while others have been more reticent to move forward citing a lack 

of evidence and further concern that any new laws or regulations would only serve to dampen 

credit to lower income populations. Our issue is not with the current state of the debate but 

with the concern that the proposed rule changes would open the door for a new type of predatory lending that makes foreclosure profitable in the prime as well as subprime lending market. 10One of the few areas of agreement among commentators on predatory lending is that it is 

limited to the subprime lending market. 11For a review of predatory lending see: The Department of Housing and Urban Development 

and the Department of Treasury report on Predatory Lending. June, 2000. 12The National Home Equity Mortgage Association reports that only 2% of home equity borrowers end up in foreclosure proceedings compared to 1% for prime borrowers. 

TORS. According to their Profile of Home Buyers and Sellers over 75% of homebuyers that receive a lender recommendation from their real estate agent follow the 

agent’s advice.7 We would expect that banks would have an integrated retention 

rate at least this high.8 Therefore for the next iteration shown in Attachment 2 we 

conservatively assumed that the IAL bank would only provide mortgages for 75% 

of the homes that they list and sell. This obviously reduces the value to foreclosure 

for an IAL bank, but still does not alter the unpleasant incentive structure that 

would exist. Finally, attachment 3 assumes a home price appreciation of 2% and a 

loan probability of 75%. 

Figure 1 and the attachments show the radical change that would take place in 

the home lending market as a result of the proposed rule changes. Allowing banks 

to serve as both lender and agent creates the dangerous incentive structure where 

the lender has a vested, positive, financial interest in seeing the borrower default 

on the loan. Banks could potentially use their significant information advantage and 

leeway in interpreting late fees and initiating foreclosure proceedings to potentially 

press borrowers into default. In a worse case scenario unscrupulous banks could use 

deceptive trade practices to prey upon fragile populations in an effort to cash in on 

foreclosure. Such a practice would be tantamount to a new form of ‘‘predatory lending’’ created as a direct result of the proposed new rules. 

B. The Incentive and Ability for Predatory Lending Would Increase if the Proposed 

Rule Changes Were Enacted 

Predatory lending has only recently been thrust into the national limelight with 

accounts of personnel horror stories that were soon followed up by Congressional 

hearings and legislative wranglings. Unfortunately, there is as of yet no clear definition or even consensus as to exactly what constitutes predatory lending.9 Principally 

it appears to be an emotional response to protect fragile populations from fraudulent 

lenders who take advantage of the poor educational or financial background of their 

victims. These are people with generally poor credit that are confined to the 

subprime market.10 Some of the complaints that people have labeled as predatory 

include loan flipping, charging of excessive fees, outright fraud, and equity stripping 

or asset based lending.11 Of particular concern for our analysis here is the practice 

of asset based lending. 

Asset based lending is generally defined as the granting of a loan not based on 

the customer’s ability to repay, but on the existing equity in the customer’s home. 

When the customer is unable to meet the financial obligations of the loan the lender 

takes possession of the house and cashes out via the sale. As was shown above however, this is only profitable when the value of the house after foreclosure is greater 

than the present value of the outstanding loan. Fortunately with a traditional lender this point is not reached until the property owner has built up sufficient equity 

to stave off foreclosure. Therefore we would expect that predatory lending whereby 

the lender designs to inevitably cause foreclosure to be a rare phenomenon. Unfortunately, there is no available data that measures the extent of predatory lending (a 

point made in congressional hearings by some of the critics of the proposed reforms) 

and any foreclosures resulting from the practice. We do know however, that the majority of subprime lending is made in good faith and only rarely ends in default.12

201

13 Additionally, the rule changes would bring predatory lending practices to the prime market 

as well. This would be detrimental to one of the few remedies to subprime predatory lending 

that receives broad support; encouraging lenders in the prime market to participate in the 

subprime market. The belief is that the increased competition in the under-served communities 

would diminish the influence of unscrupulous lenders. See The Department of Housing and 

Urban Development and the Department of Treasury report on Predatory Lending. June, 2000. 14We do not mean to imply that these loan options themselves are predatory in nature, indeed 

they offer valuable benefits to well informed consumers. The literature on predatory lending 

does suggest however, that unscrupulous lenders will use loan terms of these types and deliberately mask the potential downsides. As a result when the balloon payment comes do, or interest rates rise, the consumer may be caught unprepared and forced into default. 15We define a forced sale as a homeowner having to sell their home to prevent foreclosure. 16We do not count as revenue the income stream that would be generated from the alternative investment from the repaid principal balance. This is because the next best investment 

is assumed to be the equivalent of the discount rate, therefore the income stream from the repaid balance is already in present value form. The assumption that the next best investment 

is equal to the discount rate is reasonable. Assuming that the markets are efficient, all profitable mortgages have been made, therefore there is no available mortgage opportunity for the 

repaid balance and the money can earn no better than the discount/(risk-free) rate. Only the 

IAL can lend at a higher rate because they can re-capture the mortgage with the subsequent 

home sale. 

The proposed changes however, threaten to increase predatory behavior as they 

throw the lender’s incentives out of whack with the customer’s best interest.13 For 

example, an IAL bank would find it profitable to grant a loan to a customer knowing 

that they could not pay for it and would fall into default in just a few years. This 

is truly a form of predatory lending, i.e. granting a loan based solely on the projection that the borrowers default will prove profitable. The lender could also design 

their loans to increase the probability of default by increasing the use of balloon 

payments, call options, or variable interest rate loans while shrouding the 

downsides to uneducated and fragile customers.14 While we do not desire to detail 

the strategies predatory lenders might employ we do want to reiterate a key point 

regarding the proposed rules; that they change the incentive structure to one that 

makes it profitable to engage in predatory practices that cause consumers to lose 

their homes. 

C. The Lender’s Behavior May Not be Deliberately Predatory to Have Adverse Consequences 

The lender’s behavior does not need to be deliberately predatory for the proposed 

changes to have negative effects on the home lending market. Consider that in the 

majority of late payment cases the lender is often willing to work extensively with 

the customer in order to get the payments current and stave off default. An IAL 

would have no such incentive and would be much more likely to cut a borrower loose 

at the earliest possible opportunity. Consider for a moment a homeowner that falls 

into early trouble on their loan. The IAL bank would be much more likely to foreclose because in many instances doing so would prove profitable. Additionally, foreclosing on the troubled customer has the advantage of replacing a problem loan with 

a new one that would hopefully be of less risk. Such behavior on the part of banks 

would certainly not be illegal but does run counter to what many would consider 

the public interest. It is however, in the best interests of the bank. 

D. Predatory Behavior Short of Foreclosure 

The proposed rule changes create incentives for IALs to engage in predatory practices that fall short of causing foreclosure. The incentive structure to motivate this 

behavior does not currently exist and would be a direct result of the new regulations. 

As described above once the property owner holds sufficient equity it is unlikely 

that they would ever fall into foreclosure because they could sell their home to stave 

of such an unfortunate occurrence. But this begs the question, what is the impact 

of a ‘‘forced sale’’ on the income of a traditional versus IAL bank? 15 The analysis 

is similar to what was done above, except in the case of a ‘‘forced sale’’ the lender 

does not bear foreclosure costs, nor do they receive the income from the sale of the 

property. The traditional bank gains the owed principal less the present value of 

the remaining mortgage payments. This value is always negative since the revenue 

from the mortgage payments must exceed the outstanding loan balance as long the 

mortgage rate is greater than zero.16 In contrast the IAL gains the owed principal 

less the present value of the remaining mortgage plus the present value of the new 

mortgage (less the cost of funds). Effectively the IAL bank has merely traded out 

the existing mortgage with the new one. The value of the new mortgage must always be higher than the value of the current one since there are more years remainVerDate Jan 17 2002 11:40 Jul 31, 2002 Jkt 000000 PO 00000 Frm 00205 Fmt 6601 Sfmt 6621 G:\WORK\COMM\051602\79656.000 HJUD1 PsN: 79656
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17Once again we are assuming equivalence of the loan amount and mortgage rate.

ing on the life of the loan.17 As a result the payoff to an IAL bank for a forced sale 

is positive for all years. This situation is shown graphically in figure 2. 

The salient feature of this analysis is that the IAL always benefits from a forced 

sale while the traditional lender never does. This opens the door for abusive behavior that would not otherwise exist. For example, a practice described in the literature on subprime predatory lending is lenders notifying owners that they will be 

evicted within days if they do not comply with the lender’s demands, even when 


Cap4.eps
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18 Neighborhood Reinvestment Corporation Joint Center for Housing Studies of Harvard University. Understanding Predatory Lending: Moving Toward a common Definition and Workable 

Solutions. October 1999. 19 In reality this potential conflict of interest is offset by the desire of the agent to quickly 

complete the transaction and the importance of reputation capital to the agent. 

they in fact have no ability to force an eviction in such a short timeframe.18 An IAL 

bank could engage in a similar practice, for instance threatening homeowners that 

are late in payments with rapid foreclosure and eviction if the owner does not agree 

to quickly liquidate their property. IALs might also increase their use of balloon 

payments, becoming less forgiving in late payments, or engage in outright fraud in 

an effort to force property owners to sell. Of particular concern is that this predatory 

behavior would likely focus on long time homeowners whom are nearing the end of 

their mortgage. When the mortgage is paid in full the IAL not only loses the income 

stream they also lose any power and influence they might have had to force a sale. 

Therefore as the 30th year approaches we would expect to see more desperate, (or 

less accommodating) action by the lender. Unfortunately most homeowners nearing 

the 30th year tend to be the elderly, a group that as a whole is much more susceptible to unfair trade practices and one that has been a preferred target of predatory 

lenders in the subprime market. Once again, we do not desire to detail all the potential types of predatory practices the lender might use (indeed such a list would be 

impossible as the creativity predatory lenders have shown in the subprime market 

in creating deceptive practices would be truly impressive if not for the negative consequences), we simply want to show that incentives now exist for behavior that otherwise would not. 

