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S. HRG. 107–982

IMPACT ON CONSUMERS OF BANK AND FINANCIAL

HOLDING COMPANIES’ ENGAGEMENT IN REAL

ESTATE BROKERAGE AND PROPERTY MANAGEMENT

HEARING

BEFORE THE

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

OF THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

ON

THE EXAMINATION OF BANKING AND FINANCIAL HOLDING COMPANIES’ ENGAGEMENT IN REAL ESTATE BROKERAGE AND PROPERTY 

MANAGEMENT

MAY 23, 2002

Printed for the use of the Committee on Banking, Housing, and Urban Affairs

(

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

PAUL S. SARBANES, Maryland, Chairman

CHRISTOPHER J. DODD, Connecticut 

TIM JOHNSON, South Dakota 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

ZELL MILLER, Georgia 

THOMAS R. CARPER, Delaware 

DEBBIE STABENOW, Michigan 

JON S. CORZINE, New Jersey 

DANIEL K. AKAKA, Hawaii 

PHIL GRAMM, Texas 

RICHARD C. SHELBY, Alabama 

ROBERT F. BENNETT, Utah 

WAYNE ALLARD, Colorado 

MICHAEL B. ENZI, Wyoming 

CHUCK HAGEL, Nebraska 

RICK SANTORUM, Pennsylvania 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

JOHN ENSIGN, Nevada

STEVEN B. HARRIS, Staff Director and Chief Counsel 

WAYNE A. ABERNATHY, Republican Staff Director 

MARTIN J. GRUENBERG, Senior Counsel 

LINDA LORD, Republican Chief Counsel 

SARAH DUMONT, Republican Minority Professional Staff 

JOSEPH R. KOLINSKI, Chief Clerk and Computer Systems Administrator 

GEORGE E. WHITTLE, Editor

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

TIM JOHNSON, South Dakota, Chairman 

ROBERT F. BENNETT, Utah, Ranking Member 

ZELL MILLER, Georgia 

THOMAS R. CARPER, Delaware 

DEBBIE STABENOW, Michigan 

CHRISTOPHER J. DODD, Connecticut 

JACK REED, Rhode Island 

EVAN BAYH, Indiana 

JON S. CORZINE, New Jersey 

JOHN ENSIGN, Nevada 

RICHARD C. SHELBY, Alabama 

WAYNE ALLARD, Colorado 

RICK SANTORUM, Pennsylvania 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho

MICHAEL NIELSEN, Republican Professional Staff

(II)

CONTENTS

THURSDAY, MAY 23, 2002

Page

Opening statement of Senator Johnson ................................................................. 1

Opening statements, comments, or prepared statements of: 

Senator Bennett ................................................................................................ 3

Senator Reed ..................................................................................................... 4

Prepared statement ................................................................................... 35

Senator Allard ................................................................................................... 4

Senator Crapo ................................................................................................... 4

Senator Santorum ............................................................................................ 5

WITNESSES 

Tom Murphy, President, South Dakota Association of REALTORS, Sioux 

Falls, South Dakota, REALTOR, Chell REALTORS, representing the 

National Association of REALTORS ................................................................ 6

Prepared statement .......................................................................................... 35

Response to written questions of: 

Senator Reed .............................................................................................. 105

Senator Miller ............................................................................................ 113

James E. Smith, President, American Bankers Association, Chairman and 

Chief Executive Officer, Citizens Union State Bank and Trust Company, 

Clinton, Missouri .................................................................................................. 8

Prepared statement .......................................................................................... 47

Response to written questions of: 

Senator Reed .............................................................................................. 117

Senator Miller ............................................................................................ 119

John Taylor, President and Chief Executive Officer, National Community 

Reinvestment Coalition, Washington, DC .......................................................... 10

Prepared statement .......................................................................................... 65

Howard W. Hanna, III, Vice Chairman, The Real Estate Services Providers 

Council, Inc. (RESPRO), Principal and former Chairman, The Realty Alliance, President and Chief Executive Officer, Howard Hanna Real Estate 

Services, Pittsburgh, Pennsylvania .................................................................... 13

Prepared statement .......................................................................................... 76

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Statement of the American Homeowners Grassroots Alliance ............................ 121

Statement of The Financial Services Roundtable ................................................. 123

Letter submitted to Senator Tim Johnson, by CCIM Institute, Consumer 

Union, Institute of Real Estate Management, National Association of Auctioneers, National Association of Home Builders, National Community Reinvestment Coalition, National Fair Housing Alliance, and National Association of Industrial and Office Properties, dated May 20, 2002 .......................... 127

Letter submitted from Martin Edwards, Jr., CCIM ............................................. 128

(III)

(1)

IMPACT ON CONSUMERS OF BANK AND 

FINANCIAL HOLDING COMPANIES’ 

ENGAGEMENT IN REAL ESTATE BROKERAGE 

AND PROPERTY MANAGEMENT 

THURSDAY, MAY 23, 2002

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

Washington, DC.

The Subcommittee met at 10:05 a.m. in room SD–538 of the 

Dirksen Senate Office Building, Senator Tim Johnson (Chairman of 

the Subcommittee) presiding. 

OPENING STATEMENT OF SENATOR TIM JOHNSON 

Senator JOHNSON. The Subcommittee on Financial Institutions 

will come to order. 

I want to thank you for joining us for today’s oversight hearing 

to discuss the impact on consumers of national bank and financial 

holding companies’ engagement in real estate brokerage and property management. 

Welcome, Ranking Member Bennett, who I am advised will be 

with us very soon, and my colleagues, and thank our distinguished 

panel of witnesses for taking the time to help the Financial Institutions Subcommittee consider this important issue. 

Over the past several months, the consumer real estate market 

has served as an anchor in stormy economic seas, and I have been 

impressed by the resilience of the marketplace. It has been clear 

for some time the critical role that homeownership plays in creating strong communities, strong families, and helping individuals 

achieve the American Dream. We have come to understand, 

though, the additional role that consumer real estate plays in our 

economy. 

For these reasons, it is critical that we proceed with caution with 

any changes in the real estate market. At the same time, however, 

under Gramm-Leach-Bliley, Congress did intend to create flexibility for the financial services industry to innovate. We should be 

mindful of the manner with which we proceed because the potential change provides an early test of the Gramm-Leach-Bliley regulatory process. 

Today, it is not our job to discuss any particular proposal, but, 

rather, to step back to discuss the general issue of what impact financial holding company and national bank affiliate entry into the 

real estate brokerage and property management businesses might 

2

have on American consumers. It is far too easy to lose sight of why 

this debate is important. We need to keep in mind that our objective is to keep America strong through a strong economy, strong 

communities, and continued opportunity for all of our citizens to 

achieve the dream of homeownership. 

With that, it is an honor to introduce our panel of excellent witnesses, who have clearly spent considerable time and energy producing some very thoughtful testimony. We appreciate their willingness to appear before us today, and I will introduce three of the 

four guests, and then yield to Senator Santorum, when he comes 

in shortly, to introduce Mr. Hanna, who hails from the State of 

Pennsylvania. 

First, I am pleased to introduce a fellow South Dakotan, Mr. 

Tom Murphy, of Sioux Falls. Tom, who is here today on behalf of 

the National Association of REALTORS, is the President of the 

South Dakota Association of REALTORS, which has been serving 

my home State for over 50 years. 

Tom is affiliated with Chell REALTORS of Sioux Falls, and is 

a graduate of the REALTORS Institute. Tom has been, and is 

very active at the national, State and local REALTOR levels. He 

is a past State Governmental Affairs Chairman of the South Dakota Association of REALTORS and is serving on the grievance 

committee of the Sioux Falls Board of REALTORS and has served 

in numerous task forces and work groups at the State and local 

levels. 

We appreciate Tom taking time from both his job as a REALTOR and the father of three to join us here today. Tom and his 

wife, Dr. Carla Murphy, of Physicians Laboratory of Sioux Falls, 

are widely recognized community leaders, and Tom’s willingness to 

travel to Washington bears out his commitment to his community 

and to his colleagues. 

Next, we welcome Mr. James Smith, President of the American 

Bankers Association. Mr. Smith is Chairman and Chief Executive 

Officer of Citizens Union State Bank and Trust in Clinton, Missouri. Mr. Smith has a long and distinguished career in banking, 

having entered that profession in 1967. I would also note that there 

appears to be a link between baseball and banking. Like the distinguished Senator from Kentucky, Mr. Smith played professional 

baseball in his past life, was part of the New York Yankees from 

1963 to 1966, and we have no doubt that he has been practicing 

his pitch for today’s hearing. 

[Laughter.] 

During his service with the ABA, Mr. Smith has chaired the communications council, the government relations council, the bankers 

electronic network, and task force on government relations grassroots. 

Mr. Smith, thank you for being with us today. 

Mr. SMITH. Thank you. 

Senator JOHNSON. Our next guest and witness is John Taylor, 

President and Chief Executive Officer of the National Community 

Reinvestment Coalition, whose stated mission is to promote economic justice. 

3

With over 820 national, regional, and local organizations, the 

NCRC has led the effort to increase low-income and minority access to credit and capital. 

I would like to thank you, Mr. Taylor, for your organization’s 

hard work on behalf of so many Americans. Mr. Taylor has worked 

in the community development and reinvestment industry for over 

24 years, and in 2001, ran for the U.S. Congress to fill a vacancy 

in the 9th Congressional District of Massachusetts. 

Mr. Taylor has been widely recognized for his commitment to 

community service and in 1996, received a presidential appointment to the community development financial institutions advisory 

board. He also serves on a number of boards and has received numerous awards and citations over the years for this work in economic justice efforts, including the Martin Luther King, Jr. Peace 

Award, two Congressional citations awards from the Congress, and 

many others. 

Mr. Taylor, thank you for taking time to appear with us today. 

Our final witness is Mr. Howard Hanna, from Pittsburgh, Pennsylvania. And I will defer to Senator Santorum to introduce Mr. 

Hanna. 

But before I yield, I would ask that a written statement prepared 

by the Financial Services Roundtable and the American Homeowners Grassroots Alliance be included in the record. And we will 

proceed from there. 

We will await Senator Santorum’s arrival for the introduction of 

Mr. Hanna, and I would recognize my Ranking Member, Senator 

Bennett, for any introductory comments that he might choose to 

make. 

STATEMENT OF SENATOR ROBERT E. BENNETT 

Senator BENNETT. Thank you very much, Mr. Chairman. I appreciate it, and I apologize for being a minute or two late. 

The Gramm-Leach-Bliley Act was a culmination of, I guess, 20 

years of effort in the Congress to try to resolve the question of how 

banks and other financial institutions would operate in a nondepression atmosphere. 

The Glass-Steagle was drawn up in a very different economic circumstance. I remember as a Member of this Subcommittee when 

Don Riegle was the Chairman, they were talking about it. When 

Al D’Amato was the Chairman, we made a number of runs at trying to deal with it. 

It was not until Phil Gramm became the Chairman that we finally got a resolution, at least momentarily, of many of the issues 

of banking and commerce. 

Now we are seeing the first test of regulations that have been 

proposed under Gramm-Leach-Bliley. I think it is very timely that 

we have the opportunity before the Congress to examine all the implications of what has been proposed. 

So, I congratulate you on holding the hearing. I look forward to 

hearing from the witnesses and appreciate their willingness to 

come and share with us their views and attitudes on this very important subject, as I say, the first real test of revisiting, the possibility of revisiting, Gramm-Leach-Bliley that we have had since 

that landmark legislation was passed. 

4

Thank you, Mr. Chairman. 

Senator JOHNSON. Thank you, Senator Bennett. 

Senator Reed. 

COMMENTS OF SENATOR JACK REED 

Senator REED. Mr. Chairman, I just want to commend you for 

holding this hearing. It is a very important topic for both the banking industry and the real estate industry. And I would like to submit my formal statement to the record. 

Thank you, Mr. Chairman. 

Senator JOHNSON. Very well. 

Senator Allard. 

STATEMENT OF SENATOR WAYNE ALLARD 

Senator ALLARD. Mr. Chairman, I would like to thank you for 

convening this hearing. 

As my colleagues know, this is an issue that I have followed very 

carefully. I appreciate the opportunity to gather more information. 

Last year, I introduced Senate bill 1839, the Consumer Choice in 

Real Estate Act of 2001. This bill would clarify Congressional intent that real estate brokerage and management are not financial 

activities and would therefore retain the separation of commerce 

and banking that we intended during the consideration of the 

Gramm-Leach-Bliley Act in 1998. 

The Gramm-Leach-Bliley Act closed the unitary thrift loophole 

that allowed a single savings and loan to be owned by a commercial 

entity. This clearly established that banking and commerce were 

not to mix. 

Congress explicitly defined several functions to be financial in 

nature or incidental to finance to clarify the separation. Real estate 

management and brokerage services were not defined as financial 

services. 

Congress already established a clear position regarding banks’ 

involvement in real estate management and brokerage activities. 

My bill would reiterate that prohibition. I believe that we should 

not permit Federal regulators to preempt the intent of Congress. 

The real estate and banking industries have served America 

well, and I believe that the current system provides consumers 

with many important options. I know that the regulators received 

many letters during the comment period and I commend them for 

taking the time to allow all interested parties to comment and for 

their pledge to carefully review all comments. 

I believe that this hearing is a good opportunity to continue the 

dialogue on the matter of banks’ involvement in real estate management and brokerage. I know that our witnesses will have very 

strong viewpoints and I look forward to their testimony. 

Thank you, Mr. Chairman. 

Senator JOHNSON. Thank you, Senator Allard. 

Senator Crapo. 

STATEMENT OF SENATOR MIKE CRAPO 

Senator CRAPO. Thank you very much, Mr. Chairman. I too appreciate your holding this hearing. In fact, I think it was more 

than a year ago that I asked the Subcommittee to hold a hearing, 

5

and I appreciate the fact that we are holding one, and it is interesting that it is still timely. 

The Treasury and Federal Reserve have seen fit to delay their 

rulemaking on this matter. I do not know whether that is a good 

thing or a bad thing. But at least it gives this Subcommittee time 

to hold this hearing and to evaluate the issues. 

When I served in the House, I was a part of the effort to review 

these issues. As I was elected to the Senate and on the Banking 

Committee, I was a part of the Gramm-Leach-Bliley effort. 

As a part of that, I feel that we should let the law work, but also, 

oversee the law to make sure that it does work. And if this hearing 

can give us, as well as the Treasury and the Federal Reserve, guidance on what Congress intended and what we think is the appropriate direction which the regulations should take, then so be it. 

But, for me, this is going to be an informational hearing. I want 

to hear the arguments on both sides laid out. I want to be able to 

compare those arguments to what we should achieve in the legislation, and then determine whether it is appropriate for Congress to 

take any further action at that point. 

So, again, I thank you for this hearing. 

Senator JOHNSON. Thank you, Senator. 

Senator Santorum—and I would note that we withheld introductions of Mr. Hanna pending your arrival. We are pleased to have 

you here. 

Senator SANTORUM. Thank you, Mr. Chairman. 

Senator JOHNSON. Any opening remarks? 

STATEMENT OF SENATOR RICK SANTORUM 

Senator SANTORUM. Let me apologize to my constituent for having his introduction being withheld. But I appreciate you doing so, 

so I would have an opportunity to introduce someone who has been 

a friend of mine for a long time, from my hometown of Pittsburgh, 

someone who has been just a great citizen of southwestern Pennsylvania, who owns the largest real estate company in southwestern Pennsylvania. 

They are tremendous corporate citizens and assets to our region 

and Howard Hanna, in particular, is someone who I have a tremendous amount of respect for. 

My respect has been increased in that here he is as a REALTOR coming and testifying on this issue, which is not in conformity with many in the real estate profession. I asked him 

whether he was bringing security to this hearing. 

[Laughter.] 

But he assured me that, other than Chip Roach, he was not 

going to bring security. 

[Laughter.] 

I do commend him for his articulation on this issue. I think he 

does provide a thoughtful perspective on this very important issue. 

I want to say that Senator Crapo’s remarks are very close to mine. 

I think that this is an issue that we need to look at. 

I have not come down firmly in stone on one side or the other, 

but I think it is important to weigh all the evidence. I think Mr. 

Hanna’s perspective is a very thoughtful one and one that I think 

that this Subcommittee can benefit greatly from, and I appreciate 

6

his willingness to come forward and share that with the Subcommittee. 

Thank you, Mr. Chairman. 

Senator JOHNSON. Well, thank you, Senator. 

We will operate on a 10-minute clock during the course of this 

hearing. And so, we will begin testimony with the first witness, affording 10 minutes for each of the witnesses. 

We will withhold Subcommittee questioning until after all four 

witnesses have had an opportunity to either read or to summarize 

their comments before the Subcommittee. 

The first witness is Mr. Tom Murphy. 

Tom. 

STATEMENT OF TOM MURPHY

PRESIDENT, ASSOCIATION OF REALTORS

SIOUX FALLS, SOUTH DAKOTA

REALTOR, CHELL REALTORS

REPRESENTING

THE NATIONAL ASSOCIATION OF REALTORS

Mr. MURPHY. Good morning, Chairman Johnson, Senator Bennett, and Members of the Subcommittee. My name is Tom Murphy. 

I am a REALTOR with Chell REALTORS, a small residential 

real estate firm in Sioux Falls, South Dakota. I am also President 

of the South Dakota Association of REALTORS. Our State Association membership of over 1,400 REALTORS are engaged in 

helping people buy, sell, and manage real estate every day. 

I am here on behalf of the National Association of REALTORS, which represents more than 800,000 members engaged in all aspects of commercial and residential real estate. I want to thank you 

for the opportunity to testify today on this critical issue. 

It is important for all of us to take a good look at how the economy and consumers would fare if banks are allowed into the real 

estate business. That is one reason why I am glad we have the 

views of consumer groups represented on this panel. 

Mr. Chairman, you and your Subcommittee Members are to be 

commended for examining all perspectives on this proposed regulation—those of the little guy, as well as those of the big guy. 

As I mentioned, my business is a small, one-office real estate 

firm, just like nearly 80 percent of REALTOR firms. My colleague 

from Pennsylvania here represents a large regional, multioffice 

firm. Obviously, we come here today to present different perspectives of this Nation’s dynamic and diverse real estate market. 

The fact that some of our members can differ on an issue, while 

respecting and supporting each other on most, is a great example 

of the vitality of the National Association of REALTORS. It is a 

sign of the hearty competition of the real estate business today. 

My comments today represent the overwhelming majority of 

NAR’s members. Ninety-six percent of our members support the

position of the National Association of REALTORS to oppose this 

rule. Eighty-two percent of large broker/owners support this position, while 81 percent of our members believe we should be doing 

even more to stop the banks from unfairly entering our business. 

We firmly believe that redefining real estate brokerage, leasing, 

and property management as financial in nature is totally unacVerDate 0ct 09 2002 17:04 Oct 23, 2003 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 S:\DOCS\0523.TXT FRANK PsN: FRANK1
7

ceptable because it mixes banking and commerce. If the Nation’s 

most aggressive megabanks are allowed to add real estate to their 

long list of approved activities, you can be sure that consumer 

choices in real estate services will shrink. 

The Nation’s bankers, who petitioned the Federal Reserve and 

Treasury for this proposed rule, should not gain by regulation what 

they failed to gain by legislation. In 1999, Congress clearly went 

on record supporting the separation of banking and commerce. 

Oddly enough, the American Bankers Association strongly supported an amendment you offered, Mr. Chairman, during the 

Gramm-Leach-Bliley debate to bar unitary thrift holding companies 

from engaging in commercial activities like real estate brokerage. 

It now appears that members of the ABA would like to corner the 

market on commercial businesses like real estate brokerage, leasing, and management. 

Currently, we have a balanced marketplace for commerce, banking, and financial services. Let me direct your attention to the two 

charts enclosed in my statement. 

The first chart shows how the commercial and banking industries compete in the ‘‘financial services’’ arena. REALTORSdo not 

engage in banking. They do not take deposits or run ATM’s. 

Again, REALTORS are not engaged in banking. Banks do not 

sell real estate. Banking and commerce are separate. It is that simple. Otherwise, why shouldn’t banks sell cars or appliances? 

The second chart shows that in the arena where banks and REALTORS do compete on mortgage originations, banks are already 

the winners. REALTOR-affiliated mortgage lending companies 

only originate about 5 percent of mortgages, while the large banks 

handle 44 percent. 

Today’s competition occurs in the financial services arena where 

it belongs. Consumers benefit from this arrangement because the 

direct competition for financial services between commercial companies and banks results in greater consumer choice and consumer 

service. When banks say they want ‘‘one-stop shopping,’’ what they 

are really saying is they want ‘‘one-bank shopping.’’

The reality is that the entry of Federally chartered banks into 

the real estate brokerage business would tilt this balanced marketplace toward the Nation’s megabanks. It would pit Government 

subsidized banking companies against privately funded real estate 

enterprises. It would put taxpayer money at risk. 

Mr. Chairman, the National Association of REALTORS believes 

this issue is just too big to be decided by the regulators. The decision belongs with the Nation’s lawmakers. That is why we have 

called on Congress to enact The Community Choice in Real Estate 

Act, S. 1839, and H.R. 3424, a companion bill in the House, to clarify Congressional intent. 

REALTORS from all over the country have sent more than 

100,000 letters to their Congressional representatives urging support for this bill. We have sent more than 40,000 letters to the Federal Reserve and the Treasury expressing our opposition to the proposed regulation. And we have sent more than 50,000 letters to 

President Bush urging his support. 

So far, H.R. 3424 has generated tremendous support in the 

House, with more than 230 cosponsors. So far, a dozen Senators 

8

have cosponsored S. 1839. Last month, Treasury Secretary O’Neill 

announced that he plans to postpone making a decision on this 

issue until next year. The ball is back in your court. It is time for 

Congress to resolve this issue. 

Mr. Chairman, REALTORS are not alone on this issue. A diverse group of trade associations and consumer groups stand with 

us on this one. 

Passage of the Community Choice in Real Estate Act will set the 

record straight. At the same time, it will ensure more balanced 

competition and more consumer choice. 

This legislation will help to keep local entrepreneurs and businesses operating in our communities. It will help to keep some of 

our best community leaders and volunteers in place. 

REALTORS are more than business people. We are community 

leaders. Look in countless cities and townships across America and 

you will find it is a REALTOR serving as a den mother, a REALTOR who is leading the city-wide cleanup, a REALTOR who is 

hosting the candidate meet-and-greet, and a REALTOR who is 

coaching Little League. REALTORS are linked to their communities in more ways than simply through their businesses. REALTORS have a stake in the same neighborhoods where their clients 

live or want to live. 

Finally, this proposal just doesn’t make sense. Banks have

it backward. Real estate brokerage is not incidental to a financial 

activity. It is the mortgage that is, in fact, incidental to buying

a home. Twenty percent of all the homes in America involve no 

lender financing at all. 

America’s system of homeownership is the envy of the world. 

Homeownership is at an all-time high. Five out of six homebuyers 

and home sellers are satisfied with their real estate agent and they 

would use him or her again. Let’s not destabilize this pillar of our 

economy and relationship that works in communities throughout 

America. 

Thank you. 

Senator JOHNSON. Thank you, Mr. Murphy. 

Mr. Smith. 

STATEMENT OF JAMES E. SMITH

PRESIDENT, AMERICAN BANKERS ASSOCIATION

CHAIRMAN AND CHIEF EXECUTIVE OFFICER

CITIZENS UNION STATE BANK AND TRUST COMPANY

CLINTON, MISSOURI

Mr. SMITH. I want to thank you, Mr. Chairman, for holding this 

hearing. 

I believe that bankers and REALTORS have more in common 

on this issue than the rhetoric suggests. Many agents and bankers 

already work closely with one another. We both believe that customers deserve to have the best possible service. We both want customers to have many choices of whom to deal with so they can seek 

out that agent or company that they trust most. And we both believe that any financial service should be provided in a safe and 

sound manner—including adhering to all licensing, sales practices, 

and continuing education requirements. 

9

If banks could offer real estate services, consumers would have 

more choices of real estate firms when buying or selling a home. 

Real estate brokers would have more choices of potential employers. And real estate companies would have more choices of companies to partner with, providing new sources of capital and technology. By prohibiting bank involvement, S. 1839 results in fewer 

choices for everyone. 

As we begin our discussion, it is important to note that combining real estate mortgage and banking services is not a new or 

unusual activity. Real estate firms do it. Insurance companies do 

it. Securities firms do it. And well over half of the depository institutions in this country, including many of the largest banks, can 

do it. In fact, my community bank in Clinton, Missouri, already has 

the authority to do it. The packages many real estate firms offer 

provide valuable cost, convenience, and service options. This is good 

for consumers. The ABA believe that all banks should have the 

same opportunity to meet the needs of our customers. 

This issue of open and fair competition is not new—it has been 

debated in this body for years. What is new is that in 1999, Congress enacted the Gramm-Leach-Bliley Act. In the 20 years of debate on the Gramm-Leach-Bliley Act, Congress often found itself in 

the middle of arguments between financial services industries 

about who should do what. The result was an out-of-date financial 

system. 

In light of these marketplace realities, and the pervasive changes 

due to technology, the need for regulatory flexibility is vital. Congress recognized this and expressly left it to the Fed and the Treasury to determine what additional services could be offered by 

banks. The proposal on real estate follows exactly the process Congress set forth. 

It should be allowed to work, and Congress should not be put 

back in as referee for future competitive disputes. After so many 

years of effort to enact the Gramm-Leach-Bliley Act, it would be 

sad indeed to see Congress undermine its key provision the very 

first time it is used. 

Let me assure you that this issue is important to banks of all 

sizes. In fact, the ability to offer real estate services may be more 

important for smaller banks in rural areas like mine. In these communities, the bank is perceived as having the best information on 

properties for sale, including farmland. I believe, as do my fellow 

community bankers, that these services would significantly benefit 

our customers and our communities. 

In my small community, I am losing customers. The local real estate firm is offering mortgages and insurance. Since the customer 

often goes to the real estate firm first, I lose out on the ability to 

offer those products. And quite frankly, the customer misses out on 

the opportunity to have a choice. I may need to partner with a local 

firm to compete. 

Furthermore, as national chains take over local real estate firms, 

any remaining local firms may have trouble competing. One of 

them may want to partner with me. This is exactly the kind of scenario Gramm-Leach-Bliley was designed to take into account. That 

law knocked down the walls between financial players and it gave 

the Federal agencies flexibility to decide what new powers would 

10

be appropriate for banks as markets change. So let’s look ahead, 

not backward. 

We want to work with REALTORS to realize advantages for 

both our industries. We want to cooperate, not compete. To prosper, 

not pull down. To make the most of the skills and advantages each 

side brings to a common goal—thriving in a marketplace of rapid 

change. Above all, we want to be able to partner with REALTORS

to provide good, honest real estate services to America’s homeowners and homebuyers. 

I would like to add for the record, that the market origination 

number that the NAR has just provided is 1 percent. We would like 

to add for the record information that the market share of just 

three firms alone—Cendant Mortgage, GMAC, and Weickert Mortgage—is 10 percent in today’s market, not 1 percent as proposed. 

Thank you, Mr. Chairman. 

Senator JOHNSON. Thank you, Mr. Smith. 

Mr. Taylor. 

STATEMENT OF JOHN TAYLOR

PRESIDENT AND CHIEF EXECUTIVE OFFICER

NATIONAL COMMUNITY REINVESTMENT COALITION

WASHINGTON, DC 

Mr. TAYLOR. Good morning, Chairman Johnson, Senator Bennett, 

and other distinguished Members of the Subcommittee and staff 

representing other Members. 

My name is John Taylor and I am President and CEO of the National Community Reinvestment Coalition, and I am here representing 820 community-based organizations and local public 

agencies who work daily to promote economic justice in America 

and to increase fair and equal access to credit, capital, and basic 

banking services to traditionally underserved populations in both 

urban and rural areas. 

Mr. Chairman, I ask that my written statement be entered into 

the record. 

Senator JOHNSON. It is so ordered. 

