Order Code RS21104
Updated July 10, 2002
CRS Report for Congress
Received through the CRS Web
Should Banking Powers Expand into Real
Estate Brokerage and Management?
William D. Jackson
Specialist in Financial Institutions
Government and Finance Division
Summary
In late 2000, the Federal Reserve and the Treasury proposed to use their authority
to increase banking powers to adapt to changing financial markets. The regulators
proposed allowing banking companies to engage in real estate brokerage and
management as activities that are financial in nature. Their proposal has been
controversial, pitting real estate companies against banks. The substantiative issues are
of two sorts: those that question the respective nature of banking and of real estate
activities; and those that question what the impact on consumers will be from the
possible benefits of efficiency and potential changes in competition. Procedural
questions also surround the proposal. Members have introduced H.R. 3424/S.1839, the
Community Choice in Real Estate Act, to block the regulatory proposal and to remove
these real estate activities from future consideration under the market-adaptive powers
of the regulators. In view of the controversy over it, regulatory action on the proposal
is in a holding pattern until 2003. Both sides to the controversy continue their public
and legislative relations initiatives, nonetheless; hearings occurred in both House and
Senate Subcommittees even after regulatory postponement. The House Appropriations
Committee has voted to block issuance of the proposed rule in fiscal year 2003. This
report will be updated as events warrant.
Framework of Legislation and Regulation
The Gramm-Leach-Bliley Act (GLBA, P.L. 106-102)1 was landmark legislation that
allowed banking, securities, and insurance companies to operate in affiliation with each
other under the umbrella organizational form of financial holding companies (FHCs.)
GLBA also permitted FHCs, like financial subsidiaries of banks (FSs) newly authorized
by the law, to engage in a variety of financial activities not previously allowed to banks
1 113 Stat. 1338–1481, Nov. 12, 1999.
Congressional Research Service ˜ The Library of Congress
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or companies owning banks, while continuing some prohibitions.2 Also, GLBA invested
the authority in regulators to amend and add allowable activities for FHCs and FSs in
order to adapt to future changes in financial markets. The Federal Reserve (Fed) and the
Treasury Department, through its Office of the Comptroller of the Currency (OCC), have
authority to issue regulations expanding activities for FHCs and FSs respectively.
Statutory standards in GLBA for regulatory expansion of lines of business available
to FHCs and to banks through FSs are somewhat elastic. Section 103 of the Act requires
that the Fed find new activities for FHCs are financial in nature, or incidental to a
financial activity, or, in a less stringent test, both “complementary” to a financial activity
and not posing a substantial risk to safety and soundness. Section 121 defines the same
standard for FSs. New activities must meet one or more of these tests, as determined by
regulation, to be considered appropriate. GLBA allows the regulators of FHCs and FSs
to propose new permissible activities according to these criteria.
Congress crafted GLBA in this way as a compromise to allow financial affiliations
while avoiding a general mixing of “banking” with “commerce.” For example, the law
specifically excluded bank FSs from underwriting insurance, and from real estate
investment and development, except as may already have been authorized by other law.3
In December 2000, the Fed released several proposals under GLBA’s provision to
expand activities. One allowed FHCs to act as “finders, “ bringing parties to a transaction
together. That regulation is final.4 Another would allow FHCs greater entry into
electronic data processing and new technologies; it has not been acted upon.5 A third
would allow banking companies into new real estate businesses, under Section 103 of
GLBA. It has proven controversial and Members have introduced a measure that would
prevent its implementation.
Proposed Brokerage and Management Regulation
The proposed regulation in question would allow FHCs and FSs to offer two new
services. The services are real estate brokerage and real estate property management. The
2 FHCs hold controlling stock interests in separately incorporated or chartered businesses, such
as banks, mortgage companies, stockbrokers and dealers, etc. The Federal Reserve supervises
all FHCs, which are are not federally insured. FSs are businesses that banks themselves own.
The bank regulators supervise FSs, which, while not necessarily federally insured, are owned
directly by insured banks. These structural differences are important because GLBA allows
somewhat more latitude for uninsured FHCs to operate in nontraditional lines of business. FHCs
are considered less likely than banks and bank subsidiaries to cause difficulties for the federal
support mechanisms for banks, especially deposit insurance funds, should they encounter losses.