E. Conflict of interest 

Currently agents represent buyers and sellers in the home buying process while 

other services such as mortgages are provided by outside third parties. Typically the 

agent’s compensation is a percentage of the property’s selling price so that the agent 

receives more income the more expensive the home. Under this remuneration policy, 

the agent does have the incentive to encourage the buyer to purchase a more expensive home.19 But the traditional separation between agent and lender has provided 

a market based constraint on such behavior since the mortgage provider wants to 

minimize the risk that the borrower will default on their loan. As a result the lender 

will only offer loans of a size that they believe the borrower can repay, which acts 

as a constraint to potential ‘‘upselling’’ on the part of the agent. 

The proposed rule changes of course, remove this important restraining device. By 

combining agent and lender, and making default profitable for the lender, there is 

no longer any offset to upselling. The new incentive structure encourages the IAL 

to convince the buyer to purchase a more expensive home than perhaps they could 

afford. This comes with a considerable downside risk to the buyer but little or no 

risk to the IAL (and in fact as shown above would likely be profitable). Given the 

significant information asymmetries and the reliance customer’s place on their 

agent, removing the constraints on upselling raises the potential for significant 

abuse. This could come in the form of outright predatory behavior, or in more subtle 

ways such as lax credit standards that are not themselves illegal. Such behavior, 

whether illegal or not, would likely result in a significant number of homeowners 

being placed in properties beyond their means putting them at a greater risk of default and foreclosure. 

III. CONCLUSION

We have shown that the proposed rule changes to combine real estate agency with 

mortgage lending to have serious downside results. The new rules would fundamentally alter the incentive structure facing banks in their dealings with homebuyers 

and borrowers. As a result we would expect to see an increase in predatory and 

other unscrupulous behavior in the prime lending market and a corresponding increase in home foreclosures. Therefore, absent sizeable efficiencies we recommend 

against enactment of the rules as proposed by the Federal Reserve and Treasury.

204


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Cap6.eps
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Cap7.eps
207

1Professor, Department of Economics, Hunter College of the City University of New York

2 Board of Governors of the Federal Reserve System, ‘‘Proposed Rule on Real Estate Brokerage 

and Management Services.’’ Page references are to the ‘‘Proposed Rule with Request for Public 

Comment,’’ (referred herein to as the ‘‘Proposal’’) distributed under the Federal Reserve Press 

Release of December 27, 2000. The ‘‘Proposal’’ has been published in the Federal Register: Federal Reserve System, 12CFR Part 225 [Regulation Y; Docket No. R–1091] and Department of 

the Treasury, 12 CFR 1501, RIN 1505–AA84. 3For a more extensive review of the developments described in this section, see Shull, 1994. 

4The earliest bank activity restrictions were embedded in bank charters, copied from the charter of the Bank of England that prohibited that Bank from dealing in merchandise. ‘‘. . . to the 

intent that their Majesties subjects may not be oppressed by the said corporation by their monopolizing or engrossing any sort of goods, wares or merchandise. . . . ’’

REAL ESTATE BROKERAGE AND MANAGEMENT SERVICES

AS PERMISSIBLE ACTIVITIES FOR BANKING ORGANIZATIONS:

AN EVALUATION OF THE AGENCIES’ PROPOSAL OF DECEMBER 2000

BY BERNARD SHULL 1

PROFESSOR, HUNTER COLLEGE/CUNY 

A PAPER PREPARED FOR THE NATIONAL ASSOCIATION OF REALTORS

APRIL 25, 2001

I. INTRODUCTION

The Board of Governors of the Federal Reserve System (Board) and the Secretary 

of the Treasury (Secretary) (in combination, the Agencies) have proposed rules and 

requested comment (the ‘‘Proposal’’) that would establish real estate brokerage and 

management services as ‘‘financial in nature or incidental to a financial activity’’

under provisions of the Gramm-Leach-Bliley Financial Modernization Act of 1999 

(GLB).2 The rules would make these activities permissible for financial holding companies (FHCs) and financial subsidiaries of national banks (FSs). 

This paper provides an evaluation of the analysis supporting the proposed rules. 

Section II presents a brief historical background of limits on banking activities. Section III outlines the purpose of GLB, the activity expansion it facilitates, and the 

legislative guidelines for the determination of new ‘‘financial’’ activities. Section IV 

examines the Agencies’ ‘‘Proposal,’’ describing and evaluating its analysis supporting 

the proposed real estate brokerage and management services rules, and summarizes 

the principal issues raised by this examination. Conclusions are presented in Section V. 

In their ‘‘Proposal,’’ the Agencies present information suggesting that real estate 

brokerage and management services are ‘‘closely related to banking’’ and, by inference, ‘‘financial in nature or incidental to a financial activity,’’ that they are ‘‘necessary and appropriate’’ for banking organizations, and that there is little likelihood 

of adverse effects. They entertain arguments that the activities should be included 

as a statutorily listed financial activity. 

This review raises a number of related analytic, factual and public policy issues 

with respect to these views. Among other things, it suggests that further information is needed to determine that an activity is ‘‘closely related to banking’’ and is 

‘‘necessary and appropriate;’’ and that the Agencies’ should provide a more extensive 

analysis of possible adverse effects. Overall, the review indicates the ‘‘Proposal’’ is 

incomplete. Appendix A provides a description of several studies that would help fill 

the gaps. 

II. LIMITS ON BANK ACTIVITIES IN THE UNITED STATES

The corporate charter available to most private business firms in the United 

States provides a general right to engage in any lawful business. The banking charter has, from the earliest days of banking, limited the activities in which banks can 

engage. In parallel fashion, other commercial and industrial firms have been restricted from engaging in certain banking activities, in particular offering liabilities 

payable on demand. The limitations have changed over the years, with the GLB Act 

being the latest Congressional effort to define what banks, their affiliates and subsidiaries can and cannot do.3

The first rationale for limiting bank activities was that banks, because of their 

affiliation with government, had competitive advantages over other businesses and 

would tend to monopolize nonbanking markets.4 This rationale was subsequently 

augmented by the belief that nonbanking activities could have adverse effects on 

208

5With certain exceptions, Section 23A imposes a maximum of 10 percent of capital stock and 

surplus on loans by a bank to any one affiliate, and a 20 percent maximum for loans to all affiliates. The extension of credit is to be collateralized by securities having a market value at least 

equivalent to the credit extended. 6The exemption of one-bank holding companies under the 1956 Act had permitted some large 

commercial and industrial firms, including W.R. Grace, R.H. Macy and Corn Products Refining, 

to own a small bank, principally to accommodate employees. Until the mid-1960s, however, the 

one-bank company remained, for the most part, a small firm, controlling a small bank in a unit 

banking state. 7See, for example, the statement of President Nixon reprinted in Bank Holding Company Act 

Amendments, Conference Report, 1970, pp. 11–12. He and others indicated that the new holding 

companies might be able to achieve Zaibatsu-like status. 8The ‘‘purposes’’ of the Amendments of 1970 are not spelled out in the legislation itself. The 

factors leading to the legislation are, however, discussed in detail in congressional reports. See 

Bank Holding Company Act Amendments, Conference Report, 1970, pp. 11–13; Bank Holding 

Company Act Amendments of 1970, Senate Report, pp. 1–4; and Bank Holding Companies, 

House Report, 1969, pp. 2–3. The principal concerns leading to the legislation are also discussed 

in Goodell and Proxmire, 1970, pp. 34–43. 9The phrase ‘‘so closely related to the business of banking or managing or controlling 

banks. . . . ’’ in the old Act was modified to eliminate the term ‘‘the business of’’ with the intention of making clear that the new nonbanking activity should be related to banking in general, 

and not to the business of specific institutions. 

bank safety and soundness. Over the years, a succession of banking laws modifying 

activity restrictions have emphasized one or the other rationale, or both. 

In the early decades of the Twentieth Century, both bank securities affiliates and 

bank holding companies became mechanisms for circumventing activity restrictions 

on banks. Bank affiliation with securities firms was dissolved with passage of the 

Banking Act of 1933 (Glass-Steagall Act provisions). The essentially unrestricted 

growth of bank holding companies was terminated with the Bank Holding Company 

Act of 1956. Bank holding companies were defined as organizations that owned 25 

percent or more of the stock of two or more banks. Activities in which registered 

bank holding companies could engage were to be ‘‘of a financial, fiduciary, or insurance nature’’ and ‘‘so closely related to the business of banking or managing or controlling banks as to be a proper incident thereto’’ (emphasis added). 

The Federal Reserve Board narrowly interpreted the term ‘‘the business of banking’’ to mean a relationship between the customers of specific banks and their nonbanking affiliates. Effectively, this interpretation prohibited bank holding company 

control of most nonbanking firms. 

Initially, nearly all transactions between banks and their holding company affiliates were prohibited by Section 6 of the Act. In 1966, Section 6 was repealed and 

Section 23A of the Federal Reserve Act, which limited interaffiliate transactions, became effective.5 Amendments in 1982 substantially liberalized transactions among 

affiliated banks. Section 23B was added to the Federal Reserve Act in 1991, requiring that interaffiliate transactions be on an arms-length basis. 

In 1968 and 1969, large banks, wishing to expand the scope of their activities, 

began to reorganize as unregulated one-bank holding companies.6 A number of public officials, including then President Nixon, viewed the new diversified one-bank 

holding companies as a threat to the competitive, free market system. They contended, among other things, that these companies would be able to coerce or induce 

from their customers tying and reciprocal agreements permitting them to leverage 

market power and injure competitors in the new lines into which they were entering.7

Congress simultaneously recognized that bank diversification through holding 

companies could intensify competition in some of the new markets entered, permit 

banking organizations to become more efficient, and contribute to customer convenience.8 The Amendments to the Bank Holding Company Act in 1970 were an attempt to reconcile likely costs and benefits. 