Mr. TAYLOR. Thank you. On behalf of NCRC, I thank you for the 

opportunity to testify before you today on this important issue that 

will impact our Nation’s progress in extending the American 

Dream of homeownership to minority and low- and moderate-income families—banks becoming real estate brokers. NCRC’s community organizations are at the helm of driving the reinvestment 

movement. Today, as a result of the fair lending laws like the Community Reinvestment Act, which turns 25 this year, poor neighborhoods have been empowered by bank partnerships with community 

organizations to address credit needs and missed market opportunities. As a result, the number of loans to minority and working 

class borrowers over the last decade has increased faster than the 

number of loans to the more affluent borrowers. Bank CRA commitments have grown from a few million dollars a year to over $50 

billion annually. Without these loans and commitments, the economic flow of private capital and credit into our communities would 

be extinct and hence, certain death for disinvested neighborhoods. 

The arena of competition has dramatically shifted in the wake of 

Gramm-Leach-Bliley, in our opinion, which we believe actually 

11

blurred the distinction among financial industries. In March 2000, 

the Federal Reserve Board issued a list of the first 117 bank holding companies that elected to become financial holding companies 

to take advantage of the opportunities of entering into the insurance and securities markets. As of April 2002, over 600 bank holding companies have elected to become financial holding companies 

in order to diversify their businesses. Conversely, less than a dozen 

nonbank companies have converted to financial holding companies 

for the purpose of seeking a banking charter. 

NCRC supports competition in its truest sense—when parties act 

independently and offer the most favorable terms to secure business. But one must wonder if today’s financial market upholds

the true meaning of competition when it seems like Gramm-LeachBliley has allowed all roads to lead back to the bank. While 

nonbank lenders own real estate companies, they have not utilized 

Gramm-Leach-Bliley to amass the market power that banks now 

enjoy after their mad rush to become financial holding companies. 

Would adding real estate to the menu of businesses that banks can 

own level the playing field between banks and nonbanks, or only 

serve to make banks more powerful to the detriment of real competition in the financial industry? 

NCRC maintains that the addition of real estate to the already 

dizzying array of products now offered by ‘‘financial supermarkets’’ 

will lead to an even greater consolidation of bank market power 

and result in fewer choices for consumers. Our worst nightmare is 

a consolidated financial market that includes real estate brokerage 

is: A bank offers favorable terms to its real estate affiliate, giving 

it significant advantage over a competing real estate business that 

does not have an affiliate; The bank with the real estate affiliate 

stops offering loans to customers of nonaffiliated real estate competitors; The number of product choices offered to customers of 

nonaffiliated real estate businesses decreases, resulting in higher 

cost loans for consumers. 

When considering banks in real estate, policymakers have not 

adequately addressed the negative impacts on small real estate 

businesses of further industry consolidation. And I think you heard 

Mr. Murphy allude to that. The over 375,000 women- and minorityowned small businesses in our country have played a significant 

role in community revitalization. Many of these real estate entrepreneurs have established themselves in working class communities and dedicated their business to helping rebuild formerly redlined neighborhoods through partnerships with affordable homeownership programs. 

NCRC strongly takes the position that by allowing banks into the 

real estate business, small real estate businesses will be forced out 

of the marketplace by the monopolized ‘‘financial supermarkets.’’

Finally, on this point, the banking industry holds a special status, different from any other industry. They are the stewards of the 

American public’s wealth. To encourage people to do business with 

these stewards, we taxpayers guarantee that investors cannot lose 

if they do business with these banking institutions. 

With FDIC insurance, we guarantee the viability of these institutions. Was it the intent of Congress in doing that, that we were ensuring that these banks would be managed safely and soundly and 

12

making sure that credit and capital was made available to consumers, or was Congress really thinking that banks should become 

real estate brokers and enter other forms of businesses and possibly lose the public’s money and cut off the spigot to credit and 

capital? 

The next area I would like to address in regards to today’s subject matter is the consumer protection issues. In testifying before 

you today, I must be honest to NCRC’s mission of economic justice 

and state emphatically that injustice exists in the banking, insurance, and real estate industries. Until those problems are solved to 

protect borrowers and consumers, these markets should not be 

commingled. 

According to the Department of Housing and Urban Development, a report just released entitled, Black And White Disparities 

in Subprime Mortgage Refinance Lending, borrowers in upper-income African-American neighborhoods were 2.9 times more likely 

to refinance with a subprime lender than borrowers in upper-income neighborhoods overall. 

Our own research at NCRC has found similar disparities. For example, major subprime and manufactured home lenders made 47 

percent of the refinance loans in predominantly African-American 

and Hispanic neighborhoods in the District of Columbia in the year 

2000, a significant increase from the 39 percent of the loans in 

1999, and 25 percent of the loans in 1994. In contrast, subprime 

and manufactured home lenders made less than 4 percent of the 

loans in predominantly white neighborhoods in the 3 years of the 

study. 

The major secondary market institutions have found pricing inefficiencies in the subprime loans. Freddie Mac states that up to 30 

percent of subprime borrowers which they securitized were in fact 

qualified for prime loans. Fannie Mae’s Franklin Raines is quoted 

as saying almost half of the subprime loans they see should have 

received prime loans. 

The issue of insurance redlining is also a problem, but unlike 

home mortgage lending, insurance data is limited only to a handful 

of States. In California, for example, the Center for Economic Justice found that the average insurer wrote only about 5.57 percent 

of its private passenger automobile liability policies and only 6.62 

percent of its homeowner policies in low-income and minority 

neighborhoods. 

As I mentioned, the real estate market is not without its unscrupulous actors. Property flipping involves buying a home at a low 

price and then reselling it at a fraudulently inflated price within 

a short timeframe, often after making only cosmetic improvements 

to the property. NCRC has seen the following practices employed 

in property flipping schemes: Real estate investors continuing buying neglected properties at sheriff sales and reselling homes at escalated prices to unsophisticated first-time homebuyers; Targeting 

immigrant communities, particularly non-English-speaking individuals; Colluding with property appraisers to inflate property value; 

Tricking homeowners into thinking they are dealing with legitimate real estate companies; and Defrauding the Government by 

steering people to FHA financing, knowing the property is either 

inflated or has been frequently flipped. 

13

In the year 2000, the Department of Housing and Urban Development’s Inspector General testified about the rampant flipping 

rings the agency was combatting. One investigation alone uncovered over 1,200 flipped loans, totalling approximately $160 million. 

Twenty-five percent of the loans were in default. The IG indicated 

that approximately one hundred representatives of lending and 

real estate industries colluded on this scheme. If Congress allows 

banks and real estate firms to combine without strengthening the 

consumer protection laws, our communities are more likely to be 

the victims of these scams than beneficiaries of greater product 

choice and lower prices. 

A couple of years ago, I and several others testified before different committees in Congress to not undo the 70-year-old GlassSteagle law that allowed commercial banks to merge with securities firms and insurance companies. We argued that it would injure 

the banking industry and, more importantly, consumers’ interests. 

Not even 2 full years have passed before we see the perfect example of why Congress of 70 years ago argued against the merging 

of the banking industry with other industries—the fear of scandal, 

self-dealing, and swindling of investors. Need more proof of the 

need for the separation of finance from other industries than the 

biggest bankruptcy and business failure in the history of the American economy, the Enron swindle. 

Mr. Chairman, I see that I am out of time. I just want to close 

by adding that we strongly oppose, from a consumers’ perspective, 

the allowance of the banking industry into the real estate industry. 

Should that occur, and we hope that it wouldn’t, we would also 

hope that, along with that would be some very strong language 

about the real estate industry being able to provide data and be obligated to not ignore the interests of working-class and workingpoor consumers and minorities and women who have difficulties 

often accessing credit and capital and homeownership. 

I thank you for the opportunity to comment. 

Senator JOHNSON. Well, thank you, Mr. Taylor. 

Mr. Hanna. 

STATEMENT OF HOWARD W. HANNA, III

VICE CHAIRMAN, REAL ESTATE SERVICES

PROVIDERS COUNCIL, INC. (RESPRO)

PRINCIPAL AND FORMER CHAIRMAN

THE REALTY ALLIANCE

PRESIDENT AND CHIEF EXECUTIVE OFFICER

HOWARD HANNA REAL ESTATE SERVICES

PITTSBURGH, PENNSYLVANIA 

Mr. HANNA. Thank you and good morning, Mr. Chairman, and 

Members of the Subcommittee. And thank you, Senator Santorum, 

for the overly kind introduction. 

My name is Howard Hanna and I am President of Howard 

Hanna Real Estate Services, a family owned and operated real

estate brokerage company headquartered in Pittsburgh, Pennsylvania, and founded by my parents in 1957. 

Howard Hanna Real Estate Service has 66 neighborhood and 

community offices, serving Pennsylvania, Ohio, West Virginia, and 

New York State. We also own a mortgage company that was estabVerDate 0ct 09 2002 17:04 Oct 23, 2003 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 S:\DOCS\0523.TXT FRANK PsN: FRANK1
14

lished in 1982, Hanna Financial Services, which is licensed in 

those States, plus an additional nine States in the United States. 

Our firm has 1,500 sales associates and employees, of which 

1,128, as of Monday, are members of the National Association of 

REALTORS. I am proud and honored to be a 32-year member of 

the REALTORS Association of Metropolitan Pittsburgh, the Pennsylvania Association of REALTORS, and the National Association 

of REALTORS. 

I currently serve as Vice Chairman of the Real Estate Service 

Providers Council—known as RESPRO—and I am a member of 

the Realty Alliance, as well as a past Director and Chairman. I 

represent both organizations today. 

RESPRO is a national association of approximately 200 residential real estate brokerage, mortgage, homebuilding, title, and other 

settlement service companies who promote an environment that enables providers across industry lines to offer one-stop shopping for 

homebuyers. 

The Realty Alliance is a national organization of 45 regional residential real estate brokerage firms that provide us with idea sharing venues, industry forecasts and analysis, financial benchmarking, and technology information. 

Mr. Chairman, I would like to ask that my written testimony be 

included in the record, and additionally, the written testimony from 

Murray Consulting, who performed a one-stop shopping survey 

that I will be discussing during my comments, be included in the 

record. 

Senator JOHNSON. They will be placed into the record. 

Mr. HANNA. Thank you, sir. Together in the year 2001, 

RESPRO’s real estate broker members and Realty Alliance members closed over 2.6 million of the total 6 million home sales in the 

United States, utilizing over 315,000 sales associates who also are 

National Association of REALTOR members, and 78,000 employees in our over 57,000 offices. 

Like the majority of the Nation’s top 350 residential real estate 

brokerage firms, most RESPRO real estate broker members and 

Realty Alliance members also offer mortgage, title, closing and 

other settlement services. 

In fact, according to a 1999 study conducted by the independent 

consulting firm of Weston Edwards & Associates, the top 350 real 

estate brokerage firms closed $22 billion in mortgage loans in 1998, 

and the realty-based and builder-based lending accounted for about 

10 percent of the purchased money mortgages in that same year. 

Edwards also estimated that this amount would double within 3 

years. 

In fact, senior management from four real estate brokerage firms 

that own or partially own mortgage companies, who all are 

RESPRO and Realty Alliance members, are here with me today: 

myself from Howard Hanna Real Estate Services in Pittsburgh, 

Pennsylvania; Dick Christopher, CEO of Patterson Schwartz in 

Wilmington, Delaware; George Eastment, Executive Vice President 

of Long and Foster Real Estate in the Washington, DC metropolitan area; and Chip Roach, Vice Chairman of Prudential Fox and 

Roach REALTORS in Philadelphia, Pennsylvania. 

15

We believe that the combined purchase money mortgage originations of our four mortgage companies equaled approximately 3 percent of all purchase money mortgage in the country in 2001. So the 

5 percent that NAR referred to in its testimony, we have some 

question about. 

Edwards also found in his study that 72 percent of the Nation’s 

350 largest real estate brokerage firms offered mortgage services in 

1998, that 45 percent of those firms offered title insurance, closing, 

or escrow services, and that 36 percent offered personal insurance. 

Mr. Chairman, RESPRO and Realty Alliance favor the American free enterprise system and open competition. Any bank should 

be able to compete with us in providing homebuyers with one-stop 

shopping programs. All available evidence shows that the homebuyers prefer one-stop shopping and that realty-based one-stopshopping programs offer those homebuyers potential benefits. 

The most recent consumer survey in this area was performed in 

March of this year by Harris Interactive, the parent of the Harris 

Poll. Harris surveyed over 2,000 recent and future homebuyers and 

found that 82 percent of the homebuyers prefer using a one-stopshopping service for their home purchase. The survey also found 

that 64 percent of the homebuyers who recently used a realtybased one-stop-shopping program had a much better overall homepurchase experience. 

Other studies, some of which are described in my written statement, have found that the services offered through realty-based 

one-stop-shopping programs are not only competitive, but are even 

lower in cost in many cases, than those offered by independent 

firms. 

RESPRO and Realty Alliance do not believe the entry of financial holding companies and national banks would change the potential customer benefits of realty-based one-stop-shopping programs. 

Over the last two decades, a number of financial conglomerates 

have entered the residential real estate brokerage business—Sears 

Roebuck, Metropolitan Life, Merrill Lynch, GMAC, Prudential Insurance Company, Cendant Corporation, and Warren Buffet’s 

Berkshire Hathaway, which now owns the number two largest residential real estate brokerage company in the country. 

On the surface, these companies appeared to have significant 

competitive advantages over traditional real estate brokerage companies, such as national distribution outlets, consumer marketing 

lists that made it easy to reach everyone, valuable data about buying habits, and name recognition. In fact, Sears even had access to 

Federally insured deposits through its affiliate, Sears Savings 

Bank. 

Sears, Merrill Lynch, and Metropolitan Life have since left the 

real estate brokerage business, while Prudential, GMAC, Cendant, 

and Berkshire Hathaway remain good competitors. Their presence 

has not changed the basic character of the real estate brokerage 

marketplace; in fact, many of us believe that their entry has contributed to the development of a wider range of services and products and has caused traditional real estate brokerages, to be more 

efficient, more consumer-focused, than we ever were before. 

Federally-insured financial institutions also have entered residential real estate markets recently, such as Great Western Bank 

16

in California, Metropolitan Financial Corporation in Minneapolis, 

First Place Bank in Ohio, Empire Savings Bank in Wilmington, 

Delaware, and Pennsylvania, and Dollar Drydock in Connecticut. 

However, in a short period of time, most of these financial institutions have either sold their real estate brokerage businesses and 

entered new markets in which they feel that they can compete 

more favorably. 

Finally, I believe it is important to remember that this would be 

a two-way street, in that real estate brokerages also would have 

the ability to own banks. 

For example, my company had a close working relationship with 

a bank that was recently sold in our region. And Howard Hanna 

Real Estate Services, quite frankly, would have been very interested in purchasing this bank if Federal law had allowed it. 

Mr. Chairman, I thank you for the opportunity to testify and I 

would be glad to answer any and all questions. 

Thank you very much. 

Senator JOHNSON. Thank you, Mr. Hanna, and thank you, members of the panel. 

The Subcommittee will abide by a 10-minute question rule. That 

doesn’t mean that it is mandatory that you consume 10 minutes 

each on questioning, but we will try to place some limits to make 

sure that everyone has an opportunity to ask their questions. 

Let me begin by asking, with particular reference to Mr. Murphy 

and Mr. Taylor, I am sympathetic to the desire to maintain a variety of small independent businesses throughout our country. In my 

home State of South Dakota, we rely on small businesses to serve 

our small communities, and while large corporations play an important role in the economy, market economics do not always provide incentives to serve those small towns. But there have been 

concerns raised that bank entry into real estate brokerage could 

spell the demise of small local REALTORS. 

And yet, it seems that some of the largest corporate conglomerates are real estate brokerages with lending and insurance affiliates which operate today under existing authority. Would you 

elaborate a bit more on why bank entry into real estate brokerage 

is different than broker entry into the mortgage and insurance 

business? 

Either one of the two of you can choose to elaborate a bit on that. 

Mr. MURPHY. Thank you, Mr. Chairman. First of all, in a State 

like South Dakota, it would be no different than any other State. 

What we have is a situation where, in a community where there 

is 10 or 20 real estate firms, if one banking institution starts its 

own real estate firm, the other two will follow in line. 

With that, automatically, the smaller businessman cannot compete. They do not have the dollars to compete with the advertising. 

They cannot afford to lose the money or spend the money that is 

really stockholders’ money. 

When that deteriorates, we have fewer people in the business because if you are not working for the bank, we need people to keep 

generated into our industry. You have put a chokehold on that because if you cannot work for a bank, you cannot get started, then, 

into this business. 

17

Now that is in a small State. So we will say in 10 of 12 communities in South Dakota, instead of having 150 real estate firms, you 

would be down to about 25, maybe 20. And with that, you would 

lose a minimum of 25 percent of the ages that we would look at. 

And with that also, these people are not going to have jobs in their 

area. They are all independent contractors. They are all small businessmen. They are being choked out of this. 

But if we look at it as national, if you went to a State like California, instead of a thousand offices, you would be down to 6 or 10 

megabanks who control the whole market. You have not only controlled the number of independent contractors, they also have the 

ability to choke out all their competition. 

When that happens, it not only takes the number of independent 

contractors out of the business, but they are also in a situation 

where they can control the valuation of a property, because if you 

do not have thousands of REALTORS involved in this, from many 

markets, the only comps they are going to have are within their 

own association. It is a chokehold. 

Senator JOHNSON. Mr. Hanna. 

Mr. HANNA. Senator, I mentioned Metropolitan Financial, which 

once owned Edina Real Estate Company in Minnesota. I believe 

they also had offices in South Dakota. I have not noticed that when 

they owned Edina Real Estate Company, they took a stranglehold 

in that market. 

Senator JOHNSON. Mr. Smith, since brokers receive compensation 

on a commission basis, they have a strong incentive to make sure 

that property sales go through. 

There have been instances where appraisers have been pressures 

by brokers to make sure that the appraised value met underwriting 

requirements. Is it conceivable that a bank-affiliated broker would 

have an incentive to pressure the lender in the same way, especially if the two worked in the same organization? 

And would you comment just briefly on whether banks have appropriate internal controls to address that kind of concern? Could 

these pressures lead to substandard underwriting by insured depositories, especially during times when the property sales are 

slow? 

Mr. SMITH. Well, we do have safeguards in place and our appraisers have to be registered and certified and go to school and 

have the State qualifications in order to be an appraiser for us. 

And that is required by the FDIC and our regulatory bodies that 

examine us because they do check the appraiser’s qualifications. 

It behooves every banking organization to make loans in a very 

safe and sound manner and to pressure an appraiser to make an 

appraisal that doesn’t fit the qualifications of the real estate would 

be backward in making a safe and sound loan. And as the CEO of 

a bank, I want to be sure that my collateral is in place in order 

for that loan to be repaid properly. So that definitely would not be 

something that we would want to see. 

Mr. TAYLOR. Mr. Chairman. 

Senator JOHNSON. Yes. 

Mr. TAYLOR. Currently, a broker has a main objective to get you 

to purchase that home. They get their fee for that. And so, it is

in their interest to be able to draw upon an array of financing inVerDate 0ct 09 2002 17:04 Oct 23, 2003 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 S:\DOCS\0523.TXT FRANK PsN: FRANK1
18

stitutions that can satisfy whoever the borrower is, whoever the

buyer is. 

When that person is then employed by a specific financial institution, I would think that it is reasonable to think, in addition to 

the compensation they get from being a broker, that they will also 

be compensated for the amount of business that they steer into the 

mortgage segment of that financial institution, whether that is the 

best deal for the borrower or not. And I do not think that that gives 

consumers more choice. I think it actually narrows the choices. 

Mr. HANNA. Wouldn’t the same rules apply under RESPA for a 

bank’s sales associates as they would for sales associates at Howard Hanna Company or Long & Foster today? 

The RESPA rules wouldn’t change. They prohibit a mortgage 

company from giving compensation to a real estate sales associate 

for referral of a mortgage. 

Senator JOHNSON. Let me, in my remaining few minutes before 

we go on here, ask a question to the panel here. And this alludes 

somewhat to observations made by Mr. Hanna. 

Based on the information available through the Conference of 

State Bank Supervisors, 25 States currently allow banks to engage 

at some level in real estate brokerage and property management. 

It would appear from available data that, in spite of this authority, 

only a small number of banks have actually taken advantage of the 

authority. 

Also, it is my understanding that credit unions have had the authority to engage in real estate brokerage and property management through the credit union service organizations. Yet, data indicate that only two or three have engaged in any type of brokerage. 

None have engaged in property management. 

Given how few banks, thrifts, and credit unions have taken advantage of the existing authority, I wonder if, first, Mr. Taylor and 

Mr. Murphy would elaborate a bit on the justification for the REALTOR opposition to the entry of financial holding company national bank affiliates into the business, and for the rest of you, any 

brief observation on that as well. 

Mr. Murphy. 

Mr. MURPHY. Yes, Mr. Chairman. If you add up all the assets of 

these companies, it is not enough to do what one megabank does 

in a day. 

Most of these places have one licensee sitting in a lobby. That 

is not their main course of business. They are in places where, to 

provide a service for their community, they cannot even make a living doing this in most of those communities. 

So they are providing a service for their community that no one 

else can do for them. But at the same time, they are not in this 

to do real estate brokerage on a level that we are talking about 

here today. 

Mr. TAYLOR. One of my major concerns would be that a major 

subprime lender gets in the business of becoming a real estate 

broker and I think creates further challenges, particularly for the 

population that we are concerned with, low income and minority. 

I have not heard an argument yet as to why the merging of this 

kind of financial services would at all serve consumers better. 

19

Right now, we have an extremely competitive real estate brokerage industry. We have an extremely competitive financial services 

industry. And what is being proposed essentially would, in our 

opinion, lessen that competition and lessen the choices for consumers. 

And when we hear about the large real estate firms that are already in the mortgage industry, we have not done this, but perhaps 

we should, is take a look at, to the extent that they are in the 

mortgage industry, who are they really serving? 

Unlike financial institutions that have a CRA obligation, they 

have an obligation to make sure that the person at the bottom rung 

of the ladder working their way up to their version of the American 

Dream, has access to credit and capital. 

Real estate brokerage firms do not have that obligation, neither 

do mortgage companies. And that is why, when you take a look at 

the difference in industries and who is serving people of color and 

who is serving working-class, working-poor people, disproportionately, you will see banks doing a much better job at that, because 

that is who the law applies to. Then you look at mortgage companies and real estate firms that are independent, I think you will 

see great disparities in terms of who they are really serving. And 

that should be of concern to everybody on this Subcommittee. 

Senator JOHNSON. Any brief response? 

Mr. Smith. 

Mr. Hanna. 

Mr. SMITH. I would just like to add that the banking industry is 

under the CRA and the REALTORS are not under CRA. 

I think if the banks are permitted to partner with the local real 

estate firms, that both of us could do a much better job of providing 

mortgages, products, and services to the low-income people in our 

communities. 

Mr. TAYLOR. Well, if Mr. Smith is agreeing, and I would agree 

with him that having the real estate or even insurance industry 

come into the banking industry, that they would agree to be obligated to produce data on who they are serving and to have an affirmative obligation to make sure that they are not ignoring the 

needs of underserved populations, we may reconsider our position 

on this if that is the position of the ABA. 

[Laughter.] 

Senator JOHNSON. Mr. Hanna. 

Mr. TAYLOR. And I am a Red Sox fan, anyway. 

[Laughter.] 

Mr. SMITH. I would just like to respond, that I do go through 

CRA examinations every year. I would welcome my colleague here 

to come and sit through the CRA examination so that he could understand what we are doing in our community. 

Senator JOHNSON. Mr. Hanna. 

Mr. HANNA. We would recommend the distinguished gentleman 

to my right visit Howard Hanna Company because we are a very 

open shop, and we would be happy to go over those numbers with 

you. 

Mr. TAYLOR. I am going to take you up on those invitations. 

Senator JOHNSON. My time is expired. 

Senator Allard. 

20

Senator ALLARD. Thank you, Mr. Chairman. 

I am interested in trying to get the exact number of State-chartered banks, credit unions, and thrifts who engage in real estate 

brokerage. Do we have any idea how many financial institutions 

actually engage in real estate brokerage activity, and how many 

are involved in real estate management? 

Does anybody have those facts? 

Mr. Murphy. 

Mr. MURPHY. Yes, Senator Allard. Only six States have banks in 

residential real estate brokerage operations. In these States, 18 

banks have residential real estate brokerage operations. 

These banks represent 0.2 percent of all banks and serve areas 

with 0.57 percent of the U.S. population. And it looks to me like 

there are about 18 banks, anyway, that are involved in this. 

Mr. HANNA. I believe 26 States currently allow State-chartered 

banks to engage in real estate brokerage. 

Senator ALLARD. I picked that up in the 26 States. I was just 

wondering how many institutions in those 26. 

Mr. MURPHY. I have 18 down here, Senator. 

Senator ALLARD. Okay. Currently, if a national bank wished to 

become involved in real estate in any of those 26 States, they could 

switch their charter, could they not? 

Mr. SMITH. That is correct. 

Senator ALLARD. They could switch that charter. 

Mr. SMITH. That is correct. 

Senator ALLARD. Okay. Now, if national banks are allowed to engage in real estate management brokerage, what percentage of 

banks do you estimate would enter the industry within 5 years? 

Mr. Smith or Mr. Murphy, do you have any suggestions? 

Mr. SMITH. I can only relate that to my personal experience. 

I have had real estate powers since 1984. So 18 years. 

Senator ALLARD. And you are a State bank. Is that right? 

Mr. SMITH. I am a trust company. And Missouri trust companies 

have agency powers. I have had that ability since 1984. 

But only recently has it become apparent that I may need to try 

to partner with one of the local real estate firms in order to continue to offer the products and services that I would like to offer. 

In our community of 8,500 people, we have three or four real estate firms. But the largest one is a Re/Max firm. And at that office, 

a person drives to town, getting ready to move to town, goes in, 

finds a house, signs a contract to purchase the house. They walk 

into the next office of that firm, sign the papers to the mortgage. 

They walk into the next office of that firm and sign the papers for 

the title insurance. 

I never have a chance to see that customer or offer that customer 

a product unless he or she happen to walk in the door of my bank 

to open a checking account. I would submit to you that is a Re/Max 

firm, which is the second largest real estate firm in the United 

States. 

The question I would have is what are the other smaller real estate firms doing to compete with that? If I cannot compete with 

that, how are they going to compete with that? And I suggest to 

you that they may want to partner with the bank to have the capital and technology to compete with that. And likewise, I want to 

21

partner with them to have the ability to compete with those products and services. 

I would submit to you that it is very important to the smaller 

real estate firms to have that opportunity to partner with the bank, 

so they can continue to survive in that same marketplace. 

Senator ALLARD. Does anybody else on the panel want to comment on that question? 

Mr. Murphy. 

Mr. MURPHY. Yes. Senator, the problem with the one-stop shopping is, in our marketplace now, we have buyer brokerage, we have 

leases and we protect each other. So if I represent the buyer, and 

he does not like me, he can fire me. 

The problem with the setup that we are talking about today is, 

if you have inducements that are keeping you with an organization, 

and we have all seen negative closings in our State, it is kind of 

hard for you to feel like you can break your relationship with that 

organization. 

With me, the way it is set up, you can break that because there 

is nothing that is bound together besides the contract. We do not 

have inducements—we cannot offer inducements that would keep 

them there for the whole term—title insurance, the mortgage,

the appraisal, the closing fees. It puts the consumer at risk in the 

future. 

Senator ALLARD. Mr. Hanna, did you have something? 

Mr. HANNA. Are you talking about the consumer or the REALTOR? 

Mr. MURPHY. The consumer, sir. 

Mr. HANNA. I find that the consumer is looking for the best service at the lowest possible cost and wants to make the process simpler and easier for them to buy homes. I think that is what our 

role is as REALTORS in the market, to make it simpler and easier and less expensive for people to buy homes. 

Senator ALLARD. Go ahead, Mr. Smith. 

Mr. SMITH. I would just like to add that the banks are under the 

Bank Holding-Company Act is antitying provisions, which specifically says, we cannot force a product onto the customer in order to 

sell another product. We have to file disclosures in that respect. So 

we cannot tie those products together. 

Mr. TAYLOR. Senator Allard. 

Senator ALLARD. Mr. Taylor. 

Mr. TAYLOR. If I may. This is a piece of my testimony—it is 

short—that I did not get to, that relates. I think it gets to your 

point. 