3 113 Stat. 1373, 12 U.S.C. 24a.
4 12 C.F.R. 225.86(d), effective Jan. 22, 2001.
5 Board of Governors of the Federal Reserve System, “Bank Holding Companies and Change in
Control,” Federal Register, vol. 65, no. 246, Dec. 21, 2000, pp. 80384-80388.
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Fed and the Treasury originally released their draft regulation in late December 2000, with
public comments to be received until early March 2001.6
Their proposal would allow FHCs and FSs to enter real estate brokerage and property
management, if these activities could be considered financial in nature or incidental to a
financial activity. The language of the draft regulation does not address the less exacting
“complementary” test. “Brokerage” includes acting as an intermediary between parties
to a real estate transaction, listing and advertising real estate, soliciting sales, negotiating
terms, and handling closings. It does not involve purchase or sale of property as an owner,
and requires state licensing and regulation. “Property management” includes soliciting
tenants, negotiating leases, servicing rents, maintaining security deposits, making
operating payments, and overseeing upkeep. Managers thus need not be owners, and
banking firms could not become owners of real estate through this proposal.
The Fed and the OCC historically disallowed real estate brokerage and property
management activities for their regulated institutions. The Office of Thrift Supervision
(also within the Treasury) does allow subsidiaries of federal savings associations to
provide real estate brokerage and property management services. Some states allow these
activities for the financial institutions that they charter and regulate, however, actual
practice of them appears not to be common.7 Conversely, real estate brokers and
managers can not offer essential banking services–accepting deposits and making
commercial loans–and most are not seeking to become bank-like. They do not want to
form financial holding companies or obtain bank charters, and especially seek to avoid
becoming regulated by the Fed or other banking agency.
Bankers (American Bankers Association, Financial Services Roundtable, and New
York Clearing House Association) are requesting the new authority. In their view, it
would allow financial institutions to offer a fuller range of financial services under one
roof, using many skills that banks already have. They argue that real estate brokerage and
property management are financial in nature and that the proposed changes would be
beneficial to customers, because costs of realty transactions might fall.
The National Association of Realtors (NAR) opposes the proposal, arguing that the
law does not authorize banking firms to provide real estate brokerage and property
management services, which it argues are primarily nonfinancial in nature. From its
perspective, the proposal would create anti-competitive and anti-consumer concentrations
of power dominating the realty industry and might increase costs to consumers.
Arguments for and against the substance of the proposed regulation are of two kinds:
those concerning the respective nature of banking and of real estate activities, and those
concerning the potential impacts on consumers. They are summarized below.
Procedural questions concerning application of the Gramm-Leach-Bliley Act to what may
6 Board of Governors of the Federal Reserve System and Department of the Treasury, “Bank
Holding Companies and Change in Bank Control,” Federal Register, vol. 66, no. 2, Jan. 3, 2001,
pp. 307-314.
7 One proponent argues that 17 states allow this authority for their state-chartered banks. The
Financial Services Roundtable, letter to the Board of Governors of the Federal Reserve System
and the U.S. Department of the Treasury on RE Brokerage Regulation, March 16, 2001, p. 5.
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or may not be “commercial” or “financial” activities have also been raised. Lobbying
groups on both sides are also generally viewed as having many powerful constituencies.
Arguments Concerning the Nature of the Industries
Favoring the Proposal.
(1) Banks, FHCs, and FSs already engage in a variety of other real estate activities:
financing, appraising, leasing, settling, escrowing, and investment advising.
(2) Agency services that FHCs and FSs provide in securities and insurance are similar to
those of real estate brokers and property managers.
(3) FHCs may act as “finders,” bringing together buyers and sellers of non-real-estate
assets generally. (Once brought together, the parties must negotiate terms, including
prices, for themselves.)
(4) Bankers already act as intermediaries in arranging commercial real estate equity
financing (transfer of title, control, and risk arrangements for projects).
(5) Several diversified financial companies provide realty services beyond their more
traditional banking, securities, and insurance services. Some realty-based companies offer
bank-like services.
(6) Some depository financial institutions–savings associations and state-chartered banks–
already provide these kinds of real estate services.
Opposing the Proposal.