A key addition to the new legislation was in Section 4(c)(8) which authorized the 

Board to establish, under statutory guidelines, permissible lines of activities, into 

which all bank holding companies could enter. The guidelines authorized the Board 

to permit activities it had determined are ‘‘so closely related to banking or managing 

or controlling banks as to be a proper incident thereto.’’ 9

The ‘‘closely related to banking’’ phrase was elaborated in a Circuit Court decision 

in 1975. The Court indicated that the Board was required to ‘‘. . . articulate the 

ways in which banking activities and the proposed activities are assertedly connected, and must determine, not arbitrarily or capriciously, that the connections are 

close.’’ It indicated that the following kinds of connections may qualify: ‘‘(1) banks 

generally have, in fact, provided the proposed services; (2) banks generally provide 

services that are operationally or functionally so similar to the proposed services as 

209

10 National Courier Association v. Board of Governors of the Federal Reserve System, 516 F.2d 

1229, 1237 (1975). 11The Board has generally applied the ‘‘net public benefits’’ test to the specific facts of a holding company application to engage in a ‘‘closely related’’ activity. For a recent evaluation of a 

holding company application to engage in a previously unauthorized activity, see Bayerische 

Hypo- und Vereinsbank AG, 86 Fed. Res. Bul. 56 (2000). But the Board has also had the occasion to apply the test more generally to a new activity, aside from the specific facts of an application. It did so in evaluating whether the operation of a savings and loan association was a 

permissible activity in 1977; and found that, while ‘‘closely related,’’ the operation of a savings 

and loan association was not ‘‘a proper incident thereto.’’ See D.H. Baldwin & Co., 63 Fed. Res. 

Bul. 280 (1977). Because of automatic approval procedures based on notification, a former Assistant General Counsel to the Board suggested, a few years after passage of the 1970 Amendments, that applying the test more generally was appropriate; approvals of specific applications 

might not be warranted unless ‘‘. . . the balance of public benefits would normally be favorable ...’’ in the event of entry that did not require Board approval; i.e., de novo entry. See Heller, 

1976, pp. 230–31, note 3. 12 Bank Holding Company Act Amendments, April, May, 1969; One Bank Holding Company 

Legislation of 1970, May 1970. 13Martin, 1969, pp. 196–204; McClaren, 1969, pp. 91–95; and, McClaren, 1970, pp. 238 ff. and 

pp. 268–74. 14On the legislative background and economic significance of the restrictions imposed by Section 106, see Shull, 1993. 15Legislation in 1959 limited such holding companies to no more than one insured S&L. The 

S&L Holding Company Act of 1968 left unitary S&L holding companies unrestricted if they 

maintain a minimum percentage of assets in residential mortgages and other specified securities. Because S&Ls and other thrift institutions were granted new banking powers in 1980, permitting them to offer commercial loans and checkable deposits, unitary thrift holding companies 

were able to combine traditional banking products with other financial and commercial activities. 16 Citicorp/J.P. Morgan/Bankers Trust N.Y. Corp., 73 Fed. Res. Bul., 473 (1987). 17Offering insurance was not included among the powers provided national banks by the National Banking Act (1863–64). In 1916, however, Congress provided that national banks located 

and doing business in towns with a population of not more than 5,000 could act as the agent 

for any fire, life, or other insurance company. In 1995, the Supreme Court, accepted the OCC’s 

Continued

to equip them particularly well to provide the proposed services; and (3) banks generally provide services that are so integrally related to the proposed services as to 

require their provision in a specialized form.’’ 10

The law itself made clear that the ‘‘proper incident thereto’’ phrase established a ‘‘net public benefits’’ test that required the Board, when evaluating a new activity, 

to weigh the potential benefits from greater convenience, increased competition, or 

gains in efficiency against the potential costs of undue concentration of resources, 

decreased or unfair competition, conflicts of interest, or unsound banking practices.11

In Hearings in 1969 and 1970, insurance agents, travel agents, security brokers 

and dealers and data processors, among others, expressed concern about the difficulties of having to compete with banks.12 Then Assistant Attorney General Richard 

McLaren and Chairman of the Federal Reserve Board, William McChesney Martin 

testified to the effect that tie-in and reciprocal agreements were mechanisms by 

which commercial banks might create high levels of concentration in the United 

States.13 Even though the Board was directed to consider whether a new activity 

might result in decreased or unfair competition and an undue concentration of resources in applying the ‘‘net public benefits’’ test of Sec. 4(c)(8), Congress also enacted the anti-tying restrictions of Section 106 as a complement. 

‘‘Section 106 . . . will largely prevent coercive tie-ins and reciprocity. . . . But the dangers of ’voluntary’ tie-ins and reciprocity are basically structural 

and must be dealt with by the Board in determining the competitive effects of 

bank holding company expansion . . . under Section 4(c)(8).’’ 14

III. THE GRAMM-LEACH-BLILEY ACT

Activity restraints, under the Bank Holding Company Act, were both circumvented and modified by law and regulation in the 1980s and 1990s. Beginning 

in the early 1980s, nonbanking firms found it possible to acquire so-called ‘‘nonbank 

banks’’ that were, by definition, not banks for holding company purposes but could 

provide deposit services or commercial loans. Unitary thrift holding companies were 

permitted affiliation with all types of businesses.15 The Board interpreted the GlassSteagall Act and Section 4(c)(8) of the Bank Holding Company Act to permit holding 

companies to deal in otherwise non-permissible securities (Section 20 subsidiaries).16 Court decisions expanded the scope of insurance activities of national 

banks.17

210

determination that the brokerage of annuities should be classified as investments, not insurance, and could be reasonably be included as an ‘‘incidental power. See NationsBank v. Variable 

Annuity Life Insurance Co., 115 S.Ct. 810 (1995). In 1996, the Court held that state law could 

not prevent a national bank, affiliated with a bank holding company, and doing business 

through a branch in a small town, from selling insurance through a state-licensed insurance 

agency. States could not prevent or interfere with the ability of a national bank to sell insurance 

from a ‘‘place’’ with a population of less than 5,000, even if the actual insurance sales were outside the small town See Barnett Bank of Marion County N.A. v. Nelson, 517 U.S. 25 (1996). 18 Conference Report on Gramm-Leach-Bliley Act, 1999, pp. 1, 151. 19Leach, 2000. 20Financial Services Modernization Act of 1999, Senate Report, 1999, p. 21; Also see ‘‘Additional Views of Senators Sarbanes, Dodd, Key, Bryan, Johnson, Reed, Schumer, Bayh and Edwards,’’ pp. 70–76. 21 However, those in existence on or before May 4, 1999, or that filed an application before 

that date, retain authority to engage in nonfinancial activities. Mutual thrift holding companies 

can also engage in new financial activities authorized under Act. 

Passage of GLB in 1999 established a new framework for activity expansion for 

banking organizations in the United States. Its general purposes, the kinds of new 

financial activities it permits, and the legislative guidelines it provides for determining an activity to be ‘‘financial’’ are described below. 

A. Purposes 

GLB is complex legislation that establishes new types of permissible activities, 

new corporate organizational arrangements for engaging in these activities, new 

methods for determining additional activities, and a new regulatory framework. It 

expands the scope of permissible banking organization activities and rationalizes 

the process through which these activities can be entered. 

In general, Congress intended GLB to enhance competition in the financial services industry by eliminating legal and regulatory barriers separating different types 

of financial service providers and by facilitating affiliation among them. In particular, GLB aims at facilitating the affiliation of commercial banks, securities firms 

and insurance companies.18 At the same time, Congress intended to sustain the traditional separation between banking and commerce. 

Prior to GLB, the separation of banking and commerce was debated extensively. 

Congressman Leach, a principal author of the Act, has repeatedly voiced his objections to mixing:

‘‘. . . initially the Department of the Treasury, powerful banking and commercial interests, and the majority of my Committee and of the leadership of 

Congress advocated a modernization approach that would have mixed commerce 

and banking. Three years ago the Fed announced support for a ’basket’ approach that amounted to much the same thing. Of all the things I am proud 

of in the modernization legislation it is that our government’s two principal financial bodies—the Treasury and the Fed—changed judgement and today adamantly stand with me against mixing commerce and banking. There should be 

no misunderstanding. If this precept had been included in the final legislative 

product, I would have done my best to pull the plug on financial modernization.19

The intention to disallow a general integration of banking and commerce is explicit in the Senate Report on the bill. In explaining what the Board must consider 

in establishing new activities that are ‘‘financial in nature or incidental to financial 

activities,’’ the Report states:

‘‘This authority includes authority to allow activities that are reasonably connected to one or more financial activities. . . . The authority provides the 

Board with some flexibility to accommodate the affiliation of depository institutions with insurance companies, securities firms, and other financial service 

providers while continuing to be attentive not to allow the general mixing of 

banking and commerce in contravention of the purposes of this Act.’’ 20

With a view toward maintaining separation, GLB imposes restrictions on permissible merchant banking activities. It prohibits the chartering of new unitary thrift 

holding companies, that provided a relatively unrestricted method for combining 

banking and other businesses, and the sale of existing companies to commercial 

firms.21

The Board recognized Congressional intent to maintain a separation between 

banking and commerce soon after the Act was passed when it issued its interim rule 

on merchant banking.

211

22 Board of Governors of the Federal Reserve System and Treasury Department March 17, 

2000, pp. 8, 9. 23Meyer, 2001, p. 11. 24GLB repeals two of the four sections of the Banking Act of 1933 known as the GlassSteagall Act. It repeals Section 20, that prohibited banks from having affiliates principally engaged in dealing in securities, and Section 32, that prohibited interlocks of directors and officers 

of securities firms and banks. It does not repeal Section 16 of the Glass-Steagall Act, that limits 

banks that deal in and underwrite securities to specified types—obligations of the Federal government and general obligations of states and political subdivisions. Nor does it repeal Section 

21, that prohibits firms dealing in securities from accepting deposits. These sections continue 

to preclude ‘‘universal banking,’’ in which all investment banking activities may be conducted 

within the bank itself (Title I, Sections 101). 25With some exceptions, activities explicitly not permitted to national banks include: 1) insurance or annuity underwriting; (2) insurance company portfolio investments; (3) real estate investment and development; and (4) merchant banking. 26 Conference Report, Gramm-Leach-Bliley Act, 1999, p. 153. 27Title I, Section 103; see also ‘‘Proposal,’’ p. 4.