It is a real story about someone in this city, an elderly couple 

who were victims of a real estate problem. They owned a house in 

the Mt. Pleasant neighborhood in DC, for over 43 years. And in 

order to pay their medical expenses, an independent mortgage company convinced them to take out an adjustable-rate mortgage with 

a prepayment penalty and a loan payment that exceeded the couple’s monthly income. 

The victims retained an independent REALTOR to facilitate the 

short sale of their home, who quickly identified the appraisal conducted by the mortgage company was substantially inflated. It was 

22

only after the victims’ REALTOR requested NCRC to intervene, 

that the sale took place instead of a foreclosure. 

Now imagine if that real estate agent had been affiliated with 

that lender. They would have had no incentive to even catch anything or do anything other than to continue to take advantage of 

that person. 

I am not suggesting that Mr. Hanna personally, that he conducts 

business this way. But that is the kind of problem we have, and 

people act funny when there is the opportunity to make a buck. 

And let’s not allow that situation to occur by simply making it illegal to have those kinds of incestuous relationships between REALTORS and bankers. 

Mr. HANNA. The real estate agents that work for us, and most 

of the REALTORS that I know, are pretty independent contractors I do not think that example you gave is typical of a REALTOR, whether it works for Long & Foster, Howard Hanna, or Mr. 

Murphy’s firm. 

Mr. TAYLOR. I am just saying, if that REALTOR had a relationship with the mortgage lender, in which they actually were their 

employee, because the Federal Reserve, without this law, allowed 

that to happen, why would an employee turn on their employer and 

say, hey, gee, this is an inflated appraisal value. This is not in the 

interest of the consumer. They’d be silent. They wouldn’t do it. 

Senator ALLARD. Mr. Smith brings up an interesting issue on the 

antitying provisions that we have now. 

The question I have for you, Mr. Smith, is regarding the concern 

that is raised about whether homebuyers might feel pressure to use 

a bank’s entire range of services. In other words, if you are going 

to get a loan from us, then you have to use us for real estate and 

everything else. 

Do current antitying provisions offer consumers sufficient protection against such a possibility? How are these antitying provisions 

enforced? 

Mr. SMITH. Well, we have to disclose to our customers any arrangements we have on any products and services. We have to disclose that. They have to sign it to say that it was disclosed properly 

to them. And then the regulatory body that comes in to examine 

us makes sure that we have those documents in the file and that 

the customer in fact did sign that, saying that they are aware of 

any tying arrangements. That is checked. I can tell you explicitly 

and by all the regulatory bodies, whether it be the OCC, the FDIC, 

or our State banking center. 

Senator ALLARD. Do people even sign this provision when they 

are not granted a loan, for example? 

Mr. SMITH. Yes, they sign the documents, and then the loan goes 

to the loan committee to see if the loan is going to be approved. 

Senator ALLARD. But you are a customer. You come in and you 

talk to the bank and you say, ‘‘look, I would like to have a loan.’’ 

And the bank says, ‘‘well, where is your savings account?’’ I have 

it over, some place else over here. But I have a checking account. 

Then the bank could say, ‘‘well, before we give you a loan, we 

want to have the savings account moved over into our bank. And 

if you happen to have real estate, which is a concern raised, we 

would like to have you deal with our real estate agent to do that.’’

23

Now if the person who is applying for the loan says, ‘‘forget it, 

I am not going to deal with you on that,’’ then do you ask him to 

sign that form that there was no antitying provisions? My question 

is, how is it enforced? 

Mr. SMITH. Well, obviously, if you make the loan or you would 

sell the real estate, then you have to disclose that. 

Senator ALLARD. That there were no antitying. 

Mr. SMITH. That there was no tying. And that is how it would 

be enforced. 

Senator ALLARD. Yes, sir. 

Mr. Taylor. 

Mr. TAYLOR. Senator, antitying can actually be waived. You can 

get exemptions from the Federal Reserve. And indeed, that is just 

what Citibank did last year. It received a favorable exemption from 

antitying prohibitions to offer incentives to their credit card, mortgage, or loan customers who maintained a combined balance in a 

package of products and services that included annuities, a homeowners life and long-term care insurance for insurance affiliates of 

Citibank. 

So the regulators currently have the ability and I could foresee 

them having the ability to create other exemptions, which would 

include real estate brokerage. 

Mr. HANNA. This all, I believe, comes under RESPA which prohibits real estate firms or mortgage lenders, from requiring the use 

of an affiliated product. 

Senator ALLARD. Thank you for your responses. 

Thank you, Mr. Chairman. 

Senator JOHNSON. Thank you. My Democratic colleagues unfortunately had to leave for a ceremony event. They have left questions 

to be submitted to the panel. And we will respectfully be extending 

those questions on to the panel members to respond to those at the 

appropriate time. 

Senator Bennett. 

Senator BENNETT. Thank you, Mr. Chairman. 

We have heard a lot of dire predictions and we have heard a lot 

of rosy scenarios. I would like to stay away from conjecture for just 

a moment and go to experience. 

Mr. Smith, you say that your bank has the right to do this at 

the present time. 

Mr. SMITH. That is correct. 

Senator BENNETT. All right. Have you done it? 

Mr. SMITH. No, I have not. 

Senator BENNETT. Why not? 

Mr. SMITH. Only in the last 2 or 3 years has it become a need 

in order to compete with the real estate agent, the Re/Max agency. 

Only has it become apparent in the last 2 or 3 years that there is 

need for me to get into this line of work in order to offer the products and the services. 

Senator BENNETT. So you are telling me that the reason you are 

now contemplating it is because Re/Max is cutting into some of 

your mortgage business, not because you see this as a great opportunity to do any of the predatory things that concern Mr. Taylor. 

Is that a fair assertion? 

24

Mr. SMITH. I think that certainly is fair. Also, and we have a test 

case here with the insurance agencies, it is very difficult to start 

something de novo. And it is very critical to the success of an operation to be able to partner with someone that has the expertise and 

the experience in doing this business. 

So in order to take my bank into this market, I am going to want 

to partner with a real estate agency in order to have the experience 

and the expertise to offer these products. 

Senator BENNETT. Okay. Mr. Hanna, you have real estate agents 

that you do partner with, and you say they are pretty independent 

people. 

Mr. HANNA. Our agents, our sales associates, are independent 

contractors. 

Senator BENNETT. Independent contractors. 

Mr. HANNA. Independent contractors. 

Senator BENNETT. Can they take a loan some place else if they 

do not like what you are giving them? 

Mr. HANNA. They not only can, but they do 70 percent of the 

time. Our capture ratio is about 30 percent. Our mortgage company, our financial service company, captures about 30 to 32 percent of our total sales. 

Senator BENNETT. So you would insist that the experience would 

not produce the result that Mr. Murphy is talking about of driving 

agents out of business. 

Mr. HANNA. We have been in the mortgage business since 1982, 

and as I mentioned, in the real estate business since 1957. So we 

have a very long track record. We would like to convert more of our 

buyers’ sales to our mortgage company, but we are happy with 30 

percent because we are providing great service and great pricing to 

our real estate associates to provide to their customers. 

Senator BENNETT. You are suggesting, then, that the relationship 

that these agents have with you does not produce a circumstance 

where they can use their leverage with the homebuyer to get a 

higher price for you. 

Mr. HANNA. Our sales associates are very independent and they 

are looking for long-term relationships with their client. So they 

want to make sure that they get the best terms and conditions in 

that mortgage and closing process for their homebuyer so they can 

get future referrals from that homebuyer. 

Their primary responsibility is to create a comfortable and happy 

sale for that homebuyer. And they are out looking for the best possible mortgage product for them. 

Hopefully, it is with Howard Hanna Financial. But we don’t require that they use our mortgage company, and RESPA would prohibit us from doing so. 

Senator BENNETT. So you would insist that the experience indicates that the consumer is better served? 

Mr. HANNA. No question in my mind that the consumer is better 

serviced. 

Senator BENNETT. And so, you—well, obviously, your testimony 

here—now, Mr. Murphy, I have some experience. 

Unfortunately, I have not only bought a lot of homes. I have six 

children who have come to me for help in buying homes. 

Mr. MURPHY. I have two teenagers, so, I understand the feeling. 

25

Senator BENNETT. Yes. My wife and I, plus our six children, all 

of whom are married, of that group of seven, six are moving this 

year. 

Mr. MURPHY. Good. I would have liked their referrals, Senator. 

Senator BENNETT. No, the reason that I bring that up, when we 

made our first move to Salt Lake City, we came across an agency 

whom we really liked. I thought her service was outstanding. She 

shopped for the very best mortgage rate for us. 

Quite frankly, Mr. Smith, the experience we had with the bank 

was less than satisfactory. I remember being enormously frustrated 

with the difficulties we had with the bank. 

This was the bank that she took us to, pointed us to as having 

the lowest rate. But they were not user-friendly in the way that we 

finally got our loan. 

Mr. Murphy, my point is that this particular woman has changed 

agencies several times. She’s a hot property. Maybe I shouldn’t put 

it in those terms. 

[Laughter.] 

Lest this be misunderstood. 

[Laughter.] 

She is a very competent professional who is in high demand for 

what she does in the area. 

[Laughter.] 

And consequently, independent real estate agencies keep trying 

to steal her from each other. I have gone back, and my family has 

gone back to her for her services repeatedly. She has not only handled all of our homes, she has handled a number of our children’s 

homes. I have a little trouble assuming that she would be driven 

out of business if a bank were to come in and be able to offer other 

services. 

Can you help with that one? 

Mr. MURPHY. I think in any community, Senator, there is going 

to be a number of REALTORS who have established themselves 

over the years, 10 years, myself 15, my partner, who the Chairman 

knows, over 25 years. 

Most of our business is repeat business. The problem that we 

have is we need new people in our business regularly. Even in a 

State like South Dakota, which is small, with only 1,400 REALTORS, we need, on the average, of 150 to 200 new agents getting 

into our business. 

If you have to go to work for a bank because of the options of 

being new, the banks do not need you. Smaller offices cannot afford 

to have you around. They have a desk cost, just like anyone else. 

It doesn’t matter that you are an independent contractor. We are 

all independent contractors. 

But I can tell you, I have seen a poor REALTOR. I have never 

seen a poor banker when it comes to what they can live on. And 

the new people in our business just do not generate the income 

that it takes to sustain themselves to get themselves established. 

Senator BENNETT. Well, I am very much aware of the fact that 

many real estate agents do not earn a full-time living at this. It 

becomes almost a part-time job or an adjunct to what else they do. 

I have some cousins that are in that circumstance. And frankly, 

I have not used their services. 

26

[Laughter.] 

Mr. MURPHY. You should have sent them a referral, though. 

[Laughter.] 

Senator BENNETT. Yes. I am trying to see if we can get any evidence or experience, rather than prospective assumptions, that the 

pool of agents will shrink if the banks go into this business. 

Now, Mr. Smith, I was hoping could help us. But he is not in the 

business, so his vision of this is prospective as well. 

The best place I think I can look is in the examples that Mr. 

Hanna has given us, and Mr. Taylor, I would like you to comment 

on this, too. 

As these large, presumably reputable, firms have come into the 

real estate business, have they either dried up the number of available agents or have they engaged in the kind of predatory practices 

that you so rightly deplore? 

Or has there been a reverse? That is, the more prestigious and 

national the firm, the less likely that firm is to engage in that kind 

of practice and the more likely they are to look for agents who 

would welcome the opportunity of an affiliate. 

I do not know. You have had some experience. We have heard 

from Mr. Hanna. Now let us hear from those of you who have had 

experience. With these large firms coming into the business, what 

has happened in the area of consumer protection and agent employment? 

Mr. TAYLOR. First of all, let me say I think that is an excellent 

question. If you do not mind, I would like to go back and actually 

do some research and see what the kind of performance was versus 

what the numbers are relative to how the industry is either growing or shrinking and what the performance of the large firms are 

versus the smaller firms. 

But I cannot say, I was listening to Mr. Smith. And you cannot 

help but sympathize with the fact that he’s sitting here saying, 

look, my business as a small bank, I have to find other ways to survive. And I appreciate that. 

But I think his problem has more to do with the consolidation 

of the banking industry and then the evolution of the banking industry. There is still de novo bank applications coming in. So, obviously, people are getting into the banking industry, starting small, 

specialized banks. 

But I would say his problem is more with that and perhaps some 

of the many decisions that this Congress has made relative to allowing for mergers and the superconglomerates. 

Now, having said that, it is interesting to look at some of the 

large institutions and the way they have gone. The old Bank of 

America was one of the best community banks when it came to 

small business lending. They got acquired by NationsBank and 

NationsBank eliminated all of that very good small business lending opportunities. 

And so, you had one very large bank being acquired by another 

large bank, and there was a difference at the end of the day as to 

their performance was. 

You can look at the home mortgage disclosure data of some of 

these large institutions and you will see some doing a pretty decent 

job and others who you wonder whether they have just decided, 

27

and indeed, many of them have, decided to get out of the business 

of mortgage lending. So, I do not think that there is this one blanket statement that you can make relative to a large institution 

versus a small institution. 

Indeed, some of the minority-owned institutions might be doing 

a very excellent job, or are doing a very excellent job in some cities 

serving underserved populations. And yet, they are small institutions. Some of the community banks. 

I am a big believer in banks. And the reason I believe in banks 

is because there are laws, fair lending laws like CRA and the Fair 

Housing Act and others, which they are obligated to do. 

I think, left to their own demise, and this is just the way that 

you have to tweak the capitalist system so it works for everybody. 

But left to their own demise, they might only want to lend to the 

well-healed. And for others, we would be really struggling with 

much higher costs and much more difficult access to credit and capital. But we have laws against that, thank God. 

Well, that is not true for a lot of the other industries. So, again, 

if this were to occur, I would really hope that those same kinds of 

obligations that allow all Americans to build wealth, all Americans 

to have the opportunity. 

What I hear from your experience is, you know what, we have 

a heck of a brokerage industry and you have had a good experience 

working with an independent broker, not owned by a bank. And if 

it is not broken, why are we going to fix it, would be one of my 

conclusions. 

And the other would be, if we must go in that route to make sure 

that, in the same way that the banks are obligated to make sure 

that people are treated fairly and equitably and get access to credit 

and capital, their brokers do that same thing. 

They do not just open offices in the suburbs, but they have offices 

in rural America and inner-city America, so that people have access 

to the services. 

Mr. SMITH. Senator, if I may respond? 

Senator BENNETT. Let me hear from Mr. Murphy on the issue. 

You have raised a whole series of issues that we could have a 

whole series of hearings on. 

Mr. SMITH. Right. 

Mr. MURPHY. I liked his answer, first of all. 

Senator BENNETT. Yes. 

Mr. MURPHY. A large real estate firm in South Dakota, the largest one that I can think of, has 42 people in it. That is the largest. 

And everyone that I know of, anyway, in our industry in South

Dakota is an independent contractor. 

We do not see problems with what we have right now. My arrangements with my loan officers, half the people that come to our 

noon monthly luncheons are the affiliates. We like the arrangement 

that we have right now. None of them wants to get into this business. Or at least, would come right out and say it, to be honest 

with you. They feel the same way. It is not broken. 

They believe that they need separation of commerce and finance. 

There is no doubt in any of their minds. They are not convinced 

that there would be separation, I think. But they are not going to 

come right out and say that, I guess. 

28

Senator BENNETT. Mr. Smith, you were going to comment. 

I apologize for going on. But I apparently touched a nerve here. 

Mr. SMITH. Very quickly, I would like to say something about the 

consolidation. 

My community is 8,500 people. We have five banks. Three of 

them are community banks. I would tell you that our office, as well 

as two of the other offices of the banks, are downtown. 

I would like to point out that we have a highway bypass, of 

course, around our community like a lot of small communities. The 

real estate agencies have moved out on the bypass. 

But our office is downtown. We worked very hard to maintain a 

very viable downtown where we have a town square. And in fact, 

something that you will not see very often, our bank offers interestfree loans to the business owners if they will repair and remodel 

their storefronts so that we can keep a very attractive downtown 

area to pull people into our community, to spend their money and 

provide jobs, et cetera. 

Senator BENNETT. Thank you. Sorry to open up the floodgates 

about bank consolidation. 

Senator JOHNSON. Thank you, Senator Bennett. Let me just ask 

a couple real quick questions here of the panel. 

Let me branch out here. Brokerage and property management 

are two distinct activities, but they are lumped together in the proposed regulation as if they are linked in some manner. 

There hasn’t been a lot of discussion in the testimony from this 

panel relative to property management. Would any of you choose 

to elaborate on whether these should be viewed as separate and 

distinct activities as we consider this issue? 

Any of you. 

[No response.] 

It may be that there are no strong opinions one way or another. 

Mr. MURPHY. In South Dakota, they are all lumped under the 

same licensing program. 

Mr. HANNA. That is the way they are in most States, I believe. 

It is under real estate licensing. It is hard, I think in most States, 

to distinguish the difference. It is part of the real estate brokerage 

activity. 

Mr. TAYLOR. I would like the opportunity to submit a comment 

in the future on that, if I could. 

Senator JOHNSON. So the licensure process in most States, you 

are suggesting, would lump them together, even though, conceptually, it would seem that there would be a difference between 

property management and actual brokerage activities. 

Mr. HANNA. In most areas, the residential real estate brokerage 

firm is not involved in property management as we know it. This 

might not be true in some of the smaller markets, but typically, of 

commercial real estate brokerage companies, who are all under the 

same licensing law, that would be most responsible and part of 

their business model. 

Senator JOHNSON. Well, a follow up question probably has the 

same response, then, but let me ask. 

The focus we have had here today has been primarily in residential real estate and the importance of local REALTORS in providing communities with that personalized service that they need. 

29

Do you see any difference between bank getting involved in commercial real estate transactions versus residential? Are there different issues that we should consider in terms of determining the 

potential impact on consumers? 

Mr. TAYLOR. I would hate to be the business owner who’s trying 

to rent commercial property in a downtown building that is not 

managed by the major lender or lenders in that area, and then be 

going to those lenders trying to access credit and capital when they 

are obligated and have a financial interest in seeing to it that the 

other properties are leased out. I can see a conflict there that 

makes me somewhat uncomfortable. 

Senator JOHNSON. Anyone else care to comment on the difference 

between residential and commercial? 

Mr. HANNA. Well, certainly, commercial brokerage lending, in 

particular, does not come under RESPA laws. So, I think you probably have to look at that as an issue. 

Senator JOHNSON. Anyone else? 

[No response.] 

Mr. Smith, one area of concern is a potential for conflicts of interest, or the appearance of conflict of interest, if banks were to get 

into the real estate business. 

I know that there are strong antitying and privacy laws that provide protection against doing things, such as recommending inappropriate title insurance or property insurance products. 

But it would seem that there could be a temptation that could 

exist to steer customers to related areas of the banking organization, notwithstanding these restrictions. 

Could you very briefly elaborate a bit on what safeguards exist 

inside banks to ensure that this would not happen? And what 

would be the enforcement mechanism to ensure that any firewalls 

are maintained? 

Mr. SMITH. Well, under the RESPA, we have to identify all those 

things that we have in the bank. And again, the customer has to 

acknowledge the fact that we have those products and services and 

has to sign off on that. 

And the regulatory bodies review those documents whenever 

they come into the bank. They look at the mortgage documents to 

make sure that we have complied with all the various provisions 

that we have to comply with. 

I sincerely apologize to Senator Bennett for having an unfortunate experience with a bank. Sometimes we bankers get very frustrated with the regulatory process that we have to comply with. 

But, again, that is ensuring that we provide to the customer the 

proper safeguards that we have to comply with. 

So that is part of the process in making sure that the consumer 

fully understands what they are signing and what the transaction 

involves. 

Senator JOHNSON. Mr. Taylor, are you satisfied with those constraints? 

Mr. TAYLOR. Well, actually, I wanted to raise a related point that 

I think your question raises because what is interesting is, if you 

watched over the last several years as, indeed, mortgages have become more affordable and interest rates have gone down, is you 

30

have seen the banks continuously lower fees and do the kinds of 

things that competition drives them to do. 

But you mentioned some of the other products that are also offered and that are necessary as part of the deal. Title insurance, 

for example. 

That hasn’t gone down. Lawyers’ fees haven’t gone down. You 

look at some of those costs associated with that and I am wondering if—I do not know if you have picked it up in American 

Banker, but what we are looking at is, we would like to see more 

competition in those arenas because, indeed, those closing costs 

mean a lot, particularly for the populations we care about. 

Title insurance, you refinance or you get a home equity loan or 

anything like that, you get title insurance again. Well, you may not 

know this, sir, but the title insurance you originally had already 

covers you as the borrower, and it stays with you until you have 

sold off or until you drop dead. 

And yet, the bank hands you an additional title insurance policy 

for another $800–$900 dollars, on average, and if you are not savvy 

enough in some States to know that you are asking for a reissue 

policy, because if you ask for that, you actually get a discount. But, 

still, it is this incredibly inflated cost that has nothing to do with 

anything, except covering that new lender for that period of time 

that there are no liens on the property since the original title. 

I did not mean to get off on this, but the point of this is that, 

I think, in the same way with brokers, I am hoping that by keeping 

the industry separate, by keeping the competition at the level it is 

at, we have seen the broker fees go down. 

In some of these other industries where we have seemingly no 

influence, in spite of the market, in spite of the competition, I think 

there are all of five major title insurance companies, they have a 

nice little game going in which the consumer gets gouged. 

I like the idea of separate, competing industries that have to 

compete for the consumer dollar, rather than being just lumped together. That doesn’t answer your question and I apologize for that, 

but it gives me the opportunity to talk about title insurance. 

[Laughter.] 

Senator JOHNSON. Mr. Murphy, last week, we were chatting a little bit, and I thought you raised an interesting point that goes to 

one of the more fundamental issues that this whole hearing is 

about, and the difference between transactions that are fundamentally financial in nature versus those that are commercial in 

nature. 

You shared with me an observation appropriate to our home 

State about selling cattle. You asked how real estate as an asset 

is different from selling head of cattle. 

In both cases, one has documented rights of ownership. Both 

types of transactions generally involve financing through a bank or 

other financial intermediary, and in both cases, the purchaser has 

the expectation that the asset will increase in value over time. 

Yet, buying and selling cattle is universally viewed as a commercial enterprise. Whereas, we have heard today the argument that 

buying and selling a home or investing in real estate is financial 

in nature. 

31

I think this is an interesting observation you have raised, and I 

wonder if you would comment a bit about, as you see it, the differences between transactions that are fundamentally financial 

versus those that are commercial. 

Mr. MURPHY. Thank you, Senator. Well, obviously, in the Midwest, we look at things pretty straightforward. We raise 1.8 million 

head of cattle in South Dakota, which is twice as many cattle or 

livestock as we have people in our State. 

We also had 400 million bushels of corn in our State. And farmers and ranchers, it wouldn’t matter which operation you look at, 

they all feel the same way, everything that you can touch is real. 

That is the way they look at this issue. 

They look at real estate the same way. You could never convince, 

at least anyone that I know of in South Dakota, that real estate 

is financial in nature. It just doesn’t go that way. 

And if you were going to go on that route, then we would only 

need four or five banks, but they’d have to be extremely large because on one side of the bank, you are going to have to have a livestock holding company and a grain elevator, and on the other side, 

you are going to have to hold farm machinery, boats, campers, and 

every car that is sold in the State of South Dakota, too. But maybe 

I could get involved in that land sale. 

We like separation. We like the separation in government. We 

like the idea that we have 535 people out here that can make a 

decision on whether something should be done that is in the best 

interest of the people. 

Senator JOHNSON. My time is expired, but Mr. Smith, just a brief 

observation on your part about financial versus commercial transactions. 

Mr. SMITH. Well, I personally have a farm and I personally own 

cattle. But I own it. That is a product. And so, I personally buy and 

sell the cattle myself. 

So that is a product, much like hardware items, shoes, or clothes. 

That is a completely different situation than the real estate agents 

acting as a third party in the transaction of buying and selling a 

home. 

Mr. HANNA. And I will say that for 96 percent of the American 

public, the largest single asset they buy or sell is their own home. 

I think, as a statistic, 93 or 94 percent of the American families 

finance that purchase. So, I am not sure it is the same example as 

the cattle, but it is an example. 

Senator JOHNSON. My time has expired. Senator Bennett, any 

questions? 

Senator BENNETT. Yes, I would like to make just a few observations here. 

My number-one concern here, I think of all the Members of the 

Subcommittee, is for the consumer. It is the buyer of the home. 

We want to structure a circumstance where the buyer of the 

home gets the best deal, gets the best service, and is protected,

Mr. Taylor, from the predatory activity that you have described. 

And we have had hearings on that activity here in the Banking 

Committee. 

I am sympathetic to the idea of real estate agents liking the way 

things are. But if things can get better for the consumer by having 

32

a change, the way our dynamic capitalist economy works is that 

people who do not keep up with that have got to find something 

else to do, or start keeping up with that. 

As I say, the agent that I have described, I think she will thrive 

no matter what kind of a structure we have put here because she 

has the skills for which people will pay. 

But if there are marginal agents that the present circumstance 

is keeping in place who will get hurt, Champater called it, the creative destruction of capitalism? And we all have to go through it. 

I have certainly lost plenty of jobs in my life. I may lose this one 

for the comments I am making. I do not know. 

[Laughter.] 

But the bottom line should be, what is the best deal for the consumer? 

Mr. Smith, tell us why the consumer would be better off as the 

proposal that we have from the Fed and the Treasury goes into 

place. 

And Mr. Murphy, you tell us why the consumer would be damaged if this goes. 

Now I will warn you in advance, I do not think the predatory example you gave us is a legitimate example of what might happen 

because my experience is, if you have, just to pick some names, 

Welles Fargo or Bank of America, you will have a higher level of 

ethical procedure than you would have in the independent mortgage lender whom you talked about who doesn’t want anybody 

looking at him. 

Whereas, the CEO of a very large national company will say, our 

reputation is our corporate crown jewels and we will not jeopardize 

our reputation for this kind of market. 

Now, obviously, I was wrong in that assumption as far as Arthur 

Anderson is concerned, but, generally that is the case. 

Mr. TAYLOR. Or J.P. Morgan or Merrill Lynch. 

Senator BENNETT. Well, J.P. Morgan has an interesting history. 

But, generally, you do get a higher level of ethical behavior when 

you are dealing with a company that has a higher reputation than 

if you have a company that is kind of a fly-by-night outfit put together in the local community. 

Mr. TAYLOR. So are you going to limit this to those high-end, big 

companies? Is that what you are talking about? 

Senator BENNETT. It is going to be limited to Federally chartered 

banks. 

Okay, Mr. Smith, and then Mr. Taylor. 

Mr. SMITH. Senator Bennett, I alluded to the fact that in my 

community we have a Re/Max agency, and there are other real estate agents in town. And I think if you eliminate banks from having the opportunity to partner with those other real estate agents, 

maybe the mom-and-pop real estate agent, you will be eliminating 

choices for that consumer. 

If that small real estate agency, the mom-and-pop agency, doesn’t 

have the capital or the technology to compete with the Re/Maxes 

of the world, they may look to a bank to partner in order to have 

the capital, in order to have the technology to stay in business. 

And I think keeping those people in business will obviously provide more choices for people wanting to purchase houses. And I 

33

think the banking industry can bring the capital and the technology resources to the table and partner with those real estate 

agencies in order to continue to provide the products and services 

to the community, which would mean many more options for the 

consumer. 

Mr. TAYLOR. Senator Bennett, I agree. I think, for the most part, 

large financial institutions really do care about their reputation. 

In fact, in some ways, that probably influences them as much as 

some of the fair-lending laws that reputation risks. 

So, I do not believe that there isn’t some truth to that. Of course, 

this law wouldn’t limit it to those institutions. In fact, some of the 

institutions that are subprime lenders and, indeed, do predatory 

lending, would also have access to being able to offer these brokered services. 

But one thing we should look at is, as these institutions have become bigger and bigger, what is interesting for the consumer is 

that the fees have gone up—ATM fees, check-cashing fees, basic 

banking fees. 

The Federal Reserve just did a study on this, looking at some of 

the largest institutions and what has happened to the consumer as 

they have gotten bigger and bigger and their reputations have 

grown and so on, is that the consumer is paying more and more 

for basic financial services. 

I know that my colleague, Mr. Hanna, talks about how RESPA 

would limit any steering toward a particular financing institution 

by a broker. But the truth is, if you are directly affiliated with a 

financial institution in such a way that that financial institution is 

steering mortgages or prospective borrowers to you because of the 

nature of their business and their customers say, ‘‘you know, I 

think it is time to refinance or to buy a house or whatever—well, 

here, call your friend.’’ What did you call the professional? A hot 

prospect. 