(1) GLBA specifically prohibits FSs from engaging in real estate development and
investment. Thus, its intent may have been to restrain new realty powers of bankers.
(2) Real estate brokerage and property management are commercial activities. Their
necessary hands-on sales skills are far different from lending.
(3) Real estate brokerage and property management involve negotiation of realty
transactions. That role has been forbidden to FHC s as “finders.” FHC finders may not
do any activity requiring registration or licensing as a realty agent or broker.
(4) At least one study states that the real estate industry is highly competitive and
efficient, much more productive in these ways than financial services generally.8 To the
extent this is true, banking companies would presumably bring little or no net benefit to
real estate brokerage and property management.
8 This finding is a conclusion of a study by Leonard Zampano of the University of Alabama
presented during a residential forum at the NAR Midyear Legislative Meetings and Trade Expo,
Washington, DC, May 17, 2001.
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(5) Entry of deep-pocket banking companies, which benefit from federal assistance
including deposit insurance, might drive out brokers and property managers, which
typically operate on a much smaller scale.
(6) Competition for lending could decline if buyers believe that one-stop realty transacting
and financing would ease credit approval. Mortgage lenders not involved with the
brokerage part of realty transactions might lose business.
Arguments Concerning Customers (Consumers and Businesses)
Favoring the Proposal.
(1) Customers could benefit from lower costs and greater convenience if one organization
provided most realty services bundled together. Transaction details (paperwork) often
overwhelm buyers and sellers of property.
(2) Laws against forcing customers to obtain both non-lending services and loans from
banking companies (which is called”tying”) would still restrain market power of
companies providing banking and realty services jointly.
(3) Clients of banks involved might not have to face the delays and complications of
start-from-scratch checking of creditworthiness, which their bankers already know.
Opposing the Proposal.
(1) Customers might believe that obtaining realty brokerage or property management
services from bankers would ease credit approval for their financing. Better deals may
be available from competition among multiple providers in unbundled form.
(2) Customer service could suffer with fewer specialized providers. Bank credit standards
might not be appropriate for realty transactions requiring flexibility, especially when, as
now, tightening credit quality concerns (“credit crunches”) cut back bank lending.
(3) Low and moderate-income households lacking bank relationships might not benefit
from bundled realty services designed for bank clients of greater resources.
Developments and Legislation
The original proposal actually remained open for comment until May 1, 2001, an
extension of 2 months. The Fed received around 44,000 comments, the vast majority of
which opposed the regulation. The House Subcommittee on Financial Institutions and
Consumer Credit held a hearing on May 2, 2001, in which many Members voiced
disapproval of it.9 The NAR also raised conflict of interest questions. The two newest
members of the seven-person Board of Governors of the Fed come from the banking
industry. The NAR questioned whether they could be impartial in voting on the
9 “Realtors, Bankers Push Rival Studies On Banks Doing Real Estate Brokerage,” Daily Report
for Executives, Bureau of National Affairs, May 16, 2001, p. A-28.
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controversial regulation.10 On October 30, 2001, after the comment period had ended, the
NAR delivered about 35,000 letters opposing the proposal to the White House.
On December 6, 2001, Representative Ken Calvert and 32 cosponsors introduced
H.R. 3424, the Community Choice in Real Estate Act. This measure would prohibit
banking companies from engaging in real estate brokerage or real estate management
activities. The measure would clearly prevent the issuance of any implementing
regulation for the proposed activities. Its sponsors believe the regulatory proposal
circumvented the congressional intent of GLBA, by redefining real estate activities as
financial activities, thus mixing banking with commerce, and would be anticompetitive
as well. Senator Wayne Allard and three cosponsors introduced the Senate version of the
bill, S. 1839, on December 18, 2001. H.R. 3424 has gathered 244 cosponsors to date:
more than half of the House. S. 1839 has received 14 cosponsors to date.
In January 2002, the American Bankers Association arranged to have 38,000 letters
delivered directly to Representatives and Senators from its members, asking them to
oppose The Community Choice in Real Estate Act..
In view of the controversy over the proposal and other priorities such preventing the
financial funding of terrorism, the Treasury Department and the Federal Reserve Board
are delaying any ruling on it until 2003. It appears that bankers, through FHCs especially,
may become discouraged from applying for