‘‘Section 4(k)(4)(H) provides that a financial holding company may acquire or 

control shares of a company under that section ’as part of a bona fide underwriting or merchant or investment banking activity.’ The Board and the Secretary wish to emphasize the importance of this requirement in preventing circumvention of one of the fundamental purposes of the GLB Act of maintaining 

the separation of banking and commerce.’’ 22

A recent public statement by a Board member confirms this general understanding; e.g., ‘‘the Congress specifically rejected commerce and banking in 

GLB. . . . ’’ 23

B. New Activities 

GLB permits new activity expansion by repealing key sections of the GlassSteagall Act that, for over 60 years, had limited the securities dealings of commercial banks and their affiliates.24 It also amended the Bank Holding Company Act 

by adding a new section [4(k)] that permits holding companies that qualify to establish themselves as financial holding companies. These are permitted to engage in 

a broader range of activities than other holding companies, including activities that 

are ‘‘financial in nature, incidental to such activities’’ or ‘‘complementary’’ to financial activities, and merchant banking activities. National banks that meet similar 

qualifications are permitted, through a new type of financial subsidiary, to engage 

in some, but not all of the activities permitted to FHCs.25 Insured state-chartered 

banks are permitted to engage in expanded activities through financial subsidiaries 

on essentially the same basis as national banks. 

C. Legislative Guidelines 

The Board has responsibility for determining activities that are ‘‘financial in nature, incidental to financial activities’’ in consultation with the Secretary of the 

Treasury. The Conference Report for GLB states that ‘‘permitting banks to affiliate 

with firms engaged in financial activities represents a significant expansion from 

the current requirement that bank affiliates may only be engaged in activities that 

are closely related to banking.’’ 26

The Act itself [Section 4(k)(5)] directs the Board to define, ‘‘consistent with the 

purposes of this Act,’’ certain activities as ‘‘financial in nature or incidental to a financial activity.’’ These ‘‘statutorily listed’’ financial activities include: (i) lending, 

exchanging, transferring, investing for others, or safeguarding money or securities; 

(ii) providing any device or other instrumentality for transferring money or other 

financial assets; and (iii) arranging, effecting or facilitating financial transactions for 

the account of third parties. 

The Act also indicates four groups of factors that the Agencies’ need to consider 

in determining whether an activity is ‘‘financial in nature or incidental.’’ 27

(A) ‘‘the purposes of this [Bank Holding Company] Act and the Gramm-LeachBliley Act Act;

(B) changes or reasonably expected changes in the market place in which financial holding companies compete;

(C) changes or reasonably expected changes in the technology for delivering financial services; and

(D) whether such activity is necessary or appropriate to allow a financial holding company and the affiliates of a financial holding company to

(i) compete effectively with any company seeking to provide financial services in the United States;

212

28 Experience has indicated that cross-marketing of banking products with the products of 

other affiliates may create customer misunderstanding as to whether a product is that of an 

insured depository institution, regulated, supervised and the beneficiary of a Federal ‘‘safety 

net,’’ or of some other affiliated company; and, in particular, whether a debt instrument is or 

is not a federally-insured deposit. 29Title I, Sec. 114(a) and (b). 30 ‘‘Proposal,’’ p. 5. 31 Boatmen’s Bancshares, Inc., 58 Fed. Res. Bul. 427, 28 (1972); see also ‘‘Proposal,’’ pp. 6, 7. 

(ii) efficiently deliver information and services that are financial in nature 

through the use of technological means, including any application necessary 

to protect the security or efficacy of systems for the transmission of data 

or financial transactions; and

(iii) offer customers any available or emerging technological means for using financial services or for the document imaging of data.’’

Factors listed in B, C and D clearly reflect the congressional intention to permit 

the FHC and FSs a broader range of financial activities. Factor A cites the purposes 

of the Bank Holding Company Act and GLB. A purpose of both Acts was to maintain a separation of banking from commerce. 

GLB also makes Sections 23A and B of the Federal Reserve Act applicable to national banks and their financial subsidiaries. The anti-tying provisions of the Bank 

Holding Company Act (Sec. 106) are also made applicable to national banks and 

their subsidiaries. Cross-marketing among depository institutions and their affiliates and subsidiaries are subject to rules and regulations imposed by the Federal 

banking agencies.28 The Act does not permit cross-marketing arrangements between 

depository institutions and affiliated non-financial (commercial) businesses. The ‘‘adverse effects’’ terminology of the Bank Holding Company Act is used in giving the 

Board authority ‘‘to impose restrictions or requirements on relationships or transactions. These include: (A) between a depository institution subsidiary of a bank 

holding company and any affiliate . . . ; or (B) between a state member bank and 

a subsidiary of such bank; . . . ’’ to prevent significant risks to bank safety ‘‘and 

other adverse effects such as undue concentration of resources, decreased or unfair 

competition, conflicts of interest, or unsound banking practices.’’ The Act provides 

the OCC with similar authority for national banks and their subsidiaries.29

IV. THE AGENCIES’ ASSESSMENT OF ‘‘FINANCIAL IN NATURE’’

The Agencies’ assessment begins by evaluating the ‘‘closeness’’ of real estate brokerage and management services to banking. This is followed by a consideration of 

whether these activities are ‘‘necessary or appropriate,’’ an evaluation of the likelihood of adverse effects if they are held to be so, and, finally, the likelihood that the 

activities can be subsumed under one or more of the statutorily listed financial activities. 

In the following sections, the Agencies’ views in each of these areas are first summarized, and then followed by commentary. 

A. ‘‘Closely Related to Banking’’

The ‘‘closely related to banking’’ test, as discussed, was introduced in 1970 under 

Sec. 4(c)(8) of the Bank Holding Company Act. It is not included in GLB among the 

factors to be considered in determining whether an activity is ‘‘financial in nature 

or incidental to a financial activity.’’

1. ‘‘Proposal’’

The Agencies contend that the ‘‘closely related’’ standard is relevant in evaluating 

whether an activity is ‘‘financial in nature or incidental.’’ The ‘‘Proposal’’ states:

‘‘Because the new ’financial in nature or incidental’ test appears to be substantially broader than the old ’closely related to banking’ test, the Agencies believe 

that they should consider an activity to be financial in nature or incidental to 

a financial activity to the extent that it meets the old standard.’’ 30

As noted, for an activity to be ‘‘closely related to banking,’’ it must be shown that 

banks generally have provided the proposed services, generally provide services that 

are operationally or functionally similar to the proposed services, and generally provide services that are integrally related to the proposed services. In 1972, the Board 

held that ‘‘. . . real estate brokerage is not an activity that the Board has determined to be so closely related to banking or managing or controlling banks as to 

be a proper incident thereto.’’ 31 In the same year, the Board indicated that it did 

213

32 ‘‘Bank Holding Companies: Property Management Services,’’ 58 Fed. Res. Bul. 652 (1972); 

see also ‘‘Proposal,’’ p. 19. 33 ‘‘Proposal,’’ p. 16. 34 ‘‘Proposal,’’ pp. 8–11. 35 ‘‘Proposal,’’ p. 18. 36See, for example, Howard Hackley, ‘‘Our Baffling Banking System,’’ Virginia Law Review, 

Parts I and II, May-June, 1966; former Chairman of the Board, Arthur F. Burns, complained 

about ‘‘a competition in laxity.’’ See ‘‘Maintaining the Soundness of Our Banking System,’’ Address at the American Bankers Association Convention, Honolulu, Hawaii, October 21, 1974. 

‘‘. . . not consider property management services [to be] a permissible activity for 

bank holding companies under Section 4(c)(8).’’ 32

The Agencies suggest that changes in the financial services environment may, 

today, lead them to a different conclusion.33 They begin their consideration by presenting information on the ‘‘closeness’’ of real estate brokerage and management to 

banking. 

The ‘‘Proposal’’ supplies a substantial amount of information it judges relevant. 

Among other things: (1) some states permit state-chartered banks to act as real estate brokers; (2) the Office of Thrift Supervision (OTS) permits savings association 

service corporations to engage in real estate brokerage; (3) banking organizations 

engage in other real estate activity, and in most aspects of typical real estate transaction; (4) banking organizations engage in functionally and operationally similar 

activities; (5) many aspects of real estate brokerage are permissible under the new 

‘‘finder authority’’ the Agencies have found permissible; (6) banking organizations 

have the authority to assist third parties in obtaining commercial real estate equity 

financing for others; and (7) national banks are permitted to assist in a variety of 

ways in the purchase or sale of real estate.34

With respect to real estate management, the Agencies find that neither OCC nor 

state banking departments have permitted banks to provide general services. But 

thrift holding companies and thrift service corporations have been permitted to do 

so. Some real estate management services appear to be functionally and operationally similar to other activities of banking organizations; e.g., collecting rent, maintaining security deposits, making payments, providing accountings. Moreover, 

‘‘banks and bank holding companies have a long history of managing real estate assets that are part of trust estates, that are used by the banking organization in its 

own operations, or that are acquired as the result of foreclosure.35

2. Discussion. 

The Agencies’ view that activities determined to be ‘‘closely related to banking’’

must be ‘‘financial in nature or incidental to a financial activity’’ raises a question 

as to the balance of public benefits in permitting FHCs and FSs to engage in the 

activity. FHCs may engage in any activity that is determined to be ‘‘financial in nature’’ without prior approval. In consequence, no Board evaluation of net public benefits, in general or on a case by case basis, is likely to be required if an activity 

is determined to be ‘‘financial in nature’’ because it is ‘‘closely related.’’ Traditional 

holding companies, on applying to enter a new activity, must still satisfy a net public benefits test on the determination that the activity is ‘‘closely related to banking.’’ Since the ‘‘net public benefits’’ test was designed to protect against the problems raised as a result of activity expansion that breaches the banking/commerce 

barrier, its avoidance by more highly diversified FHCs is an anomaly. 

Some of the information in the ‘‘Proposal’’ may be relevant for the ‘‘closely related’’

evaluation; but some is of dubious significance; and some, if accepted as relevant, 

would imply little or no limit as to what nonbanking activities are ‘‘closely related.’’