Senator BENNETT. Never mind. 

[Laughter.] 

Mr. TAYLOR. But, in other words, that person, if I were she, if 

that bank was feeding me a line of business regularly, I would go 

out of my way to make sure that whatever opportunity I had to 

make sure that the people who were coming to me looking for 

houses, that I exposed them to that financial institution in a very 

positive way. 

I think that that will limit consumer choice. And again, I think 

the bottom line is, is the consumer being ill-served by the brokerage industry? 

I do not think so. I, like you, this year I have refinanced and paid 

that second title insurance fee. By the way, we will talk about that 

at another hearing. 

Senator BENNETT. I agree with you about title insurance. Let’s 

make the record very clear on that one. 

Mr. TAYLOR. But I was happy to deal with an independent broker 

who was able to bring me to a lot of different institutions and a 

lot of different products and gave me the best deal, and it really 

worked well. 

So that would be my comment, sir. 

Senator BENNETT. Thank you. 

34

Anyone else? Any comment on what is best for the consumer? 

Mr. HANNA. Somehow, this conversation has gone that we will 

not have independent brokers any more. If you look at the example 

of GMAC, they have all independent brokers and they have been 

in the business for a number of years. GMAC is, I consider it a

financial institution that owns real estate companies. 

And clearly, they are an example of someone in the business, a 

conglomerate financial group that has independent REALTORS

and they have a mortgage company also, and if they had their figures here, they have those same great independent REALTORS

who are making recommendations to the best mortgage products 

and the best other closing products possible in the marketplace. 

The financial conglomerates and State-chartered banks that have 

entered the real estate business over the years have not converted 

the sales force of independent contractors into salaried employees. 

I haven’t seen this trend that Mr. Taylor alluded to, or Mr.

Murphy. If banks come into the business and hire salaried people 

right off the get-go and change the industry model, they will not 

be in the business very long. 

Mr. MURPHY. The problem with that is that GMAC, they are not 

banks. There is the difference. 

Mr. HANNA. Metropolitan Financial Corporation, which owned 

Edina Real Estate in the Minneapolis-St. Paul area for years before 

it merged into First Bank System, was a Federally insured savings and loan. It kept Edina’s sales force of independent contractors intact. 

Senator BENNETT. Mr. Chairman, my time is up and we will 

leave the hearing and allow these four to continue their debate. 

[Laughter.] 

Mr. MURPHY. Which we will continue. 

Senator JOHNSON. Thank you, Senator Bennett. 

I want to thank the members of the panel. I think this has been 

a very constructive, very positive contribution to the issues that we 

are wrestling with here in the Banking Committee, and I thank 

you for your contribution. 

With that, the hearing is adjourned. 

Mr. HANNA. Thank you, Mr. Chairman. 

Mr. MURPHY. Thank you. 

Mr. TAYLOR. Thank you. 

Mr. SMITH. Thank you, Mr. Chairman. 

[Whereupon, at 11:50 a.m., the hearing was adjourned.] 

[Prepared statements, response to written questions, and additional material supplied for the record follow:]

35

PREPARED STATEMENT SENATOR JACK REED 

Thank you Mr. Chairman, and I appreciate the timeliness of the hearing, coming 

so closely after the National Association of REALTORS engaged in some Capitol 

Hill visits last week. 

This is certainly an issue eliciting a lot of comment and excitement, and I am glad 

we have the opportunity this morning to delve further into the details of what this 

regulation would mean for the banking and real estate industries, and most importantly, for the consumer. 

Both sides in this issue continue to make compelling arguments,and I look forward to a further enlightening discussion this morning. Certainly the National Association of REALTORS should be commended for their efforts in this debate, and 

I want to congratulate them for garnering so many cosponsors for their legislation 

in the House. Now I understand that their focus has shifted to the Senate. 

As a Member of the Conference Subcommittee on the Gramm-Leach-Bliley Act a 

few years ago, I recall the many discussions we had in the context of banking and 

commerce. Obviously there are many varied views on the subject, and I made my 

position clear with regard to the unitary thrift ‘‘loophole,’’ for which I believed there 

were enough safeguards in place to allow for limited mixing of banking and commercial activities. 

The situation before us at this hearing presents a much more nuanced part of 

that argument, and I am certainly mindful of the effect it could have on my constituents that are part of the real estate industry, as well as consumers in general. 

Mr. Chairman, thank you again for the opportunity to have this open and frank 

discussion on such a relevant and important issue. 

—————

PREPARED STATEMENT OF TOM MURPHY

PRESIDENT, ASSOCIATION OF REALTORS, SIOUX FALLS, SOUTH DAKOTA

REALTOR, CHELL REALTORS

REPRESENTING THE NATIONAL ASSOCIATION OF REALTORS

MAY 23, 2002

Chairman Johnson, Senator Bennett, and Members of the Subcommittee, my 

name is Tom Murphy. I am a REALTOR with Chell REALTORS—a small residential real estate firm in Sioux Falls, South Dakota. I am also President of the 

South Dakota Association of REALTORS. Our State association membership of 

over 1,400 REALTORS are engaged in helping people buy, sell, and manage real 

estate every day. 

I am here on behalf of the National Association of REALTORS, which represents 

more than 800,000 members engaged in all aspects of commercial and residential 

real estate. I want to thank you for the opportunity to testify today on this critical 

issue. 

It is important for all of us to take a good look at how the economy and consumers 

would fare if banks are allowed into the real estate business. That is one reason 

why I am glad we have the views of consumer groups represented on this panel. 

Mr. Chairman, you and your Subcommittee Members are to be commended for examining all perspectives on this proposed regulation—those of the little guy, as well 

as those of the big guy. 

As I mentioned, my business is a small, one-office real estate firm, just like nearly 

80 percent of REALTOR firms. My colleague from Pennsylvania here represents 

a large regional, multioffice firm. Obviously, we come here today to present different 

perspectives of this Nation’s dynamic and diverse real estate market. 

The fact that some of our members can differ on an issue, while respecting and 

supporting each other on most, is a great example of the vitality of the National 

Association of REALTORS. It is a sign of the hearty competition of the real estate 

business today. 

My comments today represent the overwhelming majority of NAR’s members. 

Ninety-six percent of our members support the position of the National Association 

of REALTORS to oppose this rule. Eighty-two percent of large broker/owners support this position, while 81 percent of our members believe we should be doing even 

more to stop the banks from unfairly entering our business. 

We firmly believe that redefining real estate brokerage, leasing, and property 

management as financial in nature is totally unacceptable because it mixes banking 

and commerce. If the Nation’s most aggressive megabanks are allowed to add real 

36

estate to their long list of approved activities, you can be sure that consumer choices 

in real estate services will shrink. 

The Nation’s bankers, who petitioned the Federal Reserve and Treasury for this 

proposed rule, should not gain by regulation what they failed to gain by legislation. 

In 1999, Congress clearly went on record supporting the separation of banking and 

commerce. Oddly enough, the American Bankers Association strongly supported an amendment you offered, Mr. Chairman, during the Gramm-Leach-Bliley debate to bar unitary thrift holding companies from engaging in commercial activities like real estate 

brokerage. It now appears that members of the ABA would like to corner the market on commercial businesses like real estate brokerage, leasing, and management. 

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

services. Let me direct your attention to the two charts I have enclosed. 

The first chart shows how the commercial and banking industries compete in the 

‘‘financial services’’ arena. REALTORS do not engage in banking. They do not take 

deposits or run ATM’s. 

Again, REALTORS are not engaged in banking. Banks do not sell real estate. 

Banking and commerce are separate. It is that simple. Otherwise, why shouldn’t 

banks sell cars or appliances? 

The second chart shows that in the arena where banks and REALTORS do com- pete on mortgage originations, banks are already the winners. REALTOR-affiliated 

mortgage lending companies only originate about 5 percent of mortgages, while the 

large banks handle 44 percent. 

Today’s competition occurs in the financial services arena where it belongs. Consumers benefit from this arrangement because the direct competition for financial 

services between commercial companies and banks results in greater consumer 

choice and customer service. When banks say they want ‘‘one-stop shopping’’ what 

they are really saying is they want ‘‘one-bank shopping.’’

The reality is that the entry of Federally chartered banks into the real estate brokerage business would tilt this balanced marketplace toward the Nation’s megabanks. It would pit Government subsidized banking companies against privately 

funded real estate enterprises. It would put taxpayer money at risk. 

Mr. Chairman, the National Association of REALTORS believes this issue is just 

too big to be decided by the regulators. The decision belongs with the Nation’s lawmakers. That is why we have called on Congress to enact The Community Choice 

in Real Estate Act, S. 1839, and H.R. 3424, a companion bill in the House, to clarify 

Congressional intent. 

REALTORS from all over the country have sent more than 100,000 letters to 

their Congressional representatives urging support for this bill. We have sent more 

than 40,000 letters to the Federal Reserve and the Treasury expressing our opposition to the proposed regulation. And we have sent more than 50,000 letters to President Bush urging his support. 

So far, H.R. 3424 has generated tremendous support in the House, with more than 

230 cosponsors. So far, a dozen Senators have cosponsored S. 1839. Last month, 

Treasury Secretary O’Neill announced that he plans to postpone making a decision 

on this issue until next year. The ball is back in your court. It is time for Congress 

to resolve this issue. 

Mr. Chairman, REALTORS are not alone on this issue. A diverse group of trade 

associations and consumer groups stand with us on this one. 

Passage of The Community Choice in Real Estate Act will set the record straight. 

At the same time, it will ensure more balanced competition and more consumer 

choice. 

This legislation will help to keep local entrepreneurs and businesses operating in 

our communities. It will help to keep some of our best community leaders and volunteers in place. 

REALTORS are more than business people. We are community leaders. Look in 

countless cities and townships across America and you will find it is a REALTOR

serving as a den mother; a REALTOR who is leading the city-wide clean up; a REALTOR who is hosting the candidate meet-and-greet; and a REALTOR who is 

coaching Little League. REALTORS are linked to their communities in more ways 

than simply through their businesses. REALTORS have a stake in the same neighborhoods where their clients live or want to live. 

Finally, this proposal just does not make sense. Banks have it backwards. Real 

estate brokerage is not incidental to a financial activity. It is the mortgage that is, 

in fact, incidental to buying a home. Twenty percent of all the homes sold in America involve no lender financing at all. 

America’s system of homeownership is the envy of the world. Homeownership is 

at an all time high. Five out of six homebuyers and home sellers are satisfied with 

37

their real estate agent and they would use him or her again. Let us not destabilize 

this pillar of our economy and relationship that works in communities throughout 

America. 

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

a proposed rule that would allow financial holding companies (FHC’s) and financial 

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

strongly opposed this regulation on the grounds that real estate brokerage and property management are neither financial activities, nor are they incidental to finance, 

and approval of the proposed rule would thus effect a mixing of banking and commerce. This regulation would not only result in negative market and consumer consequences. An affirmative decision by the Federal Reserve and Treasury on this proposal would also violate Congressional intent, evident in several key banking laws 

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

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

and regulatory framework for financial subsidiaries of banks and financial holding 

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

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

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

NAR-supported legislation was introduced in both the U.S. House of Representatives and the U.S. Senate (H.R. 3424 and S. 1839) that will clarify Congressional

intent that real estate brokerage and management are not incidental or complimentary to a financial activity. The proposed legislation, The Community Choice in Real 

Estate Act, will maintain the status quo regarding FHC’s ability to expand into real 

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

U.S. Congress. 

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

this issue is based primarily on two strong beliefs:

• 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-LeachBliley Act of 1999, and clearly is reflected in historical and present Congressional 

intent. 

• Permitting financial holding companies and national bank subsidiaries to enter 

the real estate brokerage and management industry would have wide-ranging, adverse market effects. Industry concentration would increase, competition would 

decline, and consumer choice would be limited with no real benefits from economies of scale or scope. The unprecedented expansion of banking powers into the 

real estate brokerage/management industry would clearly expose the financial 

holding companies’ and their banking subsidiaries’ inherent conflicts of interest 

in selling financial services (banking products) rather than serving customers in 

the brokering of real estate property.

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

sponsor of the Gramm-Leach-Bliley Act:

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

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

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

one for which there is no justification.

Such a step would open the door to a vast restructuring of the American economy and an abandonment of the traditional role of banks as impartial providers 

of credit, while exposing the taxpayer to liabilities on a scale far exceeding the 

savings and loan bailout. At issue with financial services modernization is increased competition. At issue with mixing commerce and banking is economic 

conglomeration, the concentration of ownership of corporate America.

Financial holding companies, their representative associations and other groups, 

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

38

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

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

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

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

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

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

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

services allows competition from both financial holding companies and commercial 

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

its deliberations on financial modernization. 

The reality is that the entry of Federally chartered banks or financial holding 

companies into the real estate brokerage business would tilt this balanced marketplace toward the FHC’s. It would pit Government-subsidized banking companies 

(putting taxpayer money at risk) against privately funded real estate enterprises. 

Furthermore, if FHC’s are permitted to enter the real estate business, REALTORS

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

which are subsidiaries of FHC’s—their direct competitors—for loans and financial 

services. 

Why REALTORS Support The Community Choice in Real Estate Act 

The Community Choice in Real Estate Act of 2001 was introduced by Congressmen Ken Calvert of California and Paul Kanjorski of Pennsylvania. The Act, 

H.R. 3424 was introduced with more than 30 original cosponsors and today has more 

than 225 cosponsors. The legislation, along with its companion bill in the Senate, 

S. 1839, is designed to address concerns expressed by both real estate professionals 

and consumers if financial holding companies and subsidiaries of national banks 

(FHC’s) are permitted to engage in real estate brokerage and property management 

activities. 

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

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

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

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

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

The Community Choice in Real Estate Act Returns the Issue to

the Proper Forum—the U.S. Congress 

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

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

Gramm-LeachBliley Act of 1999 (GLB) made specific reforms in the Nation’s banking and financial services laws, the separation of banking from commerce remains a tenet of national policy. While the Federal Reserve and the Treasury Secretary are authorized 

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

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

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

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

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

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

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

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

not tangible goods and rarely take any physical form. 

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

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

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

39

1See Federal Register, Vol. 66, No. 2, Wednesday, January 3, 2001, p. 310. 2Further evidence of Congressional intent regarding holding company expansion into non-financial areas can be discerned by the vote in the House of Representives in 1998 in which an 

effort to permit banks to engage in commerce—up to 5 percent of their annual net revenue and 

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

treat real estate as a financial asset.1 And while purchasing tangible assets, such 

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

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

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

specifics, see 12 U.S.C. 1843 (k)(4)). 2 Congress did make provisions to expand the 

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

based on new technological developments to deliver financial products to consumers 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Members of Congress overwhelmingly are signaling their support for retaining the 

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

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

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

as cosponsors of the bills. 

The Act Supports A Diversified Real Estate Services Marketplace 

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

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

financial services to facilitate the transaction by offering consumer financing that 

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

offering their customers financial services that complement their primary service—

banking. 

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

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

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

banks and the many Federal subsidies that flow through a bank (that is, deposit 

insurance, privileged access to credit), Congress has continually repeated its intent 

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

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

bank’s special privileges. 

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

40

3There are approxiamtely two million people who hold real estate licenses. However, not all 

of those are active practitioners. It should be noted that Realtor, REALTORS, and RealtorAssociate 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. 

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

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

competition was not ‘‘created’’ by the GLB Act; it already existed because bank-affiliated mortgage lenders already existed and, in fact, dominated—and still dominate—

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

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

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

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

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

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

Circuit City competes directly with Bank of America to sell financing services to 

customers purchasing Circuit City-electronic products. 

In the real estate marketplace, companies like John Doe, REALTOR, compete directly with banks, like Bank of America, in the financial services marketplace by 

providing real estate—related financial services—principally mortgage brokering 

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

sold by John Doe, REALTOR. Both the real estate brokerage company and the 

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

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

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

benefit from this arrangement because the direct competition for financial services 

between commercial companies and banks results in greater consumer choice and 

customer service. Prohibitions against the encroachment of Federally subsidized 

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

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

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

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

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

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

Bank and Long & Foster, REALTORS. 

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

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

competitive nature of the automobile and electronics marketplaces. The beneficiaries 

in all of these markets are consumers. 

The Community Choice in Real Estate Act Will Benefit Consumers and

the Real Estate Industry 

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

efficient, and balanced real estate marketplace, providing the consumer with choice 

at low cost and with no risk to the U.S. taxpayers. The entry of Federally insured 

depository lending institutions into the real estate brokerage business would tilt the 

competitive playing field by pitting Government subsidized financial holding companies and national bank subsidiaries against privately funded real estate enterprises. 

Passage of the Act will help preserve a fiercely competitive real estate brokerage 

marketplace. 

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

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

proposed regulation would benefit either business or consumer interests. 

The residential real estate brokerage industry is a competitive marketplace, 

where more than three quarters of a million REALTORS 3 and tens of thousands 

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

41

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 (FSBO’s). 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 FHC’s have Government-imposed barriers to entry. National banks and financial holding companies 

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

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

financial activities, without acknowledging their current competition in this area 

through their existing mortgage lending affiliates. Financial holding companies now 

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

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

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

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

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

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

flow up to the financial holding company, thus offering FHC’s and their real estate 

brokerage subsidiaries a competitive advantage over commercial firms in the real 

estate industry. 

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

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

First, FHC’s would have the ability to fund new real estate brokerages with revenues from the banking side of the business, thus tilting the playing field toward 

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

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

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

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

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

Second, FHC’s could leverage their privileged access to capital, access to numerous subsidiaries, and outside income streams to engage in a sustained period of 

below-cost pricing designed to eliminate other firms providing the same service. This 

could damage any real estate brokerage firms that do not have the resources to defend themselves against a well-financed and subsidized FHC. Again, formerly viable 

real estate brokerages could be forced to dissolve—not because of an inability to provide efficient and quality service to consumers, but because below-cost pricing can 

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

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

estate brokerage market. 

Mixing Banking and Commerce Hurts Consumers 

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

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

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

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

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

and less competition. 

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

total market. FHC’s’ entry into the real estate brokerage market would likely increase concentration and introduce unfair competition because of their Federal subVerDate 0ct 09 2002 17:04 Oct 23, 2003 Jkt 000000 PO 00000 Frm 00045 Fmt 6633 Sfmt 6621 S:\DOCS\0523.TXT FRANK PsN: FRANK1
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sidies. There is likely to be a significant decline in the number of firms and the 

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

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

that is dominated by nationwide Federally chartered firms. 

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

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

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

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

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

in the real estate brokerage industry. 

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

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

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

The expansion of banking powers that would permit financial holding companies 

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

FHC’s have an inherent conflict of interest in selling financial services (banking 

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

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

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

There is also the likelihood that FHC’s entering the real estate brokerage industry 

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

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

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

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

advice when they most need it. 

The Act Benefits Consumers and the Real Estate Industry 

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

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

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

theirs. 

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

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

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

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

both the real estate industry and America’s consumers. 

Overwhelming Industry Support for the National Association of

REALTORS Position 

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

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

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

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

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

estate brokerage and property management activities. 

Recent research indicates that the National Association of REALTORS does 

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

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

2002), more than 9 out of 10 REALTORS oppose the pending Federal Reserve and 

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

estate brokerage and management. Perhaps more importantly, 96 percent support 

43

efforts by the National Association of REALTORS to prevent FHC’s from entering 

real estate brokerage management.

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

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

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

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

more to stop FHC’s from entering the real estate business.


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PREPARED STATEMENT OF JAMES E. SMITH

PRESIDENT, AMERICAN BANKERS ASSOCIATION

CHAIRMAN AND CHIEF EXECUTIVE OFFICER

CITIZENS UNION STATE BANK AND TRUST COMPANY, CLINTON, MISSOURI

MAY 23, 2002

Mr. Chairman, I am James E. Smith, Chairman and CEO of Citizens Union State 

Bank and Trust, Clinton, Missouri and the President of the American Bankers Association. I am pleased to be here today on behalf of the American Bankers Association (ABA). ABA brings together all elements of the banking community to best represent the interests of this rapidly changing industry. Its membership—which includes community, regional, and money center banks and holding companies, as well 

as savings institutions, trust companies, and savings banks—makes ABA the largest 

banking trade association in the country. 

I want to thank you, Mr. Chairman, for holding this hearing. It allows all parties 

to get beyond the heated rhetoric and focus on the issues. In the debate over allowing banks to engage in real estate brokerage, we bankers have sometimes been portrayed as somehow working against real estate agents. We disagree with this characterization. The reality is that many agents and bankers already work closely with 

one another. In fact, I believe that bankers and many in the real estate industry 

are much closer aligned on the issue of real estate brokerage than the rhetoric suggests. We all believe that customers deserve to have the best possible service, regardless of what company provides it. We all want customers to have many choices 

of whom to deal with so they can seek out that agent or company that they trust. 

And we all believe that the provision of any financial service should be done in a 

safe and sound manner—including adhering to all licensing, qualification, sales 

practices, and continuing education requirements. 

If banking institutions offer real estate brokerage and management services there 

would be more choices available for everyone. Consumers would have more choices 

of real estate firms when buying or selling a home. Real estate brokers would have 

more choices of potential employers. And real estate companies would have more 

choices of companies to partner with that could provide new sources of capital and 

technology. By prohibiting bank involvement, S. 1839 would do just the opposite—

consumers, real estate agents, and real estate companies would have fewer choices. 

We believe a competitive market is the best way to provide quality real estate brokerage and management services. 

As we begin our discussion, it is important to note that combining real estate brokerage and banking services is not a new or unusual activity. Real estate firms do 

it. Insurance companies do it. Securities firms do it. And well over half the Federally insured depository institutions in this country, including many of the largest 

banks and savings institutions, have authority to do it. In fact, my community bank 

in Missouri has the authority to do it. The ABA believes that all banking institutions should have the same opportunity to provide services that meet the needs of 

our customers. 

This issue of open and fair competition is not new—in fact, it has been debated 

in this legislative body for many years. However, the statutory context within which 

today’s discussion will take place is quite different. In 1999, Congress took an historic step to modernize the regulation of the financial services sector by passing the 

Gramm-Leach-Bliley Act (GLB Act). In the more than 15 years of debate on the Act, 

Congress often found itself in the middle of arguments between financial services 

industries about who should do what. The result was gridlock and an out-of-date 

financial system that did not reflect changes in consumer needs or in the use of 

technology. 

To be sure that the procompetitive goals of the GLB Act continued to be met in 

a dynamic marketplace, Congress established a flexible, yet conservative regulatory 

process that would permit the financial industry to offer new services without the 

need for further legislation. This regulatory system gives the Federal Reserve and 

Treasury the flexibility and responsibility to determine what activities should be approved, including considering what is necessary to permit financial holding companies and national bank subsidiaries to ‘‘compete effectively with any company seeking to provide financial services in the United States.’’ This authority is consistent 

with the Federal Reserve’s and Treasury’s role to ensure efficient, safe, and competitive financial markets. 

The GLB Act promotes competition, safety and soundness, and enables Congress 

to avoid becoming embroiled in every competitive issue. S. 1839 would take out the 

flexibility built into this new system, and put Congress back in as referee for future 

competitive disputes. Simply put, the bill would reverse the most important longVerDate 0ct 09 2002 17:04 Oct 23, 2003 Jkt 000000 PO 00000 Frm 00051 Fmt 6633 Sfmt 6621 S:\DOCS\0523.TXT FRANK PsN: FRANK1
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term provision in the GLB Act over the very first proposal put forth under it. Having worked so hard to develop a mechanism to keep our financial system up-to-date 

on an ongoing basis, Congress should not reverse itself less than 3 years later because some group wishes to protect itself from competition. The system established 

in the GLB Act should be allowed to work and S. 1839 should not be enacted. 

Banking institutions should be allowed to offer real estate services for three key reasons:

• It’s good for consumers—It means more choices, better service, competitive prices, 

and greater convenience. • It’s only fair—Since real estate firms offer banking and insurance services, it’s 

only fair that banking institutions be allowed to provide real estate services. This 

is what the Gramm-Leach-Bliley Act is all about—promoting free and fair competition by leveling the playing field. • It’s safe—All consumer protections, including all State licensing, qualification, 

sales practices, and continuing education requirements, plus strict privacy laws 

and antitying rules, would apply to bank-affiliated real estate agents. And because brokerage and management are agency activities, they pose no risk to the 

bank.

I will discuss these points in detail in the remainder of my statement. Before I 

do, let me assure you that the competitive issues we are talking about here this 

morning are important to banks of all sizes. In fact, the ability to offer real estate 

brokerage may be more important for smaller institutions. Rural communities may 

lack real estate agents or are served only by branches of brokers in other towns because there is insufficient business to warrant a local brokerage office. In such small 

communities, the bank is perceived as the place that will have the greatest amount 

of information on what properties are for sale, including farmland acreage in agricultural communities. I believe, as do my fellow colleagues who run small community financial institutions, that these services would significantly benefit our customers and our communities. 

Competition is Good for Consumers 

The benefits of competition are well known. In a free market, businesses choose 

to offer new products if they believe they can provide better services at competitive 

prices. Obviously, not all banking organizations will choose to offer real estate services, but those that do will enter the market because they believe they can meet 

or beat the competition. Increasing the number of providers raises the bar for all 

the participants, forcing improvements in efficiency, pricing, and service levels—all 

to the benefit of homebuyers and sellers. 

Allowing all banking institutions to provide real estate services expands the 

choices for everyone: consumers, real estate agents, and real estate companies. This 

is not only the opinion of bankers, but increasingly, it is a view shared by real estate agents and particularly real estate companies. 

More Choices for Consumers, Real Estate Agents, and Realty Companies 

If banking institutions were allowed to offer real estate brokerage and management services there would be more choices for everyone.

• 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. • More Choices for Real Estate Agents—Real estate agents pride themselves on 

being independent contractors, choosing the best companies to work for. If there 

are more companies to choose from, agents’ employment opportunities will be 

much broader. Banks will only be able to attract good agents by offering competitive commissions and other incentive-based compensation packages. And because 

the real estate business requires expertise, licensing, and other requirements, 

banks would seek out experienced real estate agents. Banks know that converting 

tellers to real estate agents would be a poor business strategy. • More Choices for Real Estate Companies—Forward-looking businesses are always 

looking for opportunities to improve their franchise value—strengthening, expanding, merging, or even selling their business. Allowing banking institutions to engage in real estate brokerage and management services gives real estate companies more options for bringing additional capital and technology to the table, 

through joint ventures, for example. Banking institutions also represent potential 

buyers if agencies choose to sell their businesses. Indeed, in some communities, 

49

1The letter, dated January 16, 2002, is attached to this testimony. 

partnering with the local bank may be the only way for the local real estate 

broker to compete with the growing national chains. This is why many real estate 

firms also oppose S. 1839. It is interesting to note that many insurance agencies 

thought that bank involvement was going to hurt their business—until they realized that it provided many more options than they had before. To that end, the 

Financial Service Coordinating Council, consisting of the ABA, the American 

Council of Life Insurers, the American Insurance Association, and the Securities 

Industry Association, supports open competition and is on record opposing 

S. 1839.1

S. 1839 reduces choices: consumers would have fewer choices of whom to do business with, agents would have fewer choices of whom to work for, and businesses 

would have fewer choices for joint marketing, fewer potential merger partners, and 

fewer potential buyers. ABA believes a competitive market is the best way to provide quality real estate brokerage and management services—simply put, more competition means more choices. 