Questions related to information are discussed below as follows: (a) other legal and 

regulatory arrangements that permit banks or savings associations to offer real estate brokerage; (b) real estate-related activities in which banks currently engage; 

and (c) services by real estate brokers and managements that are functionally similar to services provided by banking organizations. Also discussed below (d) is what 

changes, if any, since the Board’s 1972 decisions on real estate brokerage and management, suggest that the activities are more closely related to banking now than 

then. 

a. Other legal and regulatory arrangements. The fact that some states permit 

state-chartered banks to act as real estate brokers, and that the OTS permits the 

service corporations of savings association to engage in real estate brokerage is of 

questionable significance. In the United States, multiple regulators produce an impressive, sometimes baffling, diversity of law and regulation affecting similar institutions.36 Without further information on the circumstances in which other regulators have made their decisions, the invocation of an activity so authorized to supVerDate Jan 17 2002 11:40 Jul 31, 2002 Jkt 000000 PO 00000 Frm 00217 Fmt 6601 Sfmt 6621 G:\WORK\COMM\051602\79656.000 HJUD1 PsN: 79656
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37 58 Fed. Res. Bul. 652 (1972). 

port a ‘‘closely related’’ determination grants the other regulator(s) an unwarranted 

influence. 

The ‘‘Proposal’’ also indicates that bank trust departments have, for many years, 

been involved in the purchase and sale of real estate. But trust departments, fully 

insulated from the everyday operations of banks by law and regulation, have long 

been permitted to engage in a wide variety of nonbanking activities. The citation 

of one or more of these nonbanking activities as supporting a ‘‘closely related’’ determination is a mismatched comparison of the proposed new activity to an activity 

that has been kept separate from ordinary banking operations. 

With respect to real estate management, the Agencies find that neither the OCC 

nor state banking departments have permitted banks to engage in this activity. The 

‘‘Proposal’’ does refer to authority granted thrift holding companies and thrift service corporations, but this comparison raises the same questions as those noted above 

with regard to real estate brokerage. 

b. Real estate-related activities. Banking organizations have engaged in a number 

of the real estate-related activities cited for many years. The ‘‘Proposal’’ observes, 

as noted, that banking organizations have long managed real estate assets in trust, 

for their own operations and that are acquired in foreclosure. It is worth noting that 

when the Board rejected real estate management as a permissible activity in 1972, 

this was also the case. In its announcement, the Board indicated that its action was 

not ‘‘. . . intended to limit the authority presently conferred by statute or regulation on bank holding companies and their subsidiaries to engage in . . . property 

management activities with respect to . . . : (a) properties held in a fiduciary capacity. (B) properties owned . . . for conducting its own . . . operations. (C) properties 

acquired . . . as a result of a default on a loan.’’ 37 Banks have been active in these 

areas for as long as they’ve had the authority to act as fiduciaries, make loans 

collateralized by real estate, and seize collateral when loans default. 

c. Activities that are functionally similar. The ‘‘Proposal’’ contends that services 

provided by real estate brokers are functionally and operationally similar to brokerage services that banking organizations are permitted to provide; e.g., services related to securities derivatives and insurance. The functional similarity appears to 

involve brokerage, and not the underlying asset (real estate). If underlying assets 

are ignored, the brokerage services of banking organizations may be viewed as functionally and operationally similar to any type of brokerage services be it for commodities, automobiles, armaments, or even Tennessee walking horses. If so, there 

might be no limit to the nature of the transaction services FHCs and FSs might 

be permitted to provide. 

The Agencies also cite recent decisions by the Board and the OCC permitting title 

insurance and other insurance related to real estate transactions; and also ‘‘finder 

authority’’ with regard to real estate transactions. The use of earlier regulatory 

agency decisions to support later decisions implies a expanding set of ‘‘closely related’’ activities. Thus, if real estate brokerage and management services are determined to be ‘‘financial in nature or incidental,’’ real estate itself could be viewed as 

closer to banking. If real estate was accepted as ‘‘financial in nature,’’ a possibility 

raised in the ‘‘Proposal,’’ then how far behind could commercial operations that are 

real estate intensive be; e.g. real estate developments and farming. 

Similarly, the finder authority permitting FHCs and FSs to bring buyers and sellers of financial and nonfinancial products together could serve to make banking 

‘‘closely related’’ to any transaction activity, with the underlying assets, then, becoming more ‘‘closely related to banking.’’ Making payments and providing accountings, among other things, are cited as 

functionally and operationally similar to some of the services of real estate management. These activities are, of course, functionally and operationally similar to activities in any commercial enterprise. If they support a ‘‘closely related’’ determination 

for real estate management, they could support a ‘‘closely related’’ determination for 

any type of activity. 

d. Changes since 1972. The question remains as to what, if anything, has changed 

between 1972 and 2001 to persuade the Agencies to alter the Board’s determination 

that real estate brokerage and management are not ‘‘closely related to banking.’’ As 

noted, some of the activities cited are old, and were permitted to banking organizations long before 1972. Some are recent and, if used to support the proposed change, 

provide a basis for a seemingly unlimited expansion of the set of activities that are 

‘‘closely related to banking.’’ More generally, the Agencies state that: ‘‘. . . the financial services environment 

has changed significantly in the past 30 years, and what may have been an inappropriate activity for bank holding companies in the early 1970s may be appropriate 

215

38 ‘‘Proposal,’’ p. 16. 39 ‘‘Proposal,’’ pp. 11, 12. 40 ‘‘Proposal,’’ p. 11. 41 ‘‘Proposal,’’ p. 12. 42 ‘‘Proposal,’’ p. 12. 43 ‘‘Proposal,’’ p. 18. 

for the diversified FHCs of the early 21st Century.’’ 38 The recent powers granted 

by the Agencies aside, there is no indication in the ‘‘Proposal,’’ except for the allusion to ‘‘the diversified FHCs of the early 21st Century,’’ as to what specific environmental changes compels a change in the Board’s 1972 determination. The implication of less risk in more highly diversified FHCs is unsubstantiated in the ‘‘Proposal.’’ Moreover, if the point has relevance, it would not be in meeting the ‘‘closely 

related to banking’’ standard, but in considering the likelihood of adverse effects, or 

in applying the ‘‘net public benefits’’ test. 

B. ‘‘Necessary and Appropriate’’

As described above, GLB indicates four sets of factors to be considered by the 

Board in determining whether an activity is ‘‘financial in nature or incidental.’’ The 

principal focus in the ‘‘Proposal’’ is on whether real estate brokerage and management are ‘‘necessary and appropriate to allow a FHC . . . to compete effectively 

with any company seeking to provide financial services in the United 

States....’’ 39

1. ‘‘Proposal’’

Prior to the passage of GLB, the Agencies indicate, the law did not explicitly authorize the Board to consider whether other financial service firms engaged in an 

activity in evaluating whether or not it would be permissible. The change significantly expands the Board’s authority ‘‘to consider the competitive realities of the 

U.S. financial marketplace in determining the permissibility of activities for 

FHCs.’’ 40

The Proposal indicates that the American Bankers Association (ABA) has addressed the question as follows: ‘‘. . . buyers and sellers of real estate are increasingly looking to a single company to provide all their real estate-related needs.’’ 41

The ABA has also provided information about a number of diversified nonbank financial companies that provide real estate brokerage services. Reference is made to 

GMAC, Prudential Insurance Co., Cendant Corporation, and Long & Foster.42 Similarly, with respect to real estate management, the ABA has argued that competitive 

considerations support the proposed rule.43

2. Discussion 

Given that the ‘‘financial in nature or incidental’’ standard provides for a broader 

range of activities than the ‘‘closely related’’ standard, its parameters are not completely clear. GLB, as noted, provides a list of activities, in general terms, that are 

‘‘financial,’’ and a list of factors the Board is to consider when making a determination. But it does not provide an operational definition comparable to the one provided in the National Courier case for ‘‘closely related to banking’’. 

The information provided by the ABA is not sufficient to conclude that real estate 

brokerage and/or management are necessary to allow FHCs to compete effectively 

for several reasons. First, there is no information, even of an anecdotal nature, indicating that customers place value on one-stop real estate shopping that includes the 

related services banks provide, such as mortgage loans, and real estate brokerage 

and/or management. 

Secondly, the evidence that nonbank affiliated companies provide real estate brokerage and/or management services is, at best, an intermediate step in evaluating 

whether the activities are ‘‘necessary and appropriate.’’ As indicated above, the ‘‘necessary and appropriate’’ consideration is to allow a FHC and FSs to compete effectively with other financial service companies. The question of ‘‘effective competition’’

is not resolved simply by finding companies that offer a service not offered by these 

banking organizations. There needs to be some showing of loss or likely loss to 

banking organizations that have not been permitted to engage in the activity. 

A need to show an impact on effective competition places a limit on the extent 

to which the aim of ‘‘competitive equality’’ drives an expansion of activities in the 

existing financial services environment; i.e., in an ‘‘industry’’ in which differences 

among different kinds of banking and nonbanking financial companies will exist as 

long as any significant separation between banking and commerce is maintained. 

For example, the fact that nonbanking companies provide one or more services that 

the banking organizations are not permitted ignores the fact that banking organizaVerDate Jan 17 2002 11:40 Jul 31, 2002 Jkt 000000 PO 00000 Frm 00219 Fmt 6601 Sfmt 6621 G:\WORK\COMM\051602\79656.000 HJUD1 PsN: 79656
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44 ‘‘Proposal,’’ pp. 12–13, 19. 45 ‘‘Proposal,’’ pp. 23, 14. 46 ‘‘Proposal,’’ p. 13, note 28. 47 ‘‘Proposal,’’ p. 19. 48 ‘‘Proposal,’’ p. 19. 49Greenspan, 1990. On the imperfect nature of firewalls, see Shull and White, 1998. 50 Helfer, 1997, pp. 62, 67 ff. 

tions provide services that nonbanking companies are not permitted to provide; i.e., 

depository services. 

C. Adverse Effects 

The likelihood of adverse effects was a critical element in evaluating new activities under the Bank Holding Company Act. The Agencies proceed differently under 

GLB. 