Many Real Estate Agents Support Open Competition 

Many agents and real estate companies are not concerned by the prospect of 

banking organizations offering real estate services. Many look forward to the opportunity to partner with a local bank. Independent agents who provide good service 

today know that they will be competitive with anyone, whether the competitor is 

another independent agent or one affiliated with a bank. The views of these real 

estate agents are often lost in the emotional rhetoric of their trade association. Here 

are a few examples of comments filed by real estate agents with the regulators on 

this proposal:

• A broker from California writes: ‘‘Additional competition will be healthy for the 

industry. Banks and other financial institutions have learned how to meet the 

needs of consumers and to handle their financial matters. One’s home is the biggest financial asset most consumers will ever deal with. If agents are so special 

for consumers, then they have nothing to fear. Maybe we could see commissions 

come down!’’ • A real estate broker in North Carolina writes: ‘‘I am a 38-year veteran of the real 

estate industry and do not agree with our National Association of [REALTORS] 

. . . There are several reasons I feel this way, primarily because our small familyowned business has always faced stiff competition from large real estate firms, yet 

we have been able to earn a good, honest living. I believe that competition is the 

American way and if you’re good at what you do, you can survive whether large 

or small.’’ • Another real estate agent notes: ‘‘I would welcome the hopefully more professional 

business management that banks would likely bring to this business. With most 

real estate being part-time people with limited training, the real estate business 

is full of misinformation, poor service, etc., a situation that could be improved 

with bank involvement. Furthermore, the American consumer deserves more true 

competition in this business. Bank-owned real estate agencies may be able to 

lower transactions costs to consumers through aggregation of services benefiting 

the public as a whole.’’ • A real estate broker in Wisconsin writes: ‘‘I don’t recall the NAR [National Association of REALTORS] concerning themselves with real estate brokers having access to online companies therefore cutting the independent mortgage banker and 

local lender out of the transaction.’’ • Another real estate agent writes: ‘‘NAR predicted the doom and gloom many, 

many years ago when franchise brokerage was in its formative stages. ERA, Re/

Max, Coldwell Banker et al., were all predicted to end ‘mom and pop’ real estate 

firms. These franchises have come; many have gone or merged with others. And 

yet still, ‘mom and pop’ brokerage firms continue to survive because of the personal attention. I welcome the competition, and I will continue to survive.’’

Many Real Estate Companies Also Support Open Competition and Oppose S. 1839

The real estate industry, like banking and most other industries, is constantly 

changing. Larger real estate brokerage firms are increasing their market share 

every time you turn around. In 1990 there were 150,000 residential real estate 

firms. Today there are about half that many. The large chains are buying up more 

and more local firms. Today Cendant—which owns Century 21, Coldwell Banker, 

and ERA—has 23 percent of the existing home sales market and has been aggressive in acquiring real estate companies. In some communities a partnership with the 

local bank may be the only way to compete with the national chains and maintain 

50

2The Boston Globe, February 25, 2001. 

a local presence. The Internet is playing a bigger and bigger role with customers, 

allowing them to surf for the perfect home, at the perfect price, financed with the 

perfect mortgage loan, and covered under the perfect insurance policy—24 hours a 

day, 365 days a year. More and more real estate services are being combined, including brokerage, insurance, and mortgage services that are offered as ‘‘one-stop 

shopping’’ packages, a subject I will speak to at length below. 

In this new, competitive environment, bankers and real estate professionals

have much to offer to each other—and to consumers. Banks like mine could provide 

needed capital, crossmarketing opportunities, and technology to support the growth 

of local real estate firms. Real estate professionals could provide the personalized 

services and experience that is their strength. Many real estate companies realize 

the strengths that both industries bring to the table. They also realize the severe 

limitations S. 1839 would impose on their ability to joint market, merge, be acquired, or even to buy a bank. 

In February of this year, The Realty Alliance—comprised of many of the Nation’s 

largest and most successful independent real estate companies with a total of 62,000 

agents—went on record in opposition to NAR’s position. In its letter to NAR, The 

Realty Alliance stated, ‘‘Our members favor and support a fair, free-market environment unbound by legislative restrictions. We find it hypocritical and fundamentally 

wrong to ask that national bank subsidiaries be barred from real estate brokerage 

activity, while real estate brokerages operate mortgage banking, insurance and title 

insurance businesses. . . . We believe, in fact, that consumers would benefit from 

the influx of capital that may result from nationally chartered banks entering this 

arena. We also believe that increased competition from companies of size would benefit consumers by making all of us sharpen our skills and improve the services we 

provide. In our view, the role of Government is not to limit competition, as your legislation would do, but rather to foster a business environment in which consumers 

benefit from competition. The members of The Realty Alliance look forward to working, and prospering, in such an environment.’’

Paul Harrington, President of DeWolfe New England, which is one of the largest 

real estate firms in the Northeast, summed it up when he said, ‘‘We believe that 

banks should be able to compete with us as long as there are safeguards to ensure 

that deposits are not being improperly invested. It would be hypocritical for us to 

say otherwise because we promote the fact that we offer customers convenience 

through one-stop shopping.’’ 2

Promoting Free and Fair Competition—The Fundamental Tenet of the

Gramm-Leach-Bliley Act 

The Gramm-Leach-Bliley Act established a framework for modernizing our financial system. After working on this for the last 20 years, Congress recognized the 

need for flexibility in the face of a rapidly evolving financial landscape. As Senator 

Phil Gramm said at the signing ceremony for this Act, ‘‘The world changes, and 

Congress and the laws have to change with it. We have learned that we promote 

economic growth and we promote stability by having competition and freedom.’’

Providing the same opportunities under the same rules and regulations is a key 

to promoting free and fair competition. In today’s real estate market, it is commonplace for real estate companies, securities firms, and insurance companies to provide 

end-to-end services, including brokerage, mortgages, and insurance. Yet not all financial service players have equal ability to offer these same services. The GrammLeach-Bliley Act was designed to address these inequalities. To examine this in detail, this section looks at three key issues: (1) the market reality that real estate 

firms are already providing banking and other financial services and that the real 

estate industry is more concentrated than the banking industry; (2) the system established in the Gramm-Leach-Bliley Act to correct disparity in the provision of financial services among providers and thereby promote free and fair competition; 

and (3) the changing real estate and financial marketplace that demands a flexible 

regulatory approach to address the inequities that exist today and may exist in the 

future. 

Combining Real Estate Brokerage and Banking Services is Not a New or

Unusual Activity 

As I previously noted at the outset, real estate companies, securities firms, insurance companies, credit unions, savings associations and, in half the States, StateVerDate 0ct 09 2002 17:04 Oct 23, 2003 Jkt 000000 PO 00000 Frm 00054 Fmt 6633 Sfmt 6621 S:\DOCS\0523.TXT FRANK PsN: FRANK1
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3See attachment developed by the Conference of State Bank Supervisors (CSBS) for a listing 

of the authorities for each State. Regarding credit unions, recently several in Wisconsin jointly 

purchased a majority interest in one of the State’s larger real estate brokerage firms. 

chartered banks can offer real estate services.3 Ironically, the National Association 

of REALTORS is now objecting to the very combinations that their members have 

undertaken—offering brokerage, mortgage banking, and, often, insurance under one 

roof. 

Take, for example, two of the biggest real estate companies in the Washington DC 

area—Weichert and Long & Foster. Both offer the full range of financial services. 

Weichert calls it ‘‘One Stop Gold’’ and Long & Foster calls it ‘‘Real-Edge Services.’’ 

These packages provide valuable cost, convenience, and service options for customers. These examples show the importance companies—and their customers—

place on having the option to combine real estate brokerage, mortgage and insurance services. On the following two pages, I have included several examples of how 

real estate companies that offer both banking and brokerage services characterize—

in their words—their services. 

All banks should have the same options. In fact, according to NAR’s own survey 

in 1999 and a recent 2002 survey by Murray Consulting, not only is one-stop shopping viewed extremely positive by homebuyers, but banks, mortgage companies,

and real estate companies are all viewed equally as appropriate providers of these 

services. 

Simply put, if real estate services and other financial products are already combined by many real estate and other financial firms, there is no reason why all 

banking organizations should not be accorded the same opportunities to provide 

these products to their customers. 

In my opening remarks I made the point that this is an issue for banks of all 

sizes, not just large banks, as NAR has suggested. More than 40 percent of all 

banks—over 4,000 institutions—have fewer than 25 employees. These are truly 

small businesses that would like the opportunity to broaden the financial products 

they can offer their customers and to compete with real estate firms offering loans 

and homeowners insurance. For the typical community bank, the intent is not to 

turn real estate brokerage into a major income-producing center, but rather to provide high-quality, high-personal-touch services for customers whose needs the bankers intimately understand and whom they already serve in other capacities. Generally, this is likely to take place by a combination with a local real estate firm—

often one that needs the joint effort to complete with the national chains.

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It is also a misconception that all national banks are large (see Chart 1). In fact, 

over 90 percent of national banks are community banks. Moreover, of the 10 largest 

banking firms, four appear to already have the legal authority to engage in real estate activities. There certainly has been no market disruption from the fact that 

well over half of the insured depository institutions in this country have the ability 

to offer real estate brokerage and management services today.

Banks that already offer real estate services through the trust department frequently find themselves having to explain to customers that the bank cannot help 

them with these services outside the trust relationship. These customers do not understand why the bank is unable to do so. Authority to offer real estate services by 

the banking organization would bridge this unnecessary gap. 

What is ironic about NAR’s false assertion about large banks wanting to dominate 

the real estate market, is the fact is that the real estate industry is significantly 

more concentrated than the banking industry. Today, a few firms dominate the real 

estate brokerage industry (see Chart 2). In fact, the top two firms in the brokerage 

business (Cendant and Re/Max) have 33 percent of the market. By comparison, the 

top 10 banks have the same 33 percent of the banking market. Cendant Corporation 

accounts for one out of every four real estate agents and alone has a 23 percent 

market share of existing home sales.


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And because consolidation within the real estate industry is occurring at breakneck speeds, small realty companies are far more likely to be bought up by one of 

the major real estate firms than by a bank. Many real estate brokers have told the 

ABA that they would welcome approval of the proposal because it would provide a 

potential local partner to help them compete with the large national chains. In fact, 

the local bank can help the small firm, through joint ventures and capital, to compete with the large national real estate firms. 

Thus, the marketplace reality is that real estate firms already provide end-to-end 

services and the largest real estate companies have been increasing their domination over the market. 

The GLB Act Was Designed to Allow Flexibility to Adjust to the Marketplace 

In the years immediately preceding passage of the GLB Act, Congress recognized 

that the statutory standard for regulatory approval of new activities for bank holding companies—the ‘‘closely related to banking’’ standard—was woefully inadequate 

in an economy transformed by technological progress. Thus, Congress agreed to a 

new, considerably broader, standard to enable banks and bank holding companies 

to remain competitive no matter in what direction financial services evolved. That 

new standard—activities that are financial in nature or incidental to a financial activity—was intended to provide the flexibility Congress knew would be necessary. 

Those activities may be conducted only in financial holding companies (‘‘FHC’’) or 

financial subsidiaries meeting certain safety and soundness and community needs 

standards enumerated in the statute. 

Congress did not give the FRB and the Treasury unfettered discretion to make 

the determination that an activity is appropriate for approval. GLB Act specifically 

sets forth certain traditional banking activities that Congress knew were clearly

financial in nature. 

In addition to these currently recognized activities, the Act authorizes activities 

that the FRB and Treasury determine, by regulation or order, to be ‘‘financial in 

nature or incidental to such financial activity.’’ This authority to permit new financial activities is considerably broader than the FRB’s comparable authority before 

the GLB Act was enacted, which had only extended to a new activity that was ‘‘so 

closely related to banking as to be a proper incident thereto.’’

One specific aspect of this new authority is that the FRB is directed to define the 

extent to which three types of activities are ‘‘financial in nature’’: (1) lending, exchanging, and engaging in certain other transactions with financial assets other 

than money or securities; (2) providing any device or instrumentality for transferring money or other financial assets; or (3) arranging, effecting, or facilitating finanVerDate 0ct 09 2002 17:04 Oct 23, 2003 Jkt 000000 PO 00000 Frm 00059 Fmt 6633 Sfmt 6621 S:\DOCS\0523.TXT FRANK PsN: FRANK1

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4 12 CFR 7.1002. 

cial transactions for the account of third parties. ABA believes the proposed real estate activities qualify under the first and third statutory categories. For example, 

real estate brokerage is generally the business of negotiating a contract for the purchase, sale, exchange, lease, or rental of real estate—which we believe is a financial 

asset—for others. 

The Fed and Treasury, in their request for public comment, note that many of 

the essential aspects of real estate brokerage are already permissible under national 

bank ‘‘finder’’ authority. The regulators already authorize financial holding companies, as well as national banks and their subsidiaries, to act as finders in bringing 

together buyers and sellers for financial or nonfinancial transactions. Permissible 

finder activities include ‘‘identifying potential parties, making inquiries as to interest, introducing or arranging meetings of interested parties, and otherwise bringing 

parties together for a transaction . . .’’ 4 This description of finders authority is the 

essence of every real estate transaction. 

Apart from their authority with respect to these three specified activities, the Fed 

and Treasury have broad discretion to determine that other types of activities are 

‘‘financial in nature or incidental to such activity.’’ In making such a determination, 

the regulators are directed to consider a number of factors. Among the specific factors to be considered are:

• Changes or reasonably expected changes in the marketplace in which financial 

holding companies compete or the technology for delivering financial services; and • Whether the proposed activity is necessary or appropriate to allow a financial 

holding company to—

• Compete effectively with any company seeking to provide financial services; • Efficiently deliver information and services that are financial in nature through 

the use of technology, including applications involving systems for data transmission or financial transactions; and • Offer customers any available or emerging technological means for using financial services or for the document imaging of data.

The GLB Act standard is a significant expansion of the Fed and Treasury’s capacity to consider the competitive realities of our Nation’s financial marketplace when 

determining permissible activities for financial holding companies and financial subsidiaries. It is our contention that the marketplace, and the technology associated 

with it, in the case of real estate brokerage and property management, have already 

changed and will continue to change dramatically in ways that significantly impact 

the ability of banks to effectively compete with other companies that provide financial services. 

Finally, in addition to the newly authorized financial activities described above, 

the Act authorizes financial holding companies to engage in certain nonfinancial activities. Specifically, a financial holding company may engage in a nonfinancial activity, or acquire a company engaged in a nonfinancial activity, if the Fed and 

Treasury determine by regulation or order that the activity: (1) is complementary 

to a financial activity; and (2) does not pose a substantial risk to the safety or 

soundness of depository institutions or the financial system generally. 

The NAR would have this Subcommittee believe that Congress meant to preclude 

real estate activities in the GLB Act and that the legislation accomplished that goal. 

This is simply untrue, and we have seen no specific evidence to back up this unfounded charge. There is absolutely nothing in the legislative history to support this 

allegation. To the contrary, the plain language of the statute and the legislative history show the Treasury and Federal Reserve are following exactly the process and 

using the factors Congress intended. 

The GLB Act itself demonstrates Congress’s knowledge of this issue in its determination that financial subsidiaries of national banks should be prohibited only 

from engaging in real estate development activities—the riskier aspect of the business in which the banking organization takes an ownership position. Had Congress 

intended to prevent banking organizations from engaging in the agency activities of 

real estate brokerage and real estate management, it clearly knew how to do so. The 

fact that Congress chose only to prohibit real estate development leads to the conclusion that Congress did not intend to restrict agency activities. 

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

the many years that led up to GLB Act would not have been surprised to see the 

current proposal. The ABA negotiated with NAR over 10 years ago the rules under 

which banks would enter the real estate brokerage business. This negotiation took 

place with respect to criteria in a previous version of the GLB Act which was, in 

fact, much more restrictive than the criteria enacted in 1999. Thus, over 10 years 

57

ago, the NAR recognized that even a more restrictive version of financial modernization could be interpreted as permitting banking companies to offer real estate brokerage. Furthermore, in 1995, NAR testified on another forerunner of the GLB Act 

before the House Banking Committee. In that testimony, NAR stated unequivocally 

that the language must be clarified to exclude brokerage and management. It was 

neither clarified then, nor was it in the GLB Act. That 1995 bill, the Financial Services Competitiveness Act of 1995, contained similar, but less broad, language to that 

ultimately enacted in the GLB Act. 

Certainly the NAR had every opportunity to raise the issue with Congress in 1999 

and either chose not to or did so without success. Rather, NAR’s simplistic argument is that the proposal involves ‘‘commerce’’ and is, therefore, beyond the scope 

of the GLB Act. However, the issue is not at all that simple. The language of the 

relevant provisions of the GLB Act does not prohibit commercial activities; rather 

they set out specific criteria to determine permissible activities. The authors clearly 

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

be permissible. That is why they left the determination of whether or not a given 

activity is ‘‘financial in nature’’ or ‘‘incidental to a financial activity’’ to the Fed and 

the Treasury, and why they developed the specific criteria that are in the statute. 

To reiterate, if the Congress had wanted to make such a determination to exclude 

the proposed activities, it would have explicitly done so—as it did with real estate 

development. 

It is worth noting, since NAR has raised the specter of banking and commerce, 

that the Fed has, for many years, been the primary opponent of breaching the wall 

between banking and commerce. Based on this record, one would certainly expect 

the Fed to look very closely at any question relating to commercial activities. 

The Changing Real Estate and Financial Marketplaces Require a

Flexible Regulatory Approach 

As noted above, the GLB Act requires that the regulators consider competitive 

factors and technological innovations when determining whether activities are financial in nature. A particularly applicable statutory phrase to focus on in this context is whether the activity is ‘‘appropriate’’ to allow institutions to ‘‘compete effectively with any company seeking to provide financial services in the United States.’’ 

Other types of insured depository institutions have the authority to provide—and 

are providing—real estate brokerage and management services. We have already 

demonstrated that real estate brokerage firms are providing financial services 

throughout the United States. Clearly, the fact that real estate brokerage firms are 

offering mortgages and other financial services must be part of the regulatory consideration. Competitive imbalances like this are the very thing that Congress sought 

to correct when it enacted the GLB Act, and we believe that the use of the flexibility 

granted to the regulators under Section 103(a) is clearly justified in the case of real 

estate brokerage and management authority for banking organizations. 

Technological innovations have also had a dramatic impact on real estate markets. One major change is the development of the secondary market for mortgage 

loans and the efficient process that bundles individual home loans into highly liquid, 

globally traded securities (see Chart 3).

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The increasing importance of the secondary market has facilitated the rapid 

growth of 50 percent mortgage lending outside traditional banking and savings institutions (see Chart 4).


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In fact, securitization has significantly changed the very nature of mortgage funding, enabling real estate firms to establish their own mortgage companies and to 

offer end-to-end real estate transactions—helping a buyer find a home, finance it, 

and insure it. The result is that traditional deposit-based lenders—banks and 

thrifts—are often bypassed completely. These are exactly the kinds of technological 

changes the GLB Act authorized the Treasury and the Fed to address. 

The dominance of the secondary market is clear evidence that this form of funding 

for plain vanilla mortgage loans is generally superior in terms of costs to funding 

with bank deposits. If banks somehow enjoyed some special benefit from deposits, 

or deposit insurance (which banks pay for through premiums and extensive regulatory costs), banks would not be selling into the secondary market, and the secondary market would not control an ever-increasing share of the marketplace. No 

amount of deposit insurance can counteract this fundamental principle of efficient 

markets. More importantly, access to this secondary market source of funding is 

available equally to mortgage and banking organizations, and is clearly why real estate companies increasingly are affiliating with mortgage banking companies. 

To summarize this section, the GLB Act recognized that achieving the goal of promoting competition necessarily required regulatory flexibility. Section 103(a) provides that flexibility by authorizing the Fed and the Treasury, subject to certain 

statutory guidelines, to approve additional activities for banking organizations. The 

ABA believes strongly that real estate brokerage and management meet the criteria. 

Of course, the Fed and Treasury have not made any determination on this proposal. 

Regardless of their ultimate decision, the Fed and Treasury should be allowed to 

follow the process Congress created only two and a half years ago. 

All Consumer Protections Are Maintained and Bank Safety and

Soundness Is Protected 

If banking organizations offer real estate services, consumers would actually have 

more protections under the law than they do today. All rules applicable to real estate brokers, including all State licensing, qualification, and sales practices will 

apply equally to bank-affiliated real estate agents. NAR has raised the specter of 

customers being taken advantage of as a result of conflicts of interest that may potentially arise when a real estate broker is affiliated with a lender. The simple fact 

is that the exact same potential for such abuse occurs, for example, each time an 


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5 12 U.S.C. § 2601 et seq. 

6The requirement for affiliated business disclosures is part of the regulations of the Department of Housing and Urban Development that implement RESPA. 24 CFR § 3500.15. 7Section 106(b) of the Bank Holding Company Act Amendments of 1970. 

agent from Century 21, Coldwell Banker, ERA (all of whom are affiliated with 

Cendant) GMAC, Long & Foster, or USAA helps a customer buy or sell a house. 

And yet, although these integrated real estate organizations, as well as State banks 

in many States, savings institutions, and credit unions, have been selling real estate 

and funding mortgages for years, there has been no outcry about these conflicts of 

interest. Why?—Because the Real Estate Settlement Procedures Act (RESPA) 5 re- quires REALTORS affiliated with lenders to disclose that fact to customers before 

the purchase occurs. 

The RESPA disclosure,6 which must be on a separate piece of paper, must state 

the relationship between the real estate agent and the lender and provide the estimated charges or range of charges of the lender. It must also notify the customer 

that he or she is not required to use the lender and is free to shop around for a 

better deal. If the real estate agent requires the use of its affiliated lender, that 

agent violates the kickback and unearned fee provisions of Section 8 of RESPA. The 

customer is expected to sign an acknowledgement of the disclosure. 

In addition, consumers have even more protections when their real estate agent 

is affiliated with a banking organization. This is because banks and bank holding 

companies and their subsidiaries and affiliates are subject to the antitying provisions of the Bank Holding Company Act.7 These restrictions prohibit banks and 

their affiliates from conditioning the provision of credit on the purchase of another 

product or service. 

Another false impression put forward by NAR is that somehow bank involvement 

is contrary to the spirit of the Community Reinvestment Act. Nothing could be further from the truth. Approval of the proposal would help low income and minority 

communities. Because banks are subject to CRA, they have every incentive to use 

the real estate authorities to enhance their outreach to communities. The bank 

would bring real estate services to areas now shortchanged and could use the combination of real estate and financial services to better serve their low-income and 

minority communities. Moreover, if the real estate unit were a subsidiary of a national bank, that subsidiary would be covered by CRA. 

Bank involvement in real estate brokerage and management services is also consistent with safe and sound banking. First, providing these services will help to diversify the income stream of these institutions and help to improve their financial 

base. Real estate brokerage and management services are activities where a bank 

acts only as an agent for a third party, but does not take an ownership position

in the property. By their very nature, agency activities pose very little risk to the 

safety and soundness of depository institutions. 

Second, under the GLB Act, the bank regulators must deem a bank to be wellcapitalized and well-managed before a banking organization can participate in any 

of the expanded financial activities permitted under the GLB Act, including real estate brokerage and property management. Thus, only financially strong institutions 

would be authorized to engage in these activities. 

Third, banking organizations are also subject to Sections 23A and 23B of the Federal Reserve Act, which limit the amount of credit and other forms of support that 

a bank could provide to a real estate brokerage affiliate or subsidiary. Such limits 

ensure that the safety and soundness of the bank will not be negatively impacted 

by its subsidiaries or affiliates. 

Fourth, many banking organizations already have years of experience in providing 

real estate activities. In fact, the purchase, sale and management of real estate are 

frequently significant aspects of fiduciary asset management in many bank trust departments. Because banks currently have trust personnel who provide real estate 

brokerage and management services on a daily basis to trust customers, providing 

the service outside of the trust department would not be a new activity in which 

banking organizations lack expertise. Thus, no new safety and soundness issues 

would be raised. 

Finally, it is important to note that a precedent already exists for bank involvement in real estate activities. In over half of the States, State banking regulators 

have the authority (either explicitly, through regulatory interpretations, and 

through wildcard and parity statutes) to allow State-chartered banking organizations to engage in real estate activities (see the attached State-by-State listing developed by the Conference of State Bank Supervisors). Moreover, savings institutions and credit unions already have brokerage authority. Allowing banks the same 

rights and privileges should enhance the competition for real estate services. 

61

Conclusion 

In July, it will be 2 years since the filing of the original petition requesting a determination that real estate brokerage and management be deemed financial in nature. It is now certain that this determination will not be made until 2003, as was 

indicated in an April 22, 2002 letter from Treasury Secretary Paul H. O’Neill to 

Congressman Michael G. Oxley, indicating that, in consultation with the Fed, the 

Treasury will not make a final decision on this proposed rule until next year. 

A fundamental purpose of GLB Act was to enable banking institutions to compete 

with other financial services providers, and there is ample evidence demonstrating 

that the real estate competition is touting the advantages of one-stop homebuying 

services. While we as an industry have always looked at real estate brokerage and 

management as providing us with more options to compete in the long term, with 

each passing day, real estate firms become more deeply involved in financial services such as mortgage and insurance, and banks like mine cannot effectively compete for this business. With each passing day, the case for allowing banks to offer 

real estate services only gets stronger. 

As an industry we have grave concerns about the broader effects of this controversy and whether it sets a precedent that could hinder future approvals of new 

powers under GLB. The Act was designed to keep our financial system up-to-date 

by delegating those decisions to the Fed and Treasury. This goal is being frustrated 

by efforts to take the case for determining what is appropriate back to Congress, 

placing Congress in the very role that it delegated to the agencies with the greatest 

level of expertise to make these decisions based on specific statutory criteria. 

S. 1839 not only frustrates the GLB Act process, it reduces consumer choice. Consumers would have fewer choices of whom to do business with; agents would have 

fewer choices of whom to work for; and businesses would have fewer choices for joint 

marketing, fewer potential merger partners, and fewer potential buyers. We believe 

a competitive market is the best way to provide quality real estate brokerage and 

management services. Increased competition clearly benefits consumers and the 

economy. It is a catalyst for innovation, more customer choice, better service, and 

competitive prices. I have no doubt that my customers and my community would 

benefit if my small bank could offer these services. 

Not only would consumers benefit from bank involvement in real estate services, 

but also bank involvement is consistent with safe and sound banking. All consumer 

protections that apply to independent REALTORS would apply to bank-affiliated 

real estate agents—plus bank-affiliated agents would be subject to additional 

antitying regulations. And because brokerage and management are agency activities, they pose no financial risk to the safety and soundness of the banking organization. 

Just 21⁄2 years ago Congress made the decision to leave this type of determination 

to the regulators—so that they could keep the financial structure up-to-date and 

keep Congress out of the middle of competitive disputes. NAR now wants to put 

Congress back in the uncomfortable position of referee. Congress explicitly gave the 

Fed and Treasury the flexibility and authority to make these determinations based 

on their expert knowledge of the changes in the financial services marketplace. 

Those agencies should be allowed to carry out the authority that Congress wisely 

provided to them. 

I thank you, Mr. Chairman, for this opportunity to present the views of the American Bankers Association.

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1The Joint Center for Housing Studies, Harvard Univeristy, The 25th Anniversary of the Community Reinvestment Act: Access to Capital in an Evolving Financial Services System, (March 

2002). 2 National Community Reinvestment Coalition, CRA Commitments (2002). Note: The Joint 

Center for Housing Studies, Harvard Univeristy used NCRC’s database to find that low- and 

moderate-income communities received a higher portion of loans in geographical area in which 

lenders and community groups negotiated CRA agreements than in areas in which they did not. 3David Olson, Testimony before the Senate Committee on Banking, Housing, and Urban Affairs’ Hearing, Predatory Mortgage Lending Practices: Abusive Uses of Yield Spread Premiums

(January 8, 2002). 4 Ibid. 

PREPARED STATEMENT OF JOHN TAYLOR

PRESIDENT AND CHIEF EXECUTIVE OFFICER

NATIONAL COMMUNITY REINVESTMENT COALITION, WASHINGTON, DC

MAY 23, 2002

Good morning Chairman Johnson, Senator Bennett, and distinguished Members 

of the Subcommittee on Financial Institutions. My name is John Taylor, and I am 

President and CEO of the National Community Reinvestment Coalition (NCRC). 

NCRC is a national trade association representing more than 700 community-based 

organizations and local public agencies who work daily to promote economic justice 

in America and to increase fair and equal access to credit, capital, and banking services to traditionally underserved populations in both urban and rural areas. NCRC 

has represented our Nation’s communities on the Federal Reserve Board’s Consumer Advisory Council (CAC), Community Development Financial Institutions 

(CDFI) Advisory Board, Freddie Mac’s Housing Advisory Council, Fannie Mae’s 

Housing Impact Council and before the United States Congress. 