1. ‘‘Proposal’’

The Agencies recognize the possibility of adverse effects in determining new activities to be financial in nature or incidental.44 But they indicate that real estate 

brokerage appears not to present significant risks to FHCs or FSs or their depository institutions. No principal, liquidity or market risks would be taken in connection with the real estate brokered. They do recognize the possibility of some operational and legal risks.45

The Agencies also cites safeguards in the law that would, presumably, mitigate 

adverse effects. These include the applicability of the anti-tying provisions of Section 

106, limits on bank-affiliate financial transaction imposed by Sections 23A and 23B, 

and the restrictions on cross-marketing in GLB. Also cited are provisions of the Real 

Estate Settlement Procedures Act aimed at protecting customers. Finally, the ‘‘Proposal’’ notes the authority of the Board and the OCC to impose additional restrictions on transactions or relationships between a depository institution, and its subsidiaries and affiliates if it is found necessary to avoid adverse effects.46

Similarly in the case of real estate management services, the Agencies contend 

that permitting real estate management services does not expose FHCs or FSs, or 

their depository affiliates, to significant risk. However, it recognizes that there may 

be increased operational, legal and reputational risks.47 As in the case of real estate 

brokerage, the ‘‘Proposal’’ cites the protections afforded by current law and regulation.48

2. Discussion 

As indicated above, a number of potential adverse effects of activity expansion 

were included in the ‘‘net public benefits’’ test added by the 1970 Amendments to 

the Bank Holding Company Act. The Board was charged with considering effects, 

such as, but not limited to, undue concentration of resources, decreased or unfair 

competition, conflicts of interest, or unsound banking practices, as well as possible 

benefits. 

In the ‘‘Proposal,’’ as noted, the Agencies have evaluated the risks to the safety 

and soundness. With respect to other possible adverse effects, they rely on law and 

regulation as safeguards. 

Sole reliance on existing law and regulation to forestall adverse effects is questionable, and runs counter to earlier congressional views and Board procedures. As 

discussed above, the anti-tying provisions of the Bank Holding Company Act (Sec. 

106) were added by Congress in 1970 as a complement to the ‘‘net public benefits’’

test of Section 4(c)(8), not as a substitute. The same complementary function can 

be imputed to the Sec. 23A limits on interaffiliate transactions since they had been 

in existence for close to 40 years when the ‘‘net public benefits’’ test was added. 

The ‘‘firewalls’’ erected by Sections 23A and B, discussed above, are intended to 

serve soundness and competitive objectives by preventing the transmission of injury 

from a floundering nonbanking affiliate to a federally-insured depository institution, 

and to prevent the extension of subsidies from the latter to the former. It is widely 

believed that they work reasonably well in good times, are prone to deteriorate in 

bad times, and are unlikely to work at all in extremis. Chairman Greenspan told 

Congress that he had ‘‘serious questions about the ability of firewalls to insulate one 

unit of a holding company from the funding problems of another.’’ 49 Ricki Helfer, 

then Chairman of the FDIC stated in discussing Sections 23A and 23B, that ‘‘these 

firewalls are not impenetrable . . . of course, in times of stress firewalls tend to 

weaken, and transgressions have occurred both within and outside the reach of the 

regulators . . . pressure can be exerted on a bank from its holding company as well 

as from subsidiaries.’’50 While such anecdotal evidence is illuminating, there apVerDate Jan 17 2002 11:40 Jul 31, 2002 Jkt 000000 PO 00000 Frm 00220 Fmt 6601 Sfmt 6621 G:\WORK\COMM\051602\79656.000 HJUD1 PsN: 79656
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51 Violations of Sections 23A and 23B for the years 1990 and 1991 are reviewed in a study 

of bank insider activity by the General Accounting Office, 1994. Data deficiencies are discussed 

on pp. 59–63. 52Shull, 1993. 53For an elaboration of these issues, see Shull and Hanweck, 2001, Ch. 6. On the growth of 

concentration in U.S. banking, see Rhoades, August 2000. 54 ‘‘Proposal,’’ p.14. 55 ‘‘Proposal,’’ p. 14. 56 ‘‘Proposal,’’ pp. 14, 15. 57 ‘‘Proposal,’’ p. 15. 58 ‘‘Proposal,’’ p. 19. 

pears to be no systematic data or empirical analysis on the extent to which firewalls 

are effective, in good times and bad.51

A similar critique might be made with regard to the anti-tying provisions of Sec. 

106. Based on an examination of private suits under this Section over its first twenty-two years of existence (there were no government actions) it seems clear that, 

whatever purpose it has served, it has not been the procompetitive purpose envisioned by Congress.52

Uncertainty as to the effectiveness of the legal and regulatory safeguards, suggests the possibility that the structural transformations effected by the Agencies’ determinations under GLB may impose pressure for regulatory interventions, based 

on Sec. 114 of GLB, to prevent ‘‘undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices.’’ The conditions 

that might invoke such interventions, or their likely effectiveness are not evaluated 

in the ‘‘Proposal.’’ Over the past two decades, the merger movement in banking has resulted in a 

substantial increase in banking concentration. Even before passage of GLB, the 

growth of banking organizations to unprecedented size raised new concerns about 

the adequacy of supervision, the possibility of supervisory forbearance and federal 

government assistance for large banking organizations that are in difficulty.53 The 

impact of the increasing size of banking organizations and rising concentration, as 

it applies to activity expansion, is not addressed in the ‘‘Proposal.’’

D. Real Estate Brokerage and Management as Statutorily Listed Activities 

As noted above, GLB lists several general activities that it directs the Board to 

define as ‘‘financial in nature or incidental to a financial activity.’’ Specific activities 

may be subsumed under these generalized activities. 

1. ‘‘Proposal’’

The ‘‘Proposal’’ indicates that the ABA has argued that real estate, itself, is a financial asset because (i) the home is the largest asset for many individuals; (ii) real 

estate services are the underpinnings for mortgage-backed securities; and (iii) real 

estate serves as a means of wealth creation and providing tax benefits. Therefore, 

real estate brokerage should fall within the listed financial activity of ‘‘lending, exchanging . . . safeguarding financial assets other than money or securities.54

The Agencies recognize that if real estate is a financial asset, its purchase and 

sale would be included as a listed financial activity. They acknowledge ‘‘. . . that 

real estate does have certain important attributes of a financial asset; namely, that 

individuals often purchase real estate, at least in part, for investment purposes and 

with a view toward the financial benefits of the transaction.’’ 55 But they point out 

that financial assets are generally thought to be intangible property, and real estate 

is tangible. Moreover, many tangible assets with substantial value are used as collateral, but generally considered to be nonfinancial. They also note that many nonfinancial assets are purchased for investment purposes; e.g., stamps, art. Finally, 

real estate may be held for non-investment purposes as well.56

The ABA also argues that purchase, sale or lease of real estate is a financial 

transaction because it is the most important, complex, and financially difficult 

transaction most individuals undertake. It falls within the listed activity of 

‘‘[a]rranging, . . . facilitating financial transactions for the accounts of third parties.’’ The Agencies do not accept these characteristics as determining whether a 

transaction is financial in nature. But they do recognize that real estate transactions often are for investment purposes and, to that extent, have some aspects of 

a financial transaction.57

Similarly, the ABA contends, with respect to real estate management, that it 

should be subsumed in the listed activity of ‘‘lending, exchanging, transferring, investing for others . . . assets other than money.’’ 58 The Agencies recognize that if 

it were to conclude that real estate is a financial asset, the argument would have 

merit. The ABA has also argued that Agencies should find real estate management 

218

59 ‘‘Proposal,’’ p. 20. 60Of course, some financial assets may be held for financial benefit, but not as ‘‘investments’’

in the conventional sense; e.g. money held for precautionary and transactions purposes; the 

same is true of some financial transactions that are for financial benefit, but not investment; 

e.g., cashing checks. 

a listed activity included in ‘‘arranging, effecting, or facilitating financial transactions for the account of third parties. The Agencies acknowledge that real estate 

management does facilitate financial transactions; but it has nonfinancial attributes 

as well.59

2. Discussion 

The Agencies do not accept the argument that real estate is a financial asset, but 

indicate that it has certain attributes of financial assets. Nor do they accept real 

estate transactions as a financial transaction, though they recognize that, to the extent such transactions are often for investment purposes, they have financial aspects. 

The Agencies’ position appears to be that assets and transactions have financial 

and nonfinancial attributes, and that financial attributes may be inferred from the 

use of assets or transactions that serve the purposes of investment and financial 

benefit.60 Then, presumably, activities involving assets and/or transactions, with some ‘‘measure’’ of financial attributes, are ‘‘financial and nature or incidental’’ or subsumed by the statutorily listed group of financial assets. 

The ability to determine ‘‘financial activities’’ on the basis of attributes suggests 

a well-specified paradigm, including careful definition of what are financial and nonfinancial attributes of assets and transactions, a method of aggregation, and a decision rule on the ‘‘attribute characteristics’’ of activities that are ‘‘financial.’’ If the 

Agencies have such a paradigm, it should be fully disclosed so that public comment 

can be forthcoming. 

E. Review of Principal Issues 

The ‘‘Proposal’’ to make real estate brokerage and management services permissible for FHCs and FSs raises a number of issues that have been examined as they 

developed in the course of the Agencies consideration of the concepts of ‘‘closely related,’’ ‘‘necessary or appropriate,’’ ‘‘adverse effects,’’ and ‘‘statutorily defined.’’ The 

principal questions found in this examination are summarized below as issues of 

analysis, fact and public policy. References to the above subsections of IV in which 

each issue is discussed are indicated in parentheses. 

1. Analytic Issues 

On the belief that any activity found to be ‘‘closely related to banking’’ must be ‘‘financial in nature or incidental,’’ the Agencies present a variety of evidence in support of real estate brokerage and management as being ‘‘closely related to banking.’’ The presumption that ‘‘closely related’’ transforms into ‘‘financial in nature’’ under 

the Gramm-Leach-Bliley Act, without any ‘‘net public benefits’’ test, raises the 

anomaly of permitting FHCs and FSs to engage in activities that may involve net 

public costs and that would not be permitted for traditional bank holding companies 

(A.2). 

Some of the changes in material factors over the recent past, arguably making 

the real estate brokerage and management services more ‘‘closely related to banking,’’ derive from the laws or regulations applicable in other regulatory domains. By 

implication, other regulators may expand the scope of what is ‘‘closely related to 

banking’’ (A.2). 

Some of the changes derive from recent Board and Treasury (OCC) decisions. The 

approval of new activities found to be ‘‘financial in nature or incidental’’ serves to 

move other nonbanking activities closer to banking—not closer to the banking of 

1972, or even the pre-GLB banking of 1999, but to the set of financial activities approved for FHCs and FSs under GLB. This approach to determining ‘‘closely related’’ is a recipe for unlimited activity expansion. (A.2). 

‘‘Necessary or appropriate’’ is the principal factor, among the four sets that GLB 

charges the Board to consider that is addressed in the ‘‘Proposal.’’ The first set of 

factors requires consideration of the purposes of the Bank Holding Company Act 

and GLB. One key purpose of both these laws was to maintain a separation of banking and commerce. This purpose is not considered in the ‘‘Proposal’’ (B). 

2. Factual Issues 

The ‘‘closely related’’ factors presented in the ‘‘Proposal’’ may or may not be sufficient to overcome the Board’s 1972 determination that neither real estate brokerage 

nor real estate management are permissible. Many of the characteristics cited and 

219

61Meyer, 2001, p. 3. 62Meyer, 2001, p. 11, 12. 63Meyer, 2001, p. 12. 

comparisons made in the ‘‘Proposal’’ could have been cited in 1972 or earlier. There 

is little systematic information in the 

‘‘Proposal’’ about changes since that time that would compel a different determination (A.2). 

That real estate brokerage and management services provided by non-bank affiliated financial service companies, does not in itself permit a conclusion that these 

activities are ‘‘necessary or appropriate’’ for FHCs and FSs to compete effectively 

with them. There is no discussion in the ‘‘Proposal’’ as to how the question of effective competition should be addressed. A ‘‘necessary or appropriate’’ finding should 

require information on loss or likely loss, if any, to banking organizations deriving 

from their inability to engage in a particular activity (B.2). 

The Agencies consideration of whether real estate brokerage and management 

may be included as statutorily listed financial activities suggests an approach for 

making such a determination based on financial and nonfinancial attributes of assets and transactions. It may be inferred that the Agencies have a model for such 

determinations. If such exists, it should be available for public comment (D.2). 

3. Public Policy Issues 

The Agencies explicitly evaluate a number of the risks that real estate brokerage 

and management activities present to FHCs, FSs and their depository affiliates. 

With respect to other possible adverse effects, including undue concentration of resources, decreased or unfair competition, and conflicts of interest, they contend that 

existing law should provide sufficient protection (C.1). 

Experience suggests that legal and regulatory restrictions, however well intended, 

are not dependable remedies for adverse structure-generated behavior that might 

develop out of Board and Treasury determinations. This is why Congress established a ‘‘net public benefits test’’ when it amended the Bank Holding Company Act 

in 1970, in addition to the anti-tying provisions of Section 106 and the interaffiliate 

transaction limits of Section 23A. Effective public policy requires that the likelihood 

of adverse effects be evaluated before, not after, a new activity is approved (C.2). 

The limited attention given to the likelihood of adverse effects, the endogenous 

process for defining what is ‘‘closely related to banking’’ and ‘‘financial in nature or 

incidental,’’ and an expansive interpretation of what is meant by a level playing 

field, implies few limits on the scope of what is likely to be determined a ‘‘financial 

activity.’’ This approach runs counter to congressional intention to maintain a separation between banking and commerce. 

The possibility that the cumulative decision-making by the Agencies will expand 

the scope of ‘‘banking’’ at the expense of ‘‘commerce’’ has been recognized by Governor Meyer. In a recent address about GLB, he states:

‘‘[T]he structure, of course, has some obvious tensions that, themselves, reflect 

some difficult compromises. These tensions . . . mean that both the regulators 

and the regulated face no bright lines on the commerce and banking front.’’ 61

He goes on to note the wide discretion afforded the Agencies:

‘‘The Congress specifically rejected commerce and banking in GLB but empowered the Federal Reserve and the Treasury to add to the permissible activities list any activity that is either ‘‘financial,’’ without much guidance as to that 

means, or is ‘‘complementary’’ to financial activities, with no guidance. . . . 

GLB grants the agencies authority to move toward mixing banking and commerce at the margin as markets and technology begin to dim the already less 

than bright line between them.’’ 62

The lack of a standard for modifying at the margin is reflected in the ABA contention in the ‘‘Proposal,’’ that real estate itself is a financial asset, and the Agencies’

agreement that it does have financial attributes. It is also reflected in an FHC contention that: ‘‘. . . anything done by a financial holding company or anything that 

includes processing a payment is intrinsically financial.’’ 63 Without a standard, the 

perceived absence of limits in mixing banking and commerce is understandable. 

There are, nevertheless, guiding principles that are relevant. These involve the 

reasons why the banking and commerce have been kept separate for over 200 years 

in the United States. They were explicit, in part, in the adverse effects of the ‘‘net 

public benefits’’ test of Section 4(c)(8). They include effects on competition, conflicts 

of interest and concentration, as well as on bank safety and soundness. These stated 

220

64 Among others things, the ‘‘Proposal’’ seeks comments on the extent to which U.S. financial 

service companies provide real estate brokerage and/or management services; on possible adverse effects and whether special restrictions are needed; on the characteristics of real estate 

transactions that might make them ‘‘financial in nature;’’ on whether real estate brokerage and/

or management should be included as a statutorily listed activity; and on whether the proposed 

real estate management rule would help ensure competitive equity. 65See ‘‘Proposal,’’ pp. 6, 7, note 8, and p. 18, note 35. 

effects are not exclusive, and historically have included the expansion of government 

regulation to and intervention in broad areas of the free market economy. 

In recent years, new technology and market changes may seem to have dimmed 

the line between banking and commerce. But, in fact, the line has never really been 

bright. Incentives to integrate have always been present, as is apparent in the universal banking systems of many other countries. They have been forestalled in the 

United States by public policy which has set limits based on the likelihood of adverse effects. 

VI. CONCLUSIONS

A distinctive feature of the U.S. banking system, from its earliest days, has been 

limits on bank activities that have, along with the exclusion of nonbanking firms 

from specific banking services, established a separation of banking from commerce. 

The Gramm-Leach-Bliley Act is the latest in a long line of legislation that has modified bank activity limits and, thereby, the parameters of banking and commerce. At 

the same time, Congress, in passing the law, has reaffirmed its intent to maintain 

a separation between the new banking/financial service organizations it has permitted and commercial companies. 

In their ‘‘Proposal’’ to determine real estate brokerage and management services 

are ‘‘financial in nature or incidental’’ and, therefor permissible to FHCs and FSs, 

the Board of Governors and the Treasury have examined information suggesting 

that these activities are ‘‘closely related to banking,’’ that they are ‘‘necessary and 

appropriate’’ for banking organizations, that the possibility of adverse effects is of 

little significance. They have entertained arguments that the activities should be 

subsumed under one or more statutorily listed financial activities. 

This review of the Agencies’ ‘‘Proposal’’ has raised a number of analytic, factual 

and public policy issues. The analytic problems suggest that further consideration 

needs to be given to the approach taken in defining ‘‘financial in nature.’’ The factual issues suggest a need for additional information. The public policy issues indicate a need to consider limits to activity expansion, in part through a more extensive examination of possible adverse effects. 

Overall, the review indicates that the ‘‘Proposal’’ is incomplete and that further 

analysis and investigation is required. Appendix A provides a list of studies that 

would be useful. 

APPENDIX A

ADDITIONAL STUDIES

The examination of the Agencies’ ‘‘Proposal’’ indicates a need for additional information and analysis with respect to a number of issues. The ‘‘Proposal’’ itself, solicits comments generally, and also at specific points in its text.64 The studies briefly 

described below reflect gaps in the ‘‘Proposal’’ indicated by this review, are not fully 

in accord with the Agencies’ perception of what is needed. The information provided 

by these studies would ideally be undertaken by the Agencies, but might also be 

pursued by proponents and/or opponents of the Agencies’ proposed rules. 

A. Basis for Earlier Board Decisions on Real Estate Brokerage and Management 

In 1972, the Board determined that real estate brokerage and management were 

not permissible activities under Section 4(c)(8) of the Bank Holding Company Act. 

Subsequent Board actions, and those of the OCC, with respect to the real estate activities of banking organizations, are briefly mentioned in the ‘‘Proposal.’’ 65

In considering the proposed reversal of the 1972 determinations, it would be useful to review the analysis underlying the Board’s earlier real estate related determinations, and also the proposed determinations of the past 30 years. In the course 

of the review, an attempt should also be made to identify the market and/or technological changes, if any, of the past 30 years, that would contribute to the proposed 

change. The ‘‘Proposal’’ suggests that significant changes have taken place, but is 

cryptic as to precisely what they are. 

The Agencies have made clear that the proposed rules need not be based on a 

change in the ‘‘closely related to banking’’ finding, because ‘‘financial in nature and 

221

incidental’’ is broader. But this review should provide a fuller understanding of the ‘‘Proposal’s’’ institutional roots, or lack thereof. 

B. Safety and Soundness Considerations 

The ‘‘Proposal’’ indicates that real estate brokerage and management services 

raise only minor risks for banking organizations and their depository affiliates. At 

the same time, real estate itself and a number of real estate-related activities have 

beeen prohibited for many years, on safety and soundness grounds, to banking organizations. This study would examine historical records involving bank experience, 

legislative debates, legislation and regulatory determinations that, at least since 

passage of the National Banking Act, have resulted in significant limits on permissible real estate and real estate-related activities for banks. If it were found that 

safety and soundness considerations have been important in the past in prohibiting 

banking organizations from engaging in real estate brokerage and management, this 

study would also extend the study described in ‘‘A’’ by looking for reasons as to what 

if anything has changed in recent years to justify the ‘‘Proposal’s’’ conclusion that 

these activities now present minimal risks. 