On behalf NCRC, I thank you for the opportunity to testify before you here today 

on an important issue that will impact our Nation’s progress in extending the American Dream of homeownership to minority and low- and moderate-income families: 

banks becoming real estate brokers. NCRC’s community organizations are at the 

helm driving the reinvestment movement. Today, as a result of fair lending laws 

like the Community Reinvestment Act (CRA), which turns 25 this year, poor neighborhoods have been empowered by bank partnerships with community organizations 

to address credit needs and missed market opportunities. As a result, the number 

of loans to minority and working class borrowers over the last decade has increased 

faster than the number of loans to more affluent borrowers.1 Bank CRA commitments have grown from a few million dollars a year to over $50 billion annually.2

Without these loans and commitments, the economic flow of private credit and capital into our communities would be extinct and hence, certain death for disinvested 

neighborhoods. 

NCRC is very concerned about the ramifications of financial holding companies 

and national banks entering the real estate brokerage business. As you can imagine 

from the industries represented here today, you will hear varying perspectives on 

banks and real estate for consideration. I would like to emphasize that my testimony today will focus on three areas that will be affected if the banking and real 

estate industry are allowed to merge: competition, consumer protections, and serving our communities. 

Competition 

NCRC has always maintained the position that competition is beneficial for the 

revitalization of communities. Healthy competition provides low-income and working 

families with more housing and lending options, and offers them alternatives to 

high-cost and abusive loans. However, in our rapidly shifting financial marketplace 

in which our largest banks now own subprime lenders and insurance agencies, we 

wonder whether product choice is increasing for our communities or whether financial conglomerates are steering consumers into costly and unnecessary products, 

often layering one product on top of another to maximize their profits. 

Over a decade ago, banks had a corner on the mortgage lending business with 

an overwhelming 80 percent market share.3 Today, however, is a different story. In 

2001, the mortgage broker industry estimated that their market share has dramatically grown to 65 percent of all residential mortgage originations.4 Does this mean 

that banks are hurting for mortgage business? Absolutely not. Instead of relying on 

loan officers, banks now depend upon mortgage brokers to make loans in minority 

and low- and moderate-income communities. And too often, banks do not engage in 

sufficient due diligence or do not require brokers to follow fair lending safeguards. 

66

5Financial Markets Center, Firms Electing to Become Financial Holding Companies Under 

the Gramm-Leach-Bliley Act (April 26, 2002). 6 Rick Lazio, President and CEO of Financial Services Forum, Remarks at American Enterprise Institues’s Roundtable on the Gramm-Leach-Bliley Act (November 13, 2001). 7 Robert E. Litan, Nicholas P. Retsinas, et al. for the Department of the Treasury, The Community Reinvestment Act After Financial Modernization: A Final Report (January 2001). 

The situation would deteriorate if banks now owned a fleet of brokerage companies 

that combined lending and real estate services. 

The arena of competition has dramatically shifted in the wake of Gramm-LeachBliley (GLB), which blurred the distinction among financial industries. In March 

2000, the Federal Reserve Board issued a list of the first 117 bank holding companies that elected to become financial holding companies to take advantage of the opportunities of entering into the insurance and securities markets. As of April 2002, 

over 600 bank holding companies have elected to become financial holding companies in order to diversify their businesses.5 Conversely, less than a dozen nonbank 

firms have converted to financial holding companies for the purpose of seeking a 

banking charter.6 Banks are also taking advantage of an ownership stake (less than 

a controlling interest) in a financial subsidiary, meaning they form partnerships 

with firms offering a plethora of financial services including: investment planning, 

estate planning, asset protection, retirement planning, income tax planning and 

preparation, and education planning. 

To reiterate, NCRC supports competition in its truest sense—when parties act 

independently and offer the most favorable terms to secure business. But one must 

wonder if today’s financial market upholds the true meaning of competition when 

it seems like GLB has allowed all roads to lead back to the bank. While nonbank 

lenders own real estate companies, they have not utilized GLB to amass the market 

power that banks now enjoy after their mad rush to become financial holding companies. Would adding real estate to the menu of businesses that banks can own 

level the playing field between banks and nonbanks or only serve to make banks 

more powerful to the detriment of real competition in the financial industry? 

NCRC maintains that the addition of real estate to the already dizzying array of 

products now offered by ‘‘financial supermarkets’’ will lead to even greater consolidation of bank market power and result in fewer choices for consumers. Our worst 

nightmare in a consolidated financial market that includes real estate brokerage is:

• A bank offers favorable loan terms to its real estate affiliate, giving it significant 

advantage over a competing real estate business that does not have an affiliate. • The bank with the real estate affiliate stops offering loans to customers of nonaffiliated real estate competitors. • The number of product choices offered to customers of nonaffiliated real estate 

businesses decreases, resulting in higher cost loans.

During consideration of GLB, NCRC and other observers worried that the consolidation afforded under GLB would lead to only higher prices. That is why GLB commissioned the Department of Treasury to study the effects of mergers among banks, 

insurance companies, and securities firms on access to loan and bank products for 

low- and moderate-income communities. Treasury’s study in January 2001 concluded that it was too early to assess the impact on cross-industry mergers.7 NCRC 

urges Congress and the Federal financial supervisory agencies to delay allowing 

banks to enter yet another industry, specifically the real estate industry, until the 

Treasury rigorously measures the impacts of GLB on affordability and accessibility 

of financial services. 

When considering banks in real estate, policymakers have not adequately addressed the negative impacts on small real estate businesses of further industry consolidation. Women- and minority-owned small businesses have played a significant 

role in community revitalization. Many of these real estate entrepreneurs have established themselves in working class communities and dedicated their business to 

helping rebuild formerly redlined neighborhoods through partnerships with affordable homeownership programs. 

According to the most recent Economic Census, over 375,000 small women- and minority-owned real estate businesses operate in this country, generating over $41 

million in sales annually. The wealth generated by these new-markets businesses 

plays a vital role in building a solid foundation from which veritable community reinvestment will flourish. Local real estate brokers are more likely than financial 

conglomerates to bring wealth back into their community and enter into business 

relationships with other neighborhood enterprises. The financial independence of 

small businesses in local communities increases an individual’s stake in the economic empowerment of a community and improves the collective well being of our 

society. 

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8 Randall M. Scheessel for the Department of Housing and Urban Development, Black and 

White Disparities in Subprime Mortgage Refinance Lending (April 2002). 9 Ibid. See also National Anti-Predatory Lending Policy is Good for America, NCRC Anti-Predatory Lending Toolkit (March 2002). 10Kathleen Day, ‘‘Fannie Mae Vows More Minority Lending.’’ Washington Post, March 16, 

2000, E1. Freddie Mac, Automated Underwriting: Making Mortgage Lending Simpler for America’s Families, Chapter 5 (Spetmeber 1996). 

NCRC strongly takes that position that by allowing banks into the real estate 

business, small real estate businesses will be forced out of the marketplace by the 

monopolized ‘‘financial supermarkets.’’ Gone will be the days in which an entrepreneur dreams of opening a specialized financial business to serve his or her neighborhood customers. Instead, small real estate businesses, insurance businesses, and 

small investment companies will be forced to make a decision: forfeit their ownership and affiliate with a bank or face going under when a larger ‘‘financial supermarket’’ opens next door. Not only will our Nation’s communities hurt, our entire 

economy will suffer. 

Consumer Protection 

Existing Problems in the Lending, Insurance, and Real Estate Markets 

The next area I would like to address in regards to today’s subject matter is consumer protection. Repeatedly, I have been told by industry representatives advocating for banks in real estate that cross-ownership within these markets will benefit the consumer by offering greater choice, greater convenience, and lower costs. 

NCRC, as a leader in fighting predatory lending, takes the issue of ‘‘benefiting the 

consumer’’ very seriously. Last summer, NCRC testified before the Full Committee 

during the 2-day hearings on predatory mortgage lending practices about the plague 

of abusive lending and equity stripping from communities of color. Lenders are not 

alone at the receiving end of NCRC criticism. Our membership organizations who 

are entrenched in the frontlines of protecting homeowners, also battle insurance 

redlining and unscrupulous real estate ‘‘property flippers.’’ In testifying before you 

today, I must be honest to NCRC’s mission of economic justice and state emphatically that injustice exists in the banking, insurance, and real estate industries. Until 

the problems are solved to protect borrowers and consumers, these markets should 

not be commingled. 

According to the Department of Housing and Urban Development’s (HUD) just released report Black and White Disparities in Subprime Mortgage Refinance Lending,

subprime refinance mortgages accounted for 36.3 percent of total refinance mortgages in low-income neighborhoods compared to 23.8 of total refinance lending nationwide in 2000.8 Borrowers in prominently African-American low-income neighborhoods were 1.5 times more likely in 2000 to refinance with a subprime lender than 

borrowers in all low-income neighborhoods. Borrowers in upper-income AfricanAmerican neighborhoods were 2.9 times more likely to refinance with a subprime 

lender than borrowers in upper income neighborhoods overall. 

NCRC research has found similar disparities. For example, major subprime and 

manufactured home lenders made 47 percent of the refinance loans in predominantly African-American and Hispanic neighborhoods in the District of Columbia in 

2000, a significant increase from 39 percent of the loans in 1999 and 25 percent of 

the loans in 1994. In contrast, subprime and manufactured home lenders made less 

than 4 percent of the loans in predominantly white neighborhoods in the 3 years 

of the study. 

Substantial evidence suggests that subprime borrowers in minority communities 

experience price discrimination. Over the last several years, Home Mortgage Disclosure Act (HMDA) data has indicated that African-American applicants are denied 

twice as often as whites. NCRC believes that it does not necessarily follow that

African-American are twice as likely to have bad credit. And given that AfricanAmericans are denied twice as often for conventional loans as whites, it does not 

follow that minority communities should be five times as likely to receive subprime 

loans as documented in an earlier HUD study.9 In some geographical areas, the disparity is much greater than five to one. 

The major secondary market institutions have found pricing inefficiencies in 

subprime loans. Freddie Mac states that up to 30 percent of subprime borrowers 

were creditworthy for prime loans. Fannie Mae’s CEO, Franklin Raines, is quoted 

as saying that half of all subprime borrowers could have received prime loans.10

A study by the Research Institute for Housing America (RIHA) concludes that

minority borrowers are more likely to receive subprime loans after controlling for

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11 Anthony Pennington-Cross, Anthony Yezer, and Joseph Nichols for the Research Institue 

for Housing America, Credit Risk and Mortgage Lending: Who Uses Subprime and Why? (October 2000). 12 Consumer Union Press Release, State Farm Loses on Attempt to Block Disclosure of Insurance Redlining Data (March 8, 2000). 13 E. Scott Reckard, ‘‘State Farm Won’t Write New Homeowners Policies.’’ LA Times, April 23, 

2002. 14Susan Gaffney, Inspector General, Department of Housing and Urban Development, Testimony before the Senate Permanent Subcommittee on Investigations, Committee on Governmental Affairs’ Hearing, HUD’s Government Insured Mortgages: The Problem of Proerty ‘‘Flipping’’ (June 30, 2000). 

credit risk factors.11 RIHA cautions against a conclusion that price discrimination 

alone explains this since minority borrowers may have different techniques of 

searching for lenders. However, considering the totality of the research by NCRC, 

HUD, Fannie Mae, Freddie Mac, RIHA, and others, it seems fair to say that the 

burden of proof lies with those who assert that discrimination does not occur in the 

subprime market. 

The issue of insurance redlining is also a problem, but unlike home mortgage 

lending, insurance data is limited to only a handful of States. Since 1995, California 

has required insurance companies to file data indicating the race and gender of policyholders, the number of policies sold and cancelled, and location of offices and 

agents, all sorted by ZIP code. Working with the California Department of Insurance, consumer advocate Birny Birnbaum of the Center for Economic Justice (CEJ) 

obtained data that show disparities between the rate at which insurance companies 

write policies in low-income communities and the rate at which policies are written 

in middle- to upper-income communities. For example, in 1995, CEJ reported that 

approximately 16 percent of California’s population lived in underserved communities; however, the data reported by State Farm revealed the company had only 

2.59 percent of its agents in those communities.12 CEJ further concluded that the 

average insurer wrote only 5.57 percent of its private passenger automobile liability 

policies and only 6.62 percent of its homeowners policies in low-income, minority 

ZIP codes. 

State Farm, one of the Nation’s largest insurance companies, is also a Federally 

chartered thrift. As such, it offers a full range of banking services, including taking 

deposits and making various types of home mortgage, auto and home equity loans, 

in addition to full range investment products. Interestingly enough, 1 month ago, 

State Farm, California’s largest insurer of homes, indicated it has stopped writing 

new homeowner policies in the State due to a surge in the amount of claims over 

the last two years.13 If lawmakers add real estate services to the roster of State 

Farm products, would this only increase the clout of State Farm and other giants? 

Would conglomerates turn product flow ‘‘on’’ or ‘‘off’’ in order to obtain concessions 

from regulatory agencies in States dependent upon their services? 

As I mentioned, the real estate market is not without its unscrupulous actors

either. Property flipping involves buying a home at a low price and then reselling 

it at fraudulently inflated price within a short time frame, often after making only 

cosmetic improvements to the property. NCRC has seen the following practices employed in property flipping schemes:

• Real estate investors continually buying neglected properties at sheriff sales and 

reselling homes at escalated prices to unsophisticated first-time homebuyers; 

• Using real estate agents, licensed and nonlicensed individuals, as a front; 

• Targeting immigrant communities, particularly nonEnglish speaking individuals; 

• Colluding with property appraisers to inflate property value; 

• Colluding with home inspectors to secure clean reports; and 

• Tricking homeowners into thinking they are dealing with legitimate real estate 

companies.

In 2000, the Department of Housing and Urban Development Inspector General 

(IG) testified about the rampant flipping rings the Agency was combating.14 One investigation alone uncovered over 1,200 flipped loans totaling approximately $160 

million. Twenty-five percent of the loans were in default. The IG indicated that approximately 100 representatives of lending and real estate industries colluded on 

this scheme. Another IG flipping investigation involved a HUD employee who conspired with a real estate agent to carry out a systematic scheme of selling HUDowned properties at prices far below HUD’s listed price. The FHA Insurance Fund 

lost several million dollars as a result of this scam. If Congress allows banks and 

real estate firms to combine without strengthening the consumer protection laws, 

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15 John Taylor, Testimony before the Senate Committee on Banking, Housing, and Urban Affairs’ Hearing, Financial Services Legislation (February 25, 1999). 16Opinion Letter of J. Virgil Mattingly, General Counsel, Federal Reserve (May 16, 2001). 17The Federal Reserve Board, Survey of Consumer Finances (1998). 

our communities are more likely to be victims of scams than beneficiaries of greater 

product choice and lower prices. 

Consumer Choice 

As I previously mentioned NCRC was vocal during the consideration of GrammLeach-Bliley about the potential of banks product packing without regard of true 

customer needs.15 Banks are not shy about advertising their cross-marketing strategy: targeting an existing customer is easier and more profitable than acquiring a 

new one. 

The Bank Holding Company Act, as amended, prohibits a bank from extending 

or varying the consideration for credit on the condition that the customer obtain any 

other nonbanking product from the bank holding company or any other subsidiary 

of the bank holding company. This prevents a bank from offering a reduced interest 

rate on a loan that may be used only to purchase products made or sold by an affiliate of the bank. However, the statute provides exceptions and exemptions that

‘‘financial supermarkets’’ can take advantage of when cross-selling their products. 

Another problem for unsophisticated banking consumers is the perception that approval of their loan is contingent on their purchasing insurance or other products 

from bank affiliates. NCRC believes that banks should not force consumers to buy 

unwanted or unnecessary products, nor should they offer incentives to induce borrowers to purchase more products than they can afford. 

Last year Citibank sought and received a favorable exemption from antitying prohibitions to offer incentives to their credit card, mortgage, or loan customers who 

maintain a combined minimum balance in a package of products and services that 

include annuities, auto, homeowners, life, and/or long-term care insurance from insurance affiliates of Citibank.16 The incentives would include lower interest rates 

and/or other items, such as airline frequent flyer miles or contributions to accounts 

maintained by a customer with other Citibank affiliates. 

Is it really in the best interest of the consumer to be bombarded with credit card 

applications, insurance product brochures, investment fund prospectuses, and now 

perhaps real estate marketing materials when they go to a bank simply to open a 

checking account? Allowing banks into yet another industry would only compound 

the abuses associated with incentives and inducements to purchasing an array of 

products. 

Where are banks’ priorities when there are over 10 million Americans who do not 

have checking accounts? 17 Today, NCRC issues a challenge to the lenders to open 

your doors to the unbanked; for every product package you market to existing customer, dedicate the same energy to marketing Individual Development Accounts and 

lifeline and low-cost accounts to underserved communities. 

Finally, on the issue of choice, NCRC is very concerned that if banks are allowed 

in the real estate business, consumers using a bank affiliated real estate agent will 

be at a disadvantage when attempting to shop for the best priced loan product, particularly if a bank employs exclusivity with its affiliate. 

Serving Our Communities 

The final point that I would like to address is the stake our Nation’s communities 

have in the decision to expand banking business lines even further to include real 

estate. At the start of my testimony, I mentioned the great success story of how 

CRA has lead to the introduction of bank partnerships and commitments in formerly divested communities. I would briefly like to elaborate how CRA must be updated to cover all of the activities that financial institutions are now permitted to 

undertake. 

As you know, CRA only applies to the depository subsidiaries of financial holding 

companies. Other parts of the holding companies have no obligation to serve the entire community in which they do business, including low- and moderate-income communities. As CRA increasingly applies to a smaller portion of burgeoning holding 

companies, the risk that low- and moderate-income communities will once again become neglected—after years of steady progress in expanding homeownership opportunities down the income ladder—increases. Despite the Federal Reserve Board’s 

findings in its study mandated by GLB that CRA-related loans are profitable, financial holding companies will become tempted to overlook low- and moderate-income 

markets as they enter new lines of business. 

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It is a travesty to each and every underserved rural community and inner city 

neighborhood in our country that CRA basically ends with checking products and 

lending activities. When the Unites States Congress passed GBL, it missed a tremendous opportunity to extend community reinvestment requirements to all bank 

affiliates, insurance companies and securities firms. Thirty-six Members of the 

House of Representatives support our position and have cosponsored the Community Reinvestment Modernization Act (H.R. 865). As an addendum to my testimony, 

I have attached the first few pages of this bill detailing purposes, findings, and sections covered, and ask for your consideration of this important measure. 

If the banks are allowed into the real estate market NCRC strongly advocates for 

CRA coverage to be extended to the real estate affiliates to ensure these companies 

have agents in low- and moderate-income communities to serve minority and working class families. NCRC also strongly encourages Congress to enact a strong 

antipredatory law to prohibit abusive lending and property flipping. 

In closing, I leave you with a true story of how a REALTOR helped identify a 

discriminatory, predatory lending practice and subsequently brought it to the attention of NCRC’s Civil Rights Department for Assistance. 

The victims were an elderly minority couple who owned their home in the Mount 

Pleasant neighborhood, here in the District of Columbia, for over 43 years. In order 

to pay medical expenses, an independent mortgage company convinced the couple 

to take out an adjustable rate mortgage with a prepayment penalty and a loan payment that exceeded the couple’s monthly income. Faced with imminent foreclosure, 

the couple was forced to consider a ‘‘short sale’’ of their home. The victims retained 

a REALTOR to facilitate the sale of the home, who quickly identified that the appraisal conducted by the mortgage company was substantially inflated. Ultimately, 

a buyer was identified and a purchase contract placed. Unbeknown to all the parties 

involved the victims had prepayment penalty of $13,791.06 included in the note that 

stalled the real estate transaction. It was only after victims’ REALTOR requested 

NCRC to intervene that the sale took place. 

If the real estate agent had been affiliated with a predatory lender or any lender 

for that matter, it is doubtful that the agent would have acted as an independent 

watchdog. When we allow additional industry consolidation without providing 

stronger community protection laws, we remove the checks and balances that guard 

against abuses in power. Fewer independent businesses with stakes in their communities exist to protect against the exploitation and plunder of greedy conglomerates. 

I thank you, Mr. Chairman, for this opportunity to testify and present the views 

of the National Community Reinvestment Coalition. I will be happy to answer any 

questions you may have.

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1 ‘‘Changes in the Way Homes Are and Will Be Bought and Sold’’, By Weston Edwards & Associates, 1999. 2Weston Edwards & Associates is expected to publish 2002 statistics in the area sometime 

in 2003. 

PREPARED STATEMENT OF HOWARD W. HANNA, III

VICE CHAIRMAN, THE REAL ESTATE SERVICES PROVIDERS COUNCIL, INC. (RESPRO)

PRINCIPAL AND FORMER CHAIRMAN, THE REALTY ALLIANCE

PRESIDENT AND CHIEF EXECUTIVE OFFICER, HOWARD HANNA REAL ESTATE SERVICES

PITTSBURGH, PENNSYLVANIA

MAY 23, 2002

Good morning, Mr. Chairman and Members of the Subcommittee. My name is 

Howard W. Hanna, III and I am President and CEO of Howard Hanna Real Estate 

Services, a family owned and operated full service real estate brokerage company 

headquartered in Pittsburgh, Pennsylvania. 

Howard Hanna Real Estate Services has 65 residential and commercial real estate brokerage offices doing real estate sales and leasing in Pennsylvania, Ohio, 

West Virginia, and New York State, and a mortgage banking company. Hanna

Financial Services, which is licensed in those four States and also Illinois, Maryland, Colorado, Wisconsin, and North Carolina. 

Our firm has 1,500 associates and employees, of which 1,128 are members of the 

National Association of REALTORS, and I am proud to be a 32-year member of 

the REALTORS Association of Metropolitan Pittsburgh, the Pennsylvania Association of REALTORS, and the National Association of REALTORS. 

I currently serve as Vice Chairman of The Real Estate Services Providers Council, 

Inc. (RESPRO) and I am a Member of The Realty Alliance. I represent both organizations today. 

RESPRO is a national nonprofit trade association of approximately 200 residential real estate brokerage, mortgage, home building, title, and other settlement service companies who united in 1992 to promote an environment that enables providers 

to offer diversified services for homebuyers and owners (one-stop shopping) through 

strategic alliances across industry lines. 

Approximately 55 percent of RESPRO’s members engage in residential real estate brokerage, either directly or as a franchisor. Most of our real estate broker 

members are what I will refer to as ‘‘integrated’’ real estate brokerage firms, which 

means that we also offer mortgage, title, and/or other settlement services to our

customers. 

The Realty Alliance is a national organization of 45 regional, residential real estate brokerage firms that provides its members with idea sharing venues, industry 

forecasts and analysis, financial benchmarking, and technology information. 

Together, RESPRO and The Realty Alliance members who are in the real estate 

brokerage business have closed over one million residential real estate transactions 

for a sales volume of over $1.8 trillion, utilizing over 300,000 sales associates and 

over 78,000 employees in over 50,000 offices nationwide. 

Position of RESPRO and The Realty Alliance Position on

Bank-Real Estate Affiliations 

Both RESPRO and The Realty Alliance have formally decided, on a vote of their 

respective Boards of Directors, to support the 2001 proposal by the Federal Reserve 

Board (Fed) and Treasury Department to allow financial holding companies and national bank subsidiaries into the real estate brokerage and related businesses by declaring these activities to be ‘‘financial in nature’’, and to oppose legislation (S. 1839, 

H.R. 3424) to block this proposal. 

All available evidence shows that homebuyers like one-stop shopping, and that realty-based one-stop shopping offers potential consumer benefits such as convenience 

and lower costs. RESPRO and The Realty Alliance believe in free enterprise and 

a competitive marketplace that would allow any company to offer consumers these 

benefits, regardless of its industry or affiliation. 

Today’s Realty-Based One-Stop Shopping Programs 

According to a 1999 study conducted by the independent consulting firm of Weston Edwards & Associates, the top 350 real estate brokerage firms closed $22 billion 

in mortgage loans in 1998, and realty-based and builder-based lending accounted for 

about 10 percent of all purchase money mortgages that same year.1 Edwards estimated that this amount would double to 20 percent within 3 years.2

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3 ‘‘One-Stop-Shopping For The Homebuyer: A Rapidly Expanding Channel of Distribution’’, by 

Weston Edwards & Associates, 1997. The business structures of these realty-owned one-stop 

shopping programs vary. Many of the largest firms have created wholly-owned mortgage lending 

or brokerage, title, and/or insurance subsidiaries. Smaller firms have created joint ventures with 

local or national mortgage lenders, financial institutions, or mortgage subsidiaries of financial 

holding companies, title underwriters, or title agencies that are jointly owned (e.g. 50 percent–

50 percent) by the partners. 

4The survey also asked homebuyers how they felt about financial institutions entering the 

real estate brokerage business. Sixty-nine percent believed it would positively affect the range 

of services available through one company, 47 percent believed it would positively impact the 

number of choices of companies to conduct their home purchase transaction, and 46 percent believed it would positively affect the price they paid for the services needed to conduct the home 

purchase transaction. 5 ‘‘Economic Analysis of Restrictions on Diversified Real Estate Services Providers’’, by 

Lexecon, Inc., January 3, 1995. 6 In a 1996 Economic Analysis accompanying a final RESPA regulation, the Department of 

Housing and Urban Development (HUD) offered its independent analysis of both the Lexecon, 

Inc. study and the Edwards study. It concluded that ‘‘. . . referral activity among affiliates 

Continued

Edwards also found that 66 to 69 percent of the 250 largest residential real estate 

brokerage firms in the country offer mortgages, 31 percent offer title, closing, escrow 

or personal insurance in 1996.3

The Potential Consumer Benefits of Realty-Based One-Stop Shopping 

Since real estate brokerage firms have entered mortgage and other financial services businesses, there have been several consumer surveys and economic studies to 

assess their impact. All have conclusively shown that realty-based one-stop shopping 

programs in today’s marketplace offer many potential benefits to the homebuyer. 

The most recent survey of consumer attitudes toward realty-based one-stop shopping, which is attached to this testimony, was performed in March of this year.

Harris Interactive, the parent of Harris Poll, surveyed 2,052 recent and future 

homebuyers and found:

• That 82 percent of homebuyers would ‘‘strongly’’ or ‘‘somewhat’’ strongly consider 

using a one-stop shopping service for their home purchase. • That when a homebuyer is aware that a real estate brokerage firm offers a full 

range of services, it positively affects their selection of a real estate agent 44 percent of the time. • That the three preferred sources of one-stop shopping programs are mortgage 

companies, banks and credit unions, and real estate brokerage firms. • That 64 percent of homebuyers who recently used one-stop shopping programs 

had a much better overall experience with their home purchase transaction. • That over 90 percent of homebuyers who did not use one-stop shopping programs 

believed that if they had used one, they would have had a better overall home 

purchase experience because:

• They would have had just one person to contact, • They would have saved money if the company offered discounted prices, • It would have sped up the homebuying process, • It would have prevented things from falling through the cracks; and • It would have assured one standard level of brand-named service from all providers of the home purchase services.4

The Edwards study I mentioned earlier found that mortgages offered by realtybased one-stop shopping programs are competitive in both price and service. It concluded that real estate agents prefer using outside lenders unless the in-house mortgage service is exceptional, and that they only recommend the in-house product to 

the homebuyer when the loan product is within 1/8th of a percent of the best rate 

and when he or she believes the service is superior to outside mortgage products. 

The Edwards study also found that 96 percent of realty-owned mortgage brokerage 

operations use multilender systems, in order to give their real estate sales force and 

their customers a choice of mortgage lenders. 

A 1994 economic study commissioned by RESPRO and conducted by Lexecon, 

Inc., a national economic consulting firm, also found that realty-based one-stop 

shopping programs potentially offer lower costs.5 The study compared title and closing costs between realty-owned title companies and independent title companies in 

over 1,000 home purchase transactions throughout seven States—Florida, Minnesota, Tennessee, Wisconsin, Mississippi, Pennsylvania, and California—and concluded that title and closing costs for realty-owned title companies were not only 

competitive with those of independent title companies, but actually resulted in a 2 

percent cost savings.6

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might still benefit consumers because of the possibility of immediate savings in shopping time 

and hassle and future reductions in prices due to lower marketing and other costs. Taking these 

benefits into account, referrals among affiliated firms are probably neutral and possibly beneficial to consumers.’’

The bottom line is that every consumer survey and empirical study to date has 

shown that homebuyers prefer and potentially benefit from realty-based one-stop 

shopping programs. 

Integrated Real Estate Brokerage Companies Favor Open Competition 

As you know, the banking industry has argued that financial holding companies 

and national bank subsidiaries should be able to compete with integrated real estate 

firms such as Howard Hanna Real Estate Services, Long & Foster Real Estate, and 

other RESPRO and Realty Alliance members. In addition, some participants in 

this debate have accused the real estate brokerage industry as being ‘‘hypocritical’’ 

by wanting to be in the financial services business without letting financial institutions compete with us in the real estate brokerage business. 

I can assure you that the vast majority of RESPRO and Realty Alliance members favor open competition and believe that banks should be able to compete with 

us in our primary business in the same way we compete with them in the mortgage 

and other settlement service businesses. 

Over the last 20 years, a number of financial conglomerates have entered the real 

estate brokerage business, with varying degrees of success: in the 1980’s and early 

1990’s, Sears Roebuck owned Coldwell Banker, Metropolitan Life owned Century 21, 

and Merrill Lynch owned Merrill Lynch Realty. Today, General Motors Acceptance 

Corporation (GMAC) owns GMAC Real Estate, Prudential Insurance Company owns 

Prudential Realty, Cendant Corporation operates the Century 21, ERA, and 

Coldwell Banker franchises, and Warren Buffet’s Berkshire Hathaway owns Home 

Services of America, Inc. 

Initially, these companies appeared to have significant competitive advantages 

over traditional real estate brokerage companies, such as national distribution outlets, consumer marketing lists that made it easy to reach everyone, valuable data 

about buying habits, and tremendous name recognition. Sears even had access to 

Federally insured deposits through its affiliate Sears Savings Bank. 

Their entry into the business real estate brokerage business concerned many independent real estate brokerage firms at the time. In fact, in 1981, the long range 

planning committee of a national network of large regional independent brokerage 

firms issued a report to its members that stated that Merrill Lynch and Sears were 

the two greatest threats to the solvency of real estate brokerage firms ever faced 

by the industry. 

But this prediction was unfounded. Sears, Merrill Lynch, and Metropolitan Life 

have since left the real estate brokerage business. While Prudential, GMAC, 

Cendant, and Berkshire Hathaway remain competitors, their presence in the real 

estate marketplace has not changed the basic character of the real estate brokerage 

business. In fact, we believe that their entry contributed to the development of a 

wider range of services and caused traditional real estate brokerage firms to become 

more efficient and more consumer-focused than they were before. 

Federally insured financial institutions also have entered residential real estate 

markets over the years. This is not surprising, since over 50 percent of financial institutions (State-chartered banks in 26 States, Federal savings associations, and 

credit unions) can currently engage in real estate brokerage. 

Metropolitan Financial Corporation owned Minneapolis-based Edina Realty from 

1988 to 1995, Sears Savings Bank was affiliated with Coldwell Banker, and Twin 

Cities Federal (TCF) and Great Western at one time owned real estate brokerage 

firms. Savings institutions or State-chartered banks have also acquired real estate 

brokerage firms in Connecticut, Pennsylvania, Delaware, Texas, New York, and 

Florida. But over time, most of these financial institutions sold their real estate brokerage businesses and retreated from the marketplace. 

Finally, it’s important to remember that real estate brokerage firms would have 

the ability to acquire Federally chartered financial institutions if the Fed-Treasury 

rule is finalized. Earlier this month, a bank in Pittsburgh with 25 offices and assets 

of $800 million that Howard Hanna Real Estate Services had a close working relationship with was sold to another bank. This was a bank that our real estate company would have been interested in purchasing if we were allowed to do so under 

Federal law. 

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7 In addition, any mortgage, title, or other settlement service joint venture created by a real 

estate brokerage firm must comply with guidelines issued in a 1996 Department of Housing and 

Urban Development (HUD) Policy Statement that intended to prevent ‘‘sham’’ joint ventures created primarily as a conduit for violating Section 8 of RESPA. Under these joint venture guidelines, HUD announced that it will look at a variety of factors to determine whether a joint venture is a ‘‘sham’’ or a legitimate joint venture, including whether both partners invest capital 

in the entity, whether the entity performs ‘‘core’’ settlement services, whether the entity has separate management and employees, and whether the partners’ return on their ownership interest 

is proportional to the capital they invested in the joint venture entity. 8 ‘‘State Survey of Affiliated Business Laws’’, by the Real Estate Services Providers Council, 

Inc. (RESPRO), 2001. 

There Should Be A Level Playing Field Between Bank-Owned and

Non-Bank Real Estate Brokerage Firms Under RESPA and State Laws 

While RESPRO and The Realty Alliance support the ability of financial holding 

companies and national bank subsidiaries to enter the real estate brokerage business, we also believe that bank-owned and nonbank real estate brokerage firms 

should compete under a similar Federal and State regulatory environment. 

The Real Estate Settlement Procedures Act (RESPA) 

At the Federal level, all settlement service providers, including integrated real estate brokerage firms and our real estate agents, must comply with the Real Estate 

Settlement Procedures Act (RESPA), which requires that a lender give a Good Faith 

Estimate (GFE) of the closing costs 3 days after the application and a HUD–1 Settlement Statement at closing. Section 8 of RESPA also prohibits settlement service 

providers from giving or receiving referral fees, or ‘‘kickbacks’’. 

Integrated real estate brokerage firms also are subject to RESPA’s ‘‘affiliated business’’ restrictions, which requires us, before we refer business to our mortgage, title 

or other settlement service affiliates, to (1) disclose the nature of the financial relationship; (2) not require the use of the affiliated settlement service; and (3) not give 

or receive any payments (referral fees) that are otherwise prohibited under RESPA. 

Under the last requirement, neither the real estate brokerage firm nor its real estate sales associates can accept any ‘‘thing of value’’ from an affiliated mortgage or 

other settlement service provider for referrals of business.7

Financial holding companies and national bank subsidiaries that enter the real 

estate brokerage business would be subject to these RESPA guidelines, which we 

believe is appropriate. 

But in the near future, HUD is expected to issue a proposed RESPA rule that 

would exempt providers from Section 8 of RESPA if they guarantee the lump-sum 

cost of a settlement service ‘‘package’’. 

For there to continue to be a level playing field between bank-owned and nonbank 

real estate brokerage firms, it is essential that HUD allow nonmortgage lenders 

such as real estate brokerage firms to offer a guaranteed ‘‘package’’ to our customers 

in the same manner as mortgage lenders. We urge Congress to closely monitor the 

progress of this HUD rulemaking proceeding to assure that all providers have the 

ability to compete under any new regulatory environment under RESPA, regardless 

of their industry or affiliation. 

State Laws Affecting Integrated Real Estate Brokerage Firms 

Integrated residential real estate brokerage firms also are subject to a myriad of 

State laws and regulations that prohibit or restrict their operations. 

In 2001, 37 States had statutes, regulations, or policies that place percentage limitations on the amount of business a title insurer or agent can receive from an affiliate, including an affiliated real estate broker, real estate agent, home builder, mortgage lender, or financial institution.8 Other States have enacted laws that prohibit 

a person from receiving a fee as real estate broker or salesperson and mortgage 

broker in the same transaction. 

As you know, the Gramm-Leach-Bliley Act (GLBA) prohibited States from (1) preventing a depository institution or affiliate from being affiliated with any entity authorized by the Act; (2) preventing or significantly interfering with the ability of a 

depository institution or affiliate to engage in insurance sales, solicitation or crossmarketing; or (3) preventing or significantly interfering with the ability of an insurer or affiliate to become a financial holding company or to acquire control of a 

depository institution. 

Since GLBA passed Congress, some financial institutions have successfully exempted themselves from these State restrictions under GLBA’s State preemption 

provisions. For example, the Kansas Insurance Department ruled in 2001 that 

GLBA preempted Kansas financial institutions only from a Kansas State law that 

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prohibited a title agency from receiving in excess of 20 percent of its operating revenue from an affiliate. 

As a result, Kansas financial institutions may own a title company but nonfinancial institutions, including real estate brokerage firms, may not. If financial 

holding companies and national bank subsidiaries are allowed to own real estate 

brokerage firms, then bank-owned real estate brokerage firms could own title agencies but nonbank real estate brokerage firms could not. 

RESPRO and The Realty Alliance members have consistently opposed these 

state antiaffiliation laws over the years, and we support their preemption or repeal 

for both financial institutions and nonfinancial institutions. If the Fed and the 

Treasury approve a final rule, we urge Congress to assure that State laws apply 

equally to all real estate brokerage firms, regardless of their affiliation. This would 

better enable all real estate brokerage firms to offer homebuyers the benefits of onestop shopping programs, regardless of whether they are affiliated with a financial 

institution. 

Mr. Chairman, I again thank you for the opportunity to testify, and I would be 

glad to answer any questions.

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RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED

FROM TOM MURPHY 

Q.1. During the few years before the enactment of Gramm-LeachBliley in 1999, a huge disagreement existed between insurance 

agents and brokers, and commercial banks, about whether banks 

should be allowed to engage in insurance activities. A compromise 

was finally reached which allowed Gramm-Leach-Bliley to proceed, 

and opened a new chapter in which banks were able to affiliate 

with insurance companies, and to sell insurance. However, certain 

State consumer protection laws affecting those sales were able to 

stand, or be enacted, if they did not ‘‘significantly interfere’’ with 

a bank’s sales of insurance.

A.1. An important point to make is that Congress wrote that new 

insurance powers chapter, not the regulators. Even after that carefully crafted compromise was enacted, there are still regulatory 

problems arising from it. As late as April 2002, the Comptroller of 

the Currency encouraged preemption of the Massachusetts Consumer Protection Act. The Comptroller avoided the ‘‘significantly 

interfere’’ language of the GLBA and instead utilized a much lower 

standard that the Consumer Protection Act ‘‘stands as an obstacle.’’ 

(See attached letter from Chairman Mike Oxley to Secretary Paul 

O’Neill) Several other examples exist of national banks and financial holding companies seeking preemption of State and local statutes and regulations due to their national charter. It is very simple 

for the regulators to now claim that all existing regulations will

be followed. But these examples prove their actual conduct is

far different.

Q.2. How is this situation different from the one we are currently 

facing between banks and real estate agents and brokers? I understand that the concern among agents is that they might ‘‘disappear’’ once banks get into their business, and that people in the 

community will no longer turn to them for their services. However, 

anecdotal evidence in the case of the insurance agents would suggest differently, showing essentially that there is still a viable market for the agents and that people in the community do still turn 

to them because they trust them and like using them. Won’t that 

situation hold out in the case of real estate agents as well?

A.2. Banks maintain that insurance companies and agents are actually benefiting from banks exercising insurance powers. There is 

no doubt that big banks will attempt to capture larger and larger 

market share. But what do the statistics say? What do consumers 

say? And what do the independent insurance agents say? In South 

Dakota, banks entering the real estate business will reduce the 

number of independent real estate brokerage companies and 

agents. 

This situation is quite different from that facing the real estate 

industry. The types of problems described above arising from ‘‘functional regulation’’ of insurance products offered by banks provide 

further evidence that the time is not ripe to grant additional powers to banks. Real estate regulation is far more localized than the 

insurance industry. Not only are there Federal and State rules and 

regulations, but also every local county, town, and village has individual requirements for the property located within their jurisdicVerDate 0ct 09 2002 17:04 Oct 23, 2003 Jkt 000000 PO 00000 Frm 00109 Fmt 6633 Sfmt 6601 S:\DOCS\0523.TXT FRANK PsN: FRANK1
106

tions. There is no evidence that the regulators considered this 

when proposing their rule. There can be no comparison of real estate and financial products such as securities and insurance. Those 

products are fungible assets that have a value wherever they may 

be. A life insurance policy can ‘‘follow’’ its insured to any State or 

country. A piece of real estate can never move from where it is first 

located. It is earth itself. It is the most locally regulated industry 

there is, by necessity. The problem with allowing the huge banking 

conglomerates into the real estate industry is that they can dominate a market due to their size and Federally granted advantages. 

If we assume they would seek to build a national brand and marketing plan, we must also assume they would seek preemption of 

local and State regulations that would burden that national approach. Past experience shows this is the path they would take, 

along with their regulators. The result would be weaker consumer 

protections, less competition, and a less efficient real estate marketplace.

Q.3. Opponents of the REALTOR argument have accused the REALTORS of acting uncompetitively in this situation. In fact, allowing the entrance of banks into the real estate brokerage and 

management market will ensure a healthy and competitive environment for all. 

What is your response to those comments? Do you not believe the 

assertion that many small and community banks are looking to 

these possible activities as a way to remain competitive with credit 

unions, as well as REALTORS?

A.3. We do not believe the assertion that many small and community banks are looking to these possible activities as a way to remain competitive. The fact is the petitions to the Federal Reserve 

Board and the Treasury Department that lead to the proposed real 

estate regulation were at the behest of the largest diversified financial holding companies and bank holding companies. The Financial 

Services Roundtable and the New York Clearing House represent 

these huge financial conglomerates and money center banks, not 

small community banks. The American Bankers Association also 

petitioned the Agencies for the real estate regulation. But they 

identified only one bank—Fremont National Bank and Trust (Fremont, Nebraska)—that should engage in real estate. Significantly, 

the Independent Community Bankers Association was not a petitioner to the Agencies. 

During hearing testimony Mr. Smith stated that he has had real 

estate powers since 1984. Although he argued that it is only in the 

last 2 to 3 years that he thought he might need to utilize that authority to compete, he still has not done so. He has the power to 

do so and has not. We believe this would hold true across the country for small community banks. The ABA has tried to sell this proposal as an aid to small institutions, but it is the top 5 to 10 largest banking conglomerates that really want this authority. If it is 

true that 26 States allow their State-chartered banks to operate 

real estate businesses, why aren’t more of them doing it? Only 18 

banks in six States are involved in residential real estate according 

to our research (see written testimony). It has been a precept of the 

dual banking system since its inception that each charter offers difVerDate 0ct 09 2002 17:04 Oct 23, 2003 Jkt 000000 PO 00000 Frm 00110 Fmt 6633 Sfmt 6601 S:\DOCS\0523.TXT FRANK PsN: FRANK1
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ferent advantages and disadvantages. There is no reason that any 

bank today could not apply for a State charter in any of these 

States and accomplish their goals, other than that they want to 

seek preemption of State and local rules because of their national 

charter. If small banks want to offer these services, they can become State chartered, or as explained below, partner with a real 

estate broker under existing rules. 

Credit unions account for less than 1 percent of mortgage originations in this country, and so the competitive argument is a red 

herring. Not long before the Gramm-Leach-Bliley Act was finally 

adopted by Congress, the banking industry failed to prevent credit 

unions’ growth through a court challenge. That effort was overwhelmingly defeated by legislation passed by Congress. The competition among financial institutions is a legacy of the Nation’s 

dual banking system and other financial policy decisions. Congress 

created these institutions, not the regulators. 

More specifically, how is it that banks entering brokering, leasing, and managing real estate will make banks more competitive 

with credit unions? Credit unions, by Federal law, can engage in 

real estate brokerage only through service organizations and those 

activities cannot exceed 1 percent of the contributed assets of

the credit unions. Moreover, there are not more than half a dozen

credit union service organizations operating residential real estate 

brokerages.

Q.4. As part of the ongoing discussion of this issue, some people 

have cited the fact that there are numerous real estate companies 

and brokerages that conduct services that are currently defined as 

traditional banking activities, such as mortgage lending and title 

insurance. 

Why do you feel this situation is different than one allowing 

banks to get into some traditional realty activities, such as brokerage and management? 

In fact, don’t some State banks, thrifts, and credit unions already 

engage in real estate brokerage activities? How is this case different than national banks entering into this arena?

A.4. First, real estate companies are not offering traditional banking products. Mortgage lending and title insurance are financial 

products that both traditional banks and commercial firms such as 

real estate brokers offer (see chart in testimony). This ‘‘gray’’ area 

is where many commercial and banking industries compete. It is 

where automobile companies and banks compete for auto financing. 

It is where retailers and banks compete on personal loan financing. 

Real estate firms do not take deposits and cash checks. Those are 

traditional banking activities. 

Today, many of the financial services activities performed by real 

estate brokers are done in partnership with banking subsidiaries. 

Under the affiliated business arrangement rules of RESPA, a bank 

owned mortgage company can partner with a real estate broker to 

offer mortgage loans. They share in the profits resulting from that 

partnership, and operate under strict consumer protections such as 

disclosures and prohibitions against kickbacks. Mr. Smith’s bank 

not only could offer real estate brokerage directly today as a Missouri trust company, but he could also partner with an existing 

108

real estate broker to offer mortgage and insurance services through 

an affiliated business arrangement. This is exactly what Mr. Smith 

claims banks are seeking through this proposed rule. But if they 

can do this today, what could be the true reason for seeking this 

rule? Could it be to avoid the tough RESPA-affiliated business arrangement rules by directly operating the real estate brokerage, or 

could it be to seek preemption of State and local regulations as discussed in question one above? 

Banks make much of the real estate company affiliation with 

mortgage companies and other real estate service providers giving 

the impression that ‘‘capture rates’’ of clients’ business is automatic 

and complete, much like what occurs when a bank customer enters 

a banking institution. The simple fact is that real estate clients 

using real estate company-affiliated businesses rarely exceed 30 

percent annually. Commercial bank mortgage originations still 

dwarf all other competitors. 

The difference in allowing huge national banks (that are the true 

proponents of this rule) in real estate and those already in the 

business is the size of these institutions. The top two or three national banks and holding companies have more assets than all of 

the existing real estate companies combined. This huge market 

power, along with Federal advantages, would allow these 

megabanks to dominate any market. As you know, once the market 

has been won, competitive forces will disappear and consumers will 

suffer.

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RESPONSE TO WRITTEN QUESTIONS OF SENATOR MILLER

FROM TOM MURPHY 

Q.1 As you know Georgia has allowed one State-chartered bank to 

offer real estate brokerage and management services. We have 

heard anecdotally that the local REALTORS have found it useful 

because the bank has placed its properties on the multilist and the 

REALTORS have more properties to sell. Don’t you think this is 

a good thing?

A.1 Although we have no research to indicate the Georgia experience, it is true that the Georgia REALTORS and bankers agreed 

to withhold any further State bank applications to perform real estate brokerage until it is decided on the Federal level. This is another reason why Congress should act on S. 1839, the Community 

Choice in Real Estate Act. It can be argued that Georgia Statechartered banks would be better served if huge national 

megabanks were not granted real estate powers. These State-chartered banks have very good business relationships with local real 

estate offices, and would be able to continue that practice under existing law. Entrance of the banking conglomerates would also unfairly squeeze the State bank markets.

Q.2. What aspects of the activities that your opponents are claiming to be ‘‘financial’’ or ‘‘incidental to a financial activity’’ do you 

specifically disagree with?

A.2. Banks claim that real estate brokerage, leasing, and management are financial activities or are incidental to a financial activity. 

The business of brokering, leasing, or managing real estate does 

not involve lending. It is financing the mortgage that facilitates the 

transfer of real property that involves lending. More than 20 percent of residential home purchases involve no lender financing 

whatsoever. If anything, the mortgage is incidental to the real estate sale, not the other way around. Real estate is better compared 

to a retail department store that provides consumer products to its 

customers. If the department store has a credit card, does that 

make the department store a bank because the credit card involves 

financing?

Q.3. What is your response to the position that The Realty Alliance, representing 45 member firms, has taken against your efforts? [The NAR is roughly 12 times the size of The Realty Alliance. However the NAR only represents about 40 percent of all 

those with a real estate licenses—though not all of the two million 

license holders are practicing.]

A.3. The Realty Alliance and the National Association of REALTORS are two different associations. The Realty Alliance is an organization of 45 independent real estate broker-owners. The Realty 

Alliance itself has members who do not share that organization’s 

position. (see attached Op-ed from Lennox Scott, member of Realty

Alliance) 

The National Association of REALTORS is an organization of 

810,000 members that includes real estate broker-owners, brokers, 

and agents. The National Association also has affiliates that have 

their own membership that practice real estate specialties, all of 

114

which require a real estate license. (see written testimony chart on 

support for NAR position)

Q.4. How can banks restrict themselves from ‘‘product packing,’’ 

their clients believing that they must use a bank for all available 

services to receive easier credit approval or lower financing rates? 

What is to stop FHC salary-based real estate representatives from 

tying in other bank products? [Real estate firms have RESPA requirements which force them to have clients sign disclosure statements that ensure understanding that real estate lending partners 

do not have to be used, and that the customer is free to shop 

around for a better deal.]

A.4. It seems inconceivable that banks would restrict themselves 

from product packing, despite the existence of antitying provisions. 

Even Fed Chairman Alan Greenspan made a critical point during 

hearings on Gramm-Leach-Bliley: Firewalls leak and in today’s 

closely integrated financial institutions they leak quickly. Chairman Greenspan had the ‘‘Asian contagion’’ fear in mind when making these comments. Given the failure of the Japanese universal 

banking system these comments were well founded. The whole 

point in banks getting these additional authorities is to cross sell 

their proprietary products. Banks call this ‘‘one-stop’’ shopping. We 

call it ‘‘one-bank’’ shopping. Banks do not have an agency relationship with their customers. Banks necessarily will promote their 

bank and financial products to the exclusion of any competitive 

products. That is the nature of banking. The business of banking 

requires capturing customers for proprietary product and service 

sales. Real estate brokers and agents have a completely different 

relationship with their clients based on an agency relationship and 

the unique nature of selling and marketing real estate. Their only 

goal is to assist in the marketing or purchase of their client’s real 

estate. Although they may recommend ancillary services, their only 

compensation comes from the completion of that transaction. Thus 

their motivations are completely different from a banker’s. A real 

estate agent’s sole obligation is to their client.

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RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED

FROM JAMES E. SMITH 

Q.1. During consideration of the Gramm-Leach-Bliley Act in 1999, 

was the banking industry pushing to have real estate brokerage 

and management services considered as financial activities? Although real estate sales and development were explicitly prohibited 

by the Act, why do you believe that the Fed and the Treasury were 

correct in promulgating rules that would make brokerage and management activities ‘‘financial in nature,’’ or ‘‘incidental to financial 

services?’’

A.1. There was no attempt to incorporate specific ‘‘financial in nature’’ activities in the statute other than the securities and insurance activities that are included. Congress recognized the dynamic 

nature of the financial services industry and designed a statute 

that could evolve with the industry. Accordingly, the GrammLeach-Bliley Act (GLBA) provides a flexible regulatory framework 

to make certain that the new statute would resist obsolescence and 

adapt to innovations in the marketplace. That framework grants 

the Federal Reserve and Treasury Department the authority to determine whether future activities are financial in nature. Furthermore, GLBA provides that financial subsidiaries of national banks 

should be prohibited only from engaging in real estate development

activities—the riskier aspect of the business in which the banking 

organization takes an ownership position. Had Congress intended 

to prevent banking organizations from engaging in the agency activities of real estate brokerage and real estate management, it 

clearly knew how to do so. The fact that Congress chose only to 

prohibit real estate development leads to the conclusion that Congress did not intend to restrict real estate agency activities.

Q.2. Do you believe, should banks be allowed to enter into these 

new activities, that they should be held to a higher standard? In 

other words, that the Community Reinvestment Act should apply 

to other affiliates of the bank, such as real estate brokerage and 

management parts, in addition to the deposit-taking part of the 

bank?

A.2. Approval of the proposed rule would actually enhance a bank’s 

ability to assist low-income and minority communities. Since banks 

are subject to the Community Reinvestment Act (CRA), they have 

every incentive to use the real estate authorities to further their 

outreach to communities. The banks would provide real estate services to areas that are currently underserved in this respect and 

could use the combination of real estate and bank services to better 

serve their low-income and minority communities. Moreover, if the 

real estate agency were a subsidiary of a national bank, that subsidiary would be covered by CRA. On the other hand, nonbankaffiliated mortgage companies, such as those affiliated with real estate companies, have no CRA or other obligation to low-income 

communities. Moveover, an institution’s record of compliance with 

CRA already is a consideration pursuant to GLBA. That is, all insured depository institutions of a holding company must have a 

‘‘satisfactory’’ or better CRA rating in order to engage in new financial activities. With respect to requiring affiliates of the bank to 

comply with CRA, we believe that directly subjecting a real estate 

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affiliate of a bank to CRA would place them at a competitive disadvantage to nonaffiliated real estate agencies that are not subject 

to CRA requirements.

Q.3. Do you believe that as part of the regulation being considered 

by the Fed and the Treasury, there should be a strict firewall between the deposit-taking part of the bank and the real estate brokerage part, similar to those State laws enacted in the context of 

insurance sales by a bank?

A.3. The proposed rule provides that real estate brokerage activities must be conducted through a subsidiary or affiliate and not the 

bank itself. Furthermore, all State licensing, qualification, sales 

practices, and continuing education requirements would apply to 

bank-affiliated real estate agents. Thus, similar to the situation 

with insurance agency activities, bank-affiliated agents would be 

subject to the same sales practice requirements as those agents not 

affiliated with banks. In addition, banks are subject to Sections 

23A and 23B of the Federal Reserve Act, which limit the amount 

of credit and other forms of support that a bank could provide to 

a real estate brokerage affiliate or subsidiary. Consumers have 

even more protections when their real estate agent is affiliated 

with a banking organization because banks and bank holding 

compamies are subject to the antitying provisions of the Bank 

Holding Company Act. These restrictions prohibit banks and their 

affiliates from conditioning the provision of credit on the purchase 

of another product or service.

Q.4. As part of the ongoing discussion of this issue, some people 

have cited the fact that there are numerous real estate companies 

and brokerages that conduct services that are currently defined as 

traditional banking activities, such as mortgage lending and title 

insurance. Why do you feel this situation is different than one allowing banks to get into some traditional banking activities, such 

as brokerage and management? In fact, don’t some State banks, 

thrifts, and credit unions already engage in real estate brokerage 

activities? How is this case different than national banks entering 

into this arena?

A.4. This question recognizes an important point in this debate: 

real estate companies, such as Long & Foster, Century 21, and 

Prudential, provide end-to-end services for the home purchasing 

process, including real estate brokerage, mortgage, and insurance 

services. It is ironic that the National Association of REALTORS

is now objecting to the very combinations that their members have 

undertaken—offering brokerage, mortgage banking, and, often, insurance under one roof. Furthermore, in 26 States, State banking 

regulators have the authority to allow State-chartered banking organizations to engage in real estate brokerage activities. In addition, savings institutions and credit unions already have brokerage 

authority. Restricting national bank subsidiaries and financial 

holding companies from offering the same end-to-end combination 

of real estate services and mortgage lending places them at a tremendous competitive disadvantage. We lose not just an opportunity 

in the brokerage field, but also the opportunity to interact with the 

customer in the first place and to offer one of the most traditional 

of banking products—the mortgage loan. 

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1 ‘‘The Competitive Implications of Safety Net-Related Subsidies,’’ Gary Whalen, Economics 

Working Paper 97–9, OCC, May 1997. 2Testimony by Ricki Helfer, Chairman, FDIC, before the House Committee on Banking and 

Financial Services, March 5, 1997. 3 ‘‘Federal Subsidies in Banking: The Link to Financial Modernization,’’ Frederick Furlong, 

Federal Reserve Bank of San Francisco Economic Letter, number 97–31, October 24, 1997. 

‘‘The Battle for Bank Regulatory Supremacy,’’ Carter Golembe, The Golembe Reports, volume 

1997–2 (March 1997).

RESPONSE TO WRITTEN QUESTIONS OF SENATOR MILLER

FROM JAMES E. SMITH 

Q.1. Aren’t there already in place antitying provisions that would 

prohibit a bank from offering favorable loan terms to its real estate 

affiliate?

A.1. Yes. Sections 23A and 23B of the Federal Reserve Act would 

limit the amount of credit and other forms of support that a bank 

could provide to a real estate brokerage affiliate or subsidiary. Consumers have even more protections when their real estate agent is 

affiliated with a banking organization because banks and bank 

holding companies are subject to the antitying provisions of the 

Bank Holding Company Act. These restrictions prohibit banks and 

their affiliates from conditioning the provision of credit on the purchase of another product or service.

Q.2. Why do you not think banks will have an unfair advantage 

after new proposed regulations are enacted? Others claim that Government subsidies (for example deposit insurance) as well the 

‘‘deep pockets’’ of your institutions will allow for an unfair advantage that would create an opportunity for FHC’s to exploit the market—perhaps going as far as using your subsidies to provide belowmarket prices?