The investigation would be particularly useful if the Agencies were to make a determination, suggested as a possibility in the ‘‘Proposal’’ but seemingly unlikely at 

this time, that real estate brokerage and management services are statutorily listed 

financial activities because real estate itself is a financial asset. 

C. Impacts on Banking Organization Profitability 

In evaluating whether an activity is ‘‘financial in nature or incidental,’’ GLB requires that the Board consider, among other things, whether the activity ‘‘. . . is 

necessary or appropriate to allow a financial holding company and the affiliates of 

a financial holding company to—(i) compete effectively with any company seeking 

to provide financial services . . . ; (ii) efficiently deliver information and services 

that are financial in nature . . . ; and (iii) offer customers any available or emerging technological means for using financial services....’’ The ‘‘Proposal’’ provides 

some information on the real estate brokerage and management services provided 

by non-banking companies, but none on the significance of this information for ‘‘effective competition’’ indicated in (i) or for the factors indicated in (ii) and (iii). 

As noted, the provision of such services by others does not mean, in and of itself, 

that banking organizations cannot ‘‘compete effectively’’ with non-banking companies. To reach such a conclusion, it would be necessary to show that the real estate 

brokerage and/or management services prohibition has resulted in loss or is likely 

to result in loss in the real estate-related activities in which banks do engage, or 

in some other way adversely affected bank profits. 

This study would review bank profits over the past decade and, to the extent possible, the profitability of the real estate related activities in which banking organizations engage. It would then make an effort to evaluate the effect on bank profits 

resulting from the existing prohibition on real estate brokerage and management 

services. 

D. Impacts on customer convenience. 

In the ‘‘Proposal,’’ the Agencies report an ABA assertion that customers involved 

in real estate transactions are inconvenienced by their inability to obtain all their 

real estate services from individual providers. Closely related to the study suggested 

on bank profitability, would be a study of the impact of the existing prohibition on 

customer convenience. 

This study would develop evidence on whether or not there has been any significant customer inconvenience, and what effect the provision of these services might 

have on customer convenience, positive, neutral or negative. The study would require a review of existing literature on the subject and, possibly, one or more surveys of customers recently involved in real estate transactions. 

E. Competitive Effects 

The intensity and maintenance of competition in relevant markets is a principal 

concern of both the Bank Holding Company Act and GLB. Activity expansion for 

banks has been justified by the need for new entry into less than competitive markets. At the same time, bank entry into new activity markets, particularly by merger, may have little or no effect on competition, or might reduce it. The ‘‘Proposal’’

does not address the question of whether there is a need for more competition in 

real estate brokerage and management markets. 

This study would review the literature on competition in real estate brokerage 

and management markets, and supplement it, to the extent necessary, in defining 

markets, evaluating their structure and the behavior of firms in them. If it is found 

that these markets are now highly competitive, with relatively easy entry, no sigVerDate Jan 17 2002 11:40 Jul 31, 2002 Jkt 000000 PO 00000 Frm 00225 Fmt 6601 Sfmt 6621 G:\WORK\COMM\051602\79656.000 HJUD1 PsN: 79656
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nificant procompetitive benefit from bank entry is to be expected. The actual effect 

on competition, whether neutral or negative, would depend on the kinds of affiliations that developed under the proposed rules, and require additional analysis. 

F. Concentration Effects 

‘‘Undue concentration of resources,’’ as an adverse effect in the ‘‘net public benefits’’ test, and also in Sec. 114 of GLB, is subject to various interpretations. After 

over a decade of large bank mergers, rising banking concentration, and recognition 

of the special supervisory difficulties and systemic issues created by large banking 

organizations, ‘‘undue concentration’’ should be given more weight now in Board determinations of permissible activities than in the past. This is particularly the case 

in light of the seemingly extensive possibilities for bank activity expansion under 

GLB, 

This study would define the term ‘‘undue concentration of resources’’ in connection 

with trends in the financial sector and in the economy. It would consider the likely 

impact on concentration of bank activity expansion and bank mergers over the next 

several years, and draw conclusions as to the likely effects in the wider economic, 

political and social areas addressed in the legislative deliberations on GLB. It would 

consider the potential effects of the proposed new rules for real estate brokerage and 

management in this broader context. 

G. Framework for Determining Statutorily Listed Financial Activities 

The discussion of financial and nonfinancial attributes of assets and transactions 

in the sections of the ‘‘Proposal’’ on real estate brokerage and management as 

‘‘statutorily listed’’ financial activities is cryptic. As discussed in the text, the ‘‘Proposal’’ implies some sort of paradigm for deconstructing assets and transactions into 

financial and nonfinancial attributes; classifying, aggregating and deciding on some, 

unspecified, basis what is a financial activity. 

To the best of my knowledge, no such paradigm exists in the economic or financial 

literature. This study would attempt the development of such a paradigm. The exercise is likely to throw light on the difficulties of making determinations along the 

lines suggested in the ‘‘Proposal.’’

REFERENCES

Bank Holding Company Act Amendments, Conference Report to Accompany H.R. 

6778, House Report No. 1747, 91st Cong., 2d Sess., (1970), pp. 11–12. 

Bank Holding Company Act Amendments of 1970, Senate Report No. 1084, 91st 

Cong., 2d Sess., 1970, pp. 1–4. 

Bank Holding Companies, House Report No. 387, 91st Cong., 1st Sess., 1969, pp. 

2–3. C.E. 

Bank Holding Company Act Amendments, Hearings before the Committee on Banking and Currency, U.S. House of Representatives, 91st Congress, 1st Session, 

Parts I, II, III, April, May, 1969; 

‘‘Bank Holding Companies: Property Management Services,’’ Federal Reserve Bulletin, July 1972

Burns, Arthur F., ‘‘Maintaining the Soundness of Our Banking System,’’ Address at 

the American Bankers Association Convention, Honolulu, Hawaii, October 21, 

1974. 

Board of Governors of the Federal Reserve System and Treasury Department, ‘‘Proposed Rule on Real Estate Brokerage and Management Services’’ distributed 

under the Federal Reserve Press Release of December 27, 2000. 

Board of Governors of the Federal Reserve System and Treasury Department ‘‘Interim Rule Governing Merchant Banking Activities of Financial Holding Companies,’’ March 17, 2000

Conference Report on Gramm-Leach-Bliley Act, to Accompany S. 900, Report No. 

106–434, 106 Cong, 1st Sess., November 2, 1999

Financial Services Modernization Act of 1999, Report of the Committee on Banking, 

Housing and Urban Affairs to Accompany S. 900, Report No. 106–44, U.S. Senate, 

106th Cong., 1st Sess., 1999, p. 21. 

Goodell, C. E., and W. Proxmire, ‘‘Supplementary Views: The Conglomerate Amendment’’ in Bank Holding Company Act Amendments of 1970, Senate Report 

No.1084, 91st Cong., 2d Sess., 1970, pp. 34–43. 

General Accounting Office, Bank Insider Activities, March, 1994. 

Greenspan, Alan, ‘‘Statement’’ before the Committee on Banking, Housing, and 

Urban Affairs, U.S. Senate, 76 Fed. Res. Bull. 731 (1990) 

Hackley, Howard, ‘‘Our Baffling Banking System,’’ Virginia Law Review, Parts I 

and II, May-June, 1966. 

223

Helfer, Ricki, ‘‘Testimony on Financial Modernization’’ in Hearings before the Subcommittee on Capital Markets, Securities, and Government Sponsored Enterprises, Committee on Banking and Financial Services, U.S. House of Representatives, 105th Cong., 1st Sess., March 5, 1997

Heller, Pauline B., Handbook of Federal Bank Holding Company Law, Law Journal 

Press, New York, 1976

Leach, James A., ‘‘Remarks’’ prepared for Delivery before Conference of State Bank 

Supervisors, San Francisco, May 12, 2000. 

Martin, William McChesney, ‘‘Testimony’’ in Banking Holding Company Act Amendments, 969, pp. 196–204. 

McClaren, Richard W., ‘‘Testimony’’ in Bank Holding Company Act Amendments, 

1969, pp. 91–95; and, ‘‘Testimony’’ in One Bank Holding Company Legislation, 

1970, pp. 238 ff. and pp. 268–74. 

Meyer, Lawrence H., ‘‘Implementing the Gramm-Leach-Bliley Act: One Year Later,’’

Remarks before the American Law Institute and American Bar Association, 

Washington D.C., 2001

One Bank Holding Company Legislation of 1970, Hearings before the Committee on 

Banking and Currency, U.S. Senate, 91st Congress, 2d Session, Parts I, II, May 

1970. 

Rhoades, Stephen A., Bank Mergers and Banking Structure in the United States, 

1980–98, Staff Study No. 174, Board of Governors of the Federal Reserve System, 

August 2000. 

Shull, Bernard, ‘‘Banking and Commerce in the United States,’’ Journal of Banking 

and Finance, Vol. 18, No. 2, March 1994, pp. 255–70. 

Shull, Bernard, ‘‘Tying and Other Conditional Agreements under Section 106 of the 

Bank Holding Company Act: A Reconsideration,’’ The Antitrust Bulletin, Vol. 38, 

No. 4, Winter, 1993, pp. 859–886. 

Shull, Bernard, and Lawrence J. White, ‘‘The Right Corporate Structure for Expanded Bank Activities,’’ The Banking Law Journal, Vol. 115, No. 5, May 1998

Shull, Bernard and Gerald Hanweck, Bank Mergers in a Deregulated Environment, 

Quorum Press, 2001

Cases Cited: 

Barnett Bank of Marion County N.A. v. Nelson, 517 U.S. 25 (1996) 

Bayerische Hypo- und Vereinsbank AG, 86 Fed. Res. Bul. 56 (2000). 

Boatmen’s Bancshares, Inc., Fed. Res. Bul. (April 1972) 

Citicorp/J.P. Morgan/Bankers Trust N.Y. Corp., 73 Fed. Res. Bul., 473 (1987). 

D.H. Baldwin & Co., 63 Fed. Res. Bul. 280 (1977) 

National Courier Association v. Board of Governors of the Federal Reserve System, 

516 F2d 1229, 1975. 

NationsBank v. Variable Annuity Life Insurance Co., 115 S.Ct. 810 (1995)

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