A.2. The subject of whether deposit insurance and the Federal Reserve’s discount window provide a competitive advantage to banks 

was fully debated during discussions that ultimately led to the 

Gramm-Leach-Bliley Act of 1999. Testimony and statements at 

that time from Federal banking regulators (Office of the Comptroller of the Currency (OCC) 1 and Federal Deposit Insurance Corporation (FDIC)) 2 and other experts 3 support the conclusion that 

no subsidy exists in the Government’s provision of services to 

banks. If a subsidy existed, banks would be expected to dominate 

in businesses where they compete directly with nonbanks. In fact, 

banks have been losing market share in terms of both assets and 

household savings since the 1970’s. The mortgage markets provide 

the most striking example of how the market has shifted away 

from depository institutions. The reason for this shift is the secondary market—not insured deposits—has become the most costefficient way to fund most mortgages. Investor demand is so great 

for mortgage-backed securities that mortgage banks have access to 

the lowest-cost funds available in the world. Traditional depositbased lenders—who pay for deposit insurance and face a host of 

regulatory expenses like higher capital requirements, exam costs, 

and CRA—are often bypassed completely. If banks enjoyed a subsidy, nondepository institutions would not control an ever-increasing market share. 

Q.3. Why do you not think banks will have a conflict-of-interest situation, with either lending favorable loans to their affiliates, or 

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even going as far as not lending to nonaffiliated firms—essentially 

to your competitors?

A.3. Banking organizations are subject to Sections 23A and 23B of 

the Federal Reserve Act, which limit the amount of credit and 

other forms of support that a bank could provide to a real estate 

brokerage affiliate or subsidiary. Such limits ensure that the safety 

and soundness of the bank will not be negatively impacted by its 

subsidiaries or affiliates. Moreover, the exact same potential for 

such conflicts exists today given that a number of real estate firms 

such as Century 21, Coldwell Banker, ERA, and Long & Foster all 

offer mortgages to homebuyers. Although these integrated real estate organizations, as well as State banks in many States, savings 

institutions, and credit unions, have been selling real estate and 

funding mortgages for years, conflicts of interest has not been a 

problem. The Real Estate Settlement Procedures Act (RESPA) addresses such conflicts (explained in further detail below).

Q.4. What aspects of ‘‘banking’’ that real estate agencies currently 

have access do you think give them an unfair advantage?

A.4. Real estate companies, such as Long & Foster, Century 21, 

and Prudential, provide end-to-end services for the home purchasing process, including real estate brokerage, mortgage, and

insurance services. It is ironic that the National Association of REALTORS is now objecting to the very combinations that their 

members have undertaken—offering brokerage, mortgage banking, 

and, often, insurance under one roof. Such combination of services 

provides valuable cost, convenience, and service options for customers. All banks should have the opportunity to compete in the 

same manner as the real estate companies.

Q.5. How can banks restrict themselves from ‘‘product packing,’’ 

their clients believing that they must use a bank for all available 

services to receive easier credit approval or lower financing rates? 

What is to stop FHC salary-based real estate representatives from 

tying in other bank products?

A.5. First, as explained in the first question, banks and bank-holding companies are subject to the antitying provisions of the Bank 

Holding Company Act. Second, RESPA applies to banks in the 

same manner as it applies to real estate firms. Specifically, RESPA 

requires REALTORS affiliated with lenders to disclose that fact 

to customers before the purchase occurs. The RESPA disclosure, 

which must be on a separate piece of paper, must state the relationship between the real estate agent and the lender and provide 

the estimated charges or range of charges of the lender. It must 

also notify the customer that he or she is not required to use the 

lender and is free to shop around for a better deal.

121

STATEMENT OF THE AMERICAN HOMEOWNERS GRASSROOTS 

ALLIANCE 

The American Homeowners Grassroots Alliance (AHGA) is a national bipartisan 

advocacy organization representing the Nation’s 70 million homeowners. AHGA believes that preserving and enhancing homeownership should be a national policy 

priority. AHGA believes that homeowners and homeownership are generally benefited by domestic and international free market policies. 

AHGA has carefully reviewed policy documents and testimony from the real estate, lending sectors, and other sources on the issue of allowing banking organizations to be involved in real estate brokerage. From the consumer perspective there 

are significant potential benefits of such a policy. Those benefits clearly outweigh 

the limited potential risks. Also, a substantial majority of consumers would like the 

option of ‘‘one-stop’’ shopping for real estate services. For these reasons AHGA believes that consumers will benefit if banking organizations are involved in real estate brokerage and urges Congress to support the entry of banks into this market. 

Opponents argue that because banks lack the invaluable experience in local real 

estate markets and the in-depth knowledge of real estate law, consumers will suffer. 

While it is true that most banks currently do not have core real estate brokerage 

competencies, both experience and common sense suggest it is unlikely that consumers will suffer. Companies in the banking and real estate sector have successfully entered each other’s markets without serious problems. Federal savings institutions, credit unions nationwide, and commercial banks in about half of the States 

have had the ability to engage in real estate brokerage for a number of years. Many 

real estate companies, including Long & Foster, Century 21, and Coldwell Banker 

and many others currently provide brokerage, mortgage lending, title insurance, 

and property insurance. Consumers have substantial protection in the fact that real 

estate practice is heavily regulated, and State licensing requirements establish minimum competencies that all participants must demonstrate. Rather than build those 

competencies from scratch, it is likely that many banks will enter the real estate 

brokerage market through partnerships with or the acquisition of small local real 

estate agencies that have substantial experience in their real estate markets and 

in-depth knowledge of real estate law. Another argument against permitting banks 

to enter real estate brokerage is that it will accelerate the consolidation process currently underway in both the real estate and lending sectors. This would reduce competition and increase costs to consumers. This is not a strong argument either. 

Other larger economic factors are driving the consolidation that will almost certainly continue in banking and real estate (and many other sectors as well), whether 

or not banks are allowed to enter real estate brokerage. AHGA believes that any 

contribution of this new policy to the consolidation process will be small. If banks 

are permitted to enter real estate brokerage the most visible difference will likely 

be that banks instead will purchase some of the small real estate brokerages that 

would otherwise be purchased by large real estate brokers. Because there will be 

more bidders the small independent brokers will benefit from higher selling prices 

when they sell their businesses. Fortunately there are a very large number of existing competitors in both sectors, so it would take many years before consolidation 

reduces the number of competitors in either sector to the point that any company 

or small group of companies could override market forces in determining prices of 

banking and real estate services. If and when we ever reach the point that market 

forces do not prevail in setting real estate service prices and lending prices and 

rates, U.S. antitrust laws are available to stop anticompetitive behavior. 

Last, opponents argue that permitting banks to enter real estate brokerage creates a conflict of interest in that a lender owning a real estate brokerage will try 

to sell follow-on products or services to its clients its other services, and in many 

cases those products or services will not represent the best value for the consumer. 

Most consumers recognize that the products or services of only a few companies in 

a given industry can represent the very best value for a particular consumer. They 

also recognize that the consumer is in the best position to determine his or her 

needs and priorities and it is the consumer’s responsibility to sort out which products or services represent the best value. Cross-selling of follow-on products is a 

very common practice in many sectors, and the products and services a company 

seeks to cross-sell are no different with respect to their potential fit to a consumer’s 

needs that the product or service that attracted the consumer in the first place. 

AHGA believes that most consumers are sophisticated enough to recognize that any 

company’s follow-on products or services also may or may not be the best value for 

the consumer and act accordingly. There is therefore no greater conflict of interest 

between a consumer and business regarding a follow-on product or services or the 

product or service that attracted the customer in the first place. Most consumers 

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do a lot of research regarding competing real estate and mortgage lending services 

before buying, selling, or financing a home. There is a wealth of free, inexpensive 

information that is available to consumers on those subjects from a wide range of 

sources, including AHGA’s sister education and research organization, the American 

Homeowners Foundation (AmericanHomeowners.org). Almost every source strongly 

urges consumers to comparison-shop every major component of real estate services. 

There are several arguments in favor of permitting banks to enter real estate brokerage. Businesses cross-sell because it is more efficient way to market, for example 

the costs are lower. In a competitive marketplace a share of marketing cost savings 

will inevitably be passed on to consumers in the form of lower fees and/or rates. In 

addition to potentially saving homeowners money, the closer coordination of home 

brokerage and lending services under one roof also potentially reduces the time between purchase and settlement, which can often be very important to consumers as 

well. These likely cost and time savings are a substantial potential consumer benefit. They would indirectly benefit individual real estate agents, because they will 

get their commissions sooner and the reduced costs and time savings will likely 

mean more homebuyers and sellers. Consumers are very concerned about the protection of their financial and other personal data. Currently RESPA requires that 

all real estate companies and banks provide disclosure notice to the customer of 

multiple services offered by affiliated firms. In addition banks are currently subject 

to greater privacy regulation than real estate companies. The current regulatory 

proposal to allow banks to enter the real estate brokerage requires real estate brokers to provide greater protection to the privacy of consumer data. Consumers support this requirement and will benefit from greater protection. One-stop shopping 

is by itself a substantial benefit to many time-starved consumers. Many homebuyers 

are couples with two demanding jobs and often more demanding children. We believe many of those homebuyers consciously and intentionally trade convenience for 

economy in many decisions. They make that choice with full awareness that they 

will likely be forgoing a better offer if they took the time to shop around. 

From a policy standpoint the question is whether Federal legislators should deny 

consumers this freedom of choice, and if so, what is the appropriate alternative. 

While AHGA strongly encourages consumers to take the time to shop competitively 

for all real estate and financing services, AHGA also believes consumers have the 

right to make their own choice. In addition, recent home sellers favor allowing 

banks to offer real estate brokerage by a 2 to 1 margin according to a 2001 survey. 

For this reason AHGA urges Members of Congress to oppose S. 1839 and 

H.R. 3424. If Congress concludes that the risks of permitting banking organizations 

to be involved in real estate brokerage outweighed the benefits, then consistency 

would require that Federal savings institutions, credit unions nationwide, and commercial banks in several States that engage in real estate brokerage to divest themselves of their real estate businesses. Since the primary arguments against the 

bank’s market expansion go to core competencies and potential conflicts of interest, 

then conversely the many real estate companies that currently provide mortgage 

lending should also be required to divest themselves of their real estate lending 

businesses. While these steps would apply the principles contained in S. 1839 and 

H.R. 3424 on a consistent basis, it would deny many consumers what they want—

one-stop shopping. If Congress truly believes action is necessary to protect consumers it would be more effective to require consumers to meet some minimum 

level of due diligence before entering a real estate or lending transaction (for example demonstrating that they have interviewed three real estate agents before listing 

a home, looked at three houses before making an offer to buy a house, or considered 

three lenders before applying for a loan). However as previously stated AHGA believes this would be too much of a restriction of personal choice. In deciding whether 

to support real estate companies or bankers on this contentious issue, AHGA recommends that Congress choose the side consumers. Congress can best serve consumers by supporting the implementation of regulations to permit banking organizations to be involved in real estate brokerage. 

The American Homeowners Grassroots Alliance (AHGA) is a national bipartisan 

advocacy organization representing the Nation’s 70 million homeowners. AHGA believes that policies that encourage and protect homeownership are in our national 

best interest. Those policies encourage and sustain the maintenance of a strong and 

broad middle class, build a sense of community and responsibility, and facilitate investment in homes, which are the largest, most universal savings/equity-building 

vehicle for most Americans. AHGA’s positions and more information about the organization are available at www.AmericanHomeowners.org. The American Homeowners Foundation’s section of the website also contains free educational materials 

to help homeowners and future homeowners buy, sell, remodel, and finance their 

homes.

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* Due to size and quality of attachments, they will be held in Senate Banking Committee files. 

STATEMENT* OF THE FINANCIAL SERVICES ROUNDTABLE

MAY 23, 2002

The Financial Services Roundtable (‘‘Roundtable’’) appreciates the opportunity to 

submit testimony on the proposal by the Federal Reserve Board (‘‘Board’’) and 

Treasury to allow greater competition in the real estate brokerage industry by permitting financial holding companies and national bank subsidiaries to enter the 

business. The Roundtable represents 100 of the largest integrated financial services 

companies providing banking, insurance, and investment products and services to 

the American consumer. Member companies participate through the chief executive 

officer and other senior executives nominated by the CEO. 

Roundtable member companies provide fuel for America’s economic engine, accounting directly for $12.4 trillion in managed assets, $561 billion in revenue, and 

1.8 million jobs. 

The Roundtable strongly opposes the Community Choice in Real Estate Act 

(S. 1839 and H.R. 3424). Despite its name, the Act would limit the ability of consumers to choose the real estate agent or broker of their choice, and would artificially restrain competition in the brokerage industry. As a result, the Act would 

harm both consumers and the financial services industry. 

S. 1839 would prohibit the Board and the Treasury from completing the administrative rulemaking process required by the Gramm-Leach-Bliley Act. (the GLB Act) 

and from ruling—if the statutory factors are met—that real estate brokerage and 

real estate management are ‘‘financial in nature’’ and therefore permissible for financial holding companies and national bank subsidiaries. 

The Roundtable believes that the Board and the Treasury should be allowed to 

complete the rulemaking process. In addition, the Roundtable believes that the 

Board and Treasury should ultimately rule that real estate brokerage is a permissible activity, for several reasons. First, permitting financial holding companies to 

enter the real estate brokerage business is good for consumers. Second, it is good 

for the financial services industry. Third, real estate brokerage is a financial activity 

consistent with the Gramm-Leach-Bliley Act. 

Consumers Will Benefit From the Proposed Rule 

The Roundtable strongly believes that consumers will be the real winners if the 

proposed regulation is adopted. Adoption of the rule will increase competition in the 

brokerage industry. More competition means more consumer choice, lower prices, 

and better customer service. 

Adoption of the regulation is necessary to meet the demands of consumers for onestop shopping for all their homebuying needs. In 1999, a study of recent homebuyers 

was conducted on behalf of the National Association of REALTORS (NAR). (See 

Attachment A). According to this NAR study, 76 percent of homebuyers said that 

getting all or some of their homebuying services handled through one company was 

appealing. Eighty-one percent supported the idea of one-stop shopping for all of 

their homebuying services and were evenly split on whether the best provider of 

such services would be a bank, a REALTOR, or a mortgage company, although a 

slight majority stated they would prefer a bank as the one-stop shopping provider. 

The NAR study concluded that 77 percent would consider using a bank for those 

one-stop shopping services in future transactions. 

If the proposed regulation is adopted, consumers will be able to receive in one location all the services necessary to buy a home: preapproval for a mortgage loan; 

assistance in finding a home; a mortgage loan after a contract to purchase a home 

has been signed; and insurance for the property (including title insurance, property 

insurance, and private mortgage insurance) prior to closing. The consumer’s life will 

be simplified and services will be expedited. Many traditional real estate brokers already have responded to consumer demand for one-stop shopping and are offering 

mortgage and, insurance services in addition to real estate brokerage services. 

Proponents of the Community Choice in Real Estate Act oppose letting financial 

holding companies compete in the real estate brokerage business. They argue that 

consumers are worried about their privacy when purchasing a home, and that letting financial holding companies compete would hurt consumer privacy. Concluding 

that brokerage is a financial activity in fact greatly enhances consumer privacy. 

While customers of financial holding companies and national banks are entitled to 

the GLB Act’s far-reaching privacy protections, customers of real estate brokers currently have no Federal privacy protections. 

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1See 12 U.S.C. § § 371c, 371c–1 and 1828(j). 2 12 U.S.C. § 2607. 

3 12 U.S.C. § 1971, et seq. 4See 12 CFR § § 559.4(e)(3) (thrift service corporations), 584.2–1(b)(8) (thrift affiliates). 5See 12 CFR § 712.5(g) and (p). 

If adopted, the Board/Treasury regulation will afford brokerage customers the 

same Federal privacy protections now afforded to bank customers: real estate brokers will have to disclose their privacy policies to homebuyers and will be prohibited 

from sharing certain nonpublic information about the homebuyer with any nonaffiliated third parties unless the homebuyer has been given notice and the opportunity to opt-out of such information sharing. Ironically, enactment of S. 1839 would 

in effect harm consumers by depriving them of the Federal privacy protections currently afforded the consumers in other sensitive financial transactions. 

Proponents of S. 1839 also argue that allowing financial holding companies to offer 

real estate brokerage services could result in harmful tying and other coercive practices. This argument is easily refuted by the fact that many brokerages are already 

affiliated with mortgage lenders, insurers, thrifts, credit unions, and State banks, 

and there is no evidence of these harmful practices occurring. Moreover, existing 

banking laws are more than adequate to preclude these types of practices within 

a financial holding company. Sections 23A and 23B of the Federal Reserve Act prohibit a bank from making below-market loans to any affiliates or subsidiaries, including those that would be engaged in real estate brokerage, and severely restrict 

a bank’s ability to provide equity contributions and other support to the real estate 

brokerage affiliate.1 Furthermore, Section 8 of the Real Estate Settlement Procedures Act 2 and the antitying provisions of Section 106 of the Bank Holding Company Act Amendments of 1970 3 preclude any coercive practices against the bank’s 

(or brokerage’s) customers. In fact, a customer dealing with a brokerage affiliated 

with a bank will enjoy far greater consumer protection than if he or she were dealing with a real estate brokerage firm not affiliated with a bank. 

The Financial Services Industry Will Benefit From the Proposed Rule 

Adoption of the regulation is prudent for the financial services industry. Traditional real estate brokers are now actively competing with banks and financial holding companies by offering financial services—in particular, loans and insurance. Of 

the 10 leading real estate brokers cited by REALTOR magazine, nine provide financial services and compete with financial holding companies by offering loans or 

insurance. According to the ‘‘1999 National Association of REALTORS Profile of 

Real Estate Firms,’’ 56 percent of its residential real estate brokerage firms with 

more than 50 agents are involved in mortgage lending. (See Attachment B). 

Additionally, Federal thrifts 4 and credit unions,5 as well as State-chartered banks 

in 26 States, are permitted to act as real estate brokers. (See Attachment C for data 

on the States). In fact, the only financial institutions that uniformly cannot engage 

in real estate brokerage are financial holding companies and national banks. The 

Roundtable asks only that more competition be allowed by permitting financial holding companies and national bank subsidiaries to offer these services as well. 

NAR argues that permitting financial holding companies to engage in real estate 

brokerage would create an unlevel playing field due to alleged ‘‘Federally chartered 

advantages.’’ NAR contends, without support, that Federal deposit insurance and 

access to the Federal Reserve system, for example, creates ‘‘Federal subsidies’’ enjoyed by depository institutions which give banks an unfair advantage. NAR further 

alleges that the proposed regulation would result in an unsafe and unsound banking 

system. 

Brokerage poses very little risk to the banking system. A real estate brokerage 

company does not act ‘‘as principal,’’ but rather acts in an ‘‘agency’’ capacity by 

being an intermediary in a transaction between a buyer and a seller. Banks have 

historically been permitted to conduct ‘‘agency’’ activities either directly or through 

affiliates. Financial holding companies are currently permitted to provide their customers with a wide array of agency services, including travel, securities, commodities, and insurance brokerage. 

Any Federal subsidy is far outweighed by the heightened regulatory burden and 

cost of supervision borne by depository institutions. The proposed regulation would 

permit real estate brokerage only in nonbank affiliates and financial subsidiaries—

entities which, by law, are firewalled away from their affiliated depository institutions and therefore cannot enjoy any such alleged ‘‘Federal subsidy.’’ In any event, 

NAR’s contention that the proposal would result in an unsafe and unsound banking 

system has not been evidenced in the 26 States that currently permit real estate 

brokerage by banks, or by the thrift, or credit union industries. 

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6See Bank Holding Company Act § 4(k)(1)(A), (B) (12 U.S.C. § 1843(k)(1)(A), (B)). 7See Bank Holding Company Act § 4(k) (12 U.S.C. § 1843(k)). 8 H.R. Conference Report No. 106–434, at 153 (November 2, 1999). 

9See BHCA § 4(k)(4) (12 U.S.C. § 1843(k)(4)); 12 CFR § 225.86(d)(1) (finder activities). 

There is no evidence that consumers have been hurt in any way by the current 

involvement of these depository institutions in the real estate brokerage industry, 

and there is no evidence that depository institutions in these markets dominate the 

brokerage industry or enjoy significant market power. Prohibiting real estate brokers from affiliating with financial holding companies seems to be out of step with 

the current marketplace. The most vocal proponent of the Act—NAR—does not 

speak for the entire real estate industry. The Realty Alliance, a real estate brokerage trade organization with over 62,000 members (most of whom are also members 

of NAR), publicly opposes NAR’s efforts. (See Attachment D for a copy of a White 

Paper delivered by The Realty Alliance to the NAR). The Realty Alliance, like the 

financial services industry, welcomes increased competition and recognizes the potential benefits to consumers that the regulation could bring. 

Real Estate Brokerage is a Financial Transaction Consistent with the

Gramm-Leach-Bliley Act 

Finally, the Roundtable believes that the proposed regulation is entirely consistent with the GLB Act which was designed to modernize and expand the financial 

services marketplace. The specific purpose of financial modernization, as stated in 

the preamble to the GLB Act, was to ‘‘enhance competition in the financial services 

industry by providing a prudent framework for the affiliation of banks, securities 

firms, insurance companies, and other financial service providers, and for other purposes.’’ [emphasis added]. 

Title I of the GLB Act created the ‘‘financial holding company’’ structure and permitted financial holding companies to conduct a much broader range of financial activities than was historically permissible for bank holding companies. The GLB Act 

permits financial holding companies to engage in all activities that have been determined by the Federal Reserve Board to be ‘‘financial in nature,’’ or incidental or 

complementary to a financial activity.6 Given the historical experience of the GlassSteagall Act and the practical limitations of creating a rigid regulatory structure, 

the GLB Act established a flexible framework that allows regulators to respond to 

changes in technology, the marketplace, and consumer demand. The GLB Act provides the Board, in consultation with Treasury, the authority to expand the statutory list of financial activities.7

Consistent with Congress’ directive and following the request of the American 

Bankers Association, the Roundtable, and others, the Board and Treasury issued a 

joint notice of proposed rulemaking in December 2000 to determine that real estate 

brokerage and real estate management activities are ‘‘financial in nature’’ or ‘‘incidental to a financial activity’’ and, consequently, permissible for financial holding 

companies and national bank subsidiaries. By issuing this proposal, the agencies 

were simply fulfilling their obligation under the GLB Act to ensure that financial 

holding companies and national banks have the ability to compete with other financial service providers. In doing so, the Board and Treasury have followed the objective rulemaking process contemplated by the GLB Act and have sought public comments on the rule. We ask that the Board and Treasury be allowed to continue their 

deliberative process. 

The broader scope of the ‘‘financial in nature’’ standard for nonbank activities of 

financial holding companies is reflected in both the legislative history of the GLB 

Act and the diverse range of activities that financial holding companies are currently permitted to conduct. First, the Conference Report to the GLB Act states that 

‘‘[p]ermitting banks to affiliate with firms engaged in financial activities represents 

a significant expansion from the current requirement that bank affiliates may engage only in activities that are closely related to banking.’’ 8 Second, financial holding companies are currently permitted to conduct a broad range of activities that 

bank holding companies are prohibited from conducting, such as unrestricted securities underwriting, merchant banking, unrestricted insurance underwriting, unrestricted insurance agency, travel agency, and acting as finder.9 The financial services marketplace has changed dramatically in the past 30 years, and what may have 

been inappropriate for bank holding companies in the early 1970’s may be entirely 

appropriate for the diversified financial holding companies of the early 21st century. 

With respect to the permissibility of real estate brokerage under the GLB Act, the 

GLB Act permits the Board to define certain activities as ‘‘financial in nature,’’ including ‘‘transferring . . . for others financial assets other than money or securities.’’ The Roundtable believes that real estate brokerage is exactly that type of acVerDate 0ct 09 2002 17:04 Oct 23, 2003 Jkt 000000 PO 00000 Frm 00129 Fmt 6633 Sfmt 6621 S:\DOCS\0523.TXT FRANK PsN: FRANK1
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10See Bank Holding Company Act § 4(k)(5)(B)(iii) (12 U.S.C. § 1843(k)(5)(B)(iii)). 11Section 103(a), new Bank Holding Company Act (BHCA) section 4(k)(3)(A)&(D)(i). 

tivity. Real estate is the largest financial asset owned by most consumers and is the 

most widely used source of collateral for consumers seeking credit. The purchase of 

real estate is the largest financial transaction for most consumers. For many, real 

estate is the largest source of individual wealth; the decision to purchase, sell, and 

finance real estate plays a significant part in retirement planning. Real estate is 

conferred special status under Federal and State tax laws, distinguishing real estate 

from other large-ticket items. For these reasons, we believe that real estate is a ‘‘financial asset’’ and that brokerage is ‘‘financial in nature.’’

In addition, the GLB Act defines as ‘‘financial in nature’’ all activities that involve 

‘‘arranging, effecting, or facilitating financial transactions’’ for others.10 Real estate 

brokerage is part of the overall financial activity of helping a consumer receive 

preapproval for a mortgage loan, find a home, appraise the property, receive final 

approval for the mortgage loan, close the transaction, and insure the home with 

property insurance, title insurance, and, in certain cases, private mortgage insurance. Each of the services and products offered as part of the overall financial transaction are integrated with one another. Such integration is reflected in several 

ways. First, consumers frequently enlist the services of a real estate broker at

the same time that they seek the products of a mortgage lender and an insurance

agency. Second, consumers generally pay the loan fees, the REALTOR’s commission, and the initial insurance premiums together at the closing. Third, the documents that consumers sign with respect to the mortgage loan, real estate brokerage, 

and the insurance generally cross-reference and are conditioned upon each other. 

In determining whether an activity is ‘‘financial in nature,’’ the GLB Act also requires the Fed to consider ‘‘changes in the marketplace in which financial holding 

companies compete’’ and whether such activity is ‘‘necessary or appropriate’’ to allow 

a financial holding company or its affiliates to ‘‘compete effectively with any company seeking to provide financial services in the United States.’’ 11 As highlighted 

earlier, approval of the regulation is both necessary and appropriate to allow financial holding companies to compete effectively with real estate brokerage companies, 

as well as with Federal thrifts, credit unions, and State banks in 26 States. 

As a result, the Roundtable firmly believes that real estate brokerage is ‘‘financial 

in nature,’’ consistent with the GLB Act. At the very least, the Board and Treasury 

should find that it is ‘‘incidental to a financial activity.’’ Banks and financial holding 

companies are involved in virtually every other aspect of residential and commercial 

real estate transactions, ranging from rendering advice; acting as a finder; appraising the property; issuing abstracts of title and performing title searches; selling and 

underwriting hazard, title, and mortgage guaranty insurance; arranging or providing financing; providing loan closing, settlement, and escrow services; and 

securitizing mortgage loans or underwriting and selling mortgage backed securities. 

Clearly, acting as a real estate broker is incidental to the performance of these other 

real estate related services that are already considered to be ‘‘closely related to 

banking’’ or ‘‘financial in nature.’’

In sum, assertions that the Board and Treasury may not rule on real estate brokerage are without basis under the GLB Act. Such an interpretation of the GLB Act 

would chill future proposals for activities to be considered ‘‘financial in nature’’ and 

would effectively turn the clock back on financial modernization. 

Conclusion 

In conclusion, the Roundtable strongly supports the proposed regulation and believes that its adoption would be a win-win proposition for consumers and the financial services industry. The regulation would allow financial services companies to 

build alliances with real estate brokerages, creating tremendous benefits for consumers, including one-stop shopping, lower prices, more choice, and increased competition. The Community Choice in Real Estate Act is nothing but an attempt to 

derail the deliberative rulemaking process—thereby preserving artificial barriers to 

entry in the brokerage market for the purpose of preserving market share and reducing threatened competition. While NAR wants to compete in the financial services markets by making loans and selling insurance, NAR wants Congress to protect 

them from competition in their own backyard. For the foregoing reasons, the Roundtable opposes S. 1839 and supports the rulemaking process commenced by the Board 

and the Treasury in December 2000. This rulemaking process is an appropriate delegation of authority to the regulators, who have expertise and experience in this 

area and are fully equipped to consider all the substantive issues and make an objective ruling in the best interests of both the consumers and the industry. 

Thank you for the opportunity to submit our views.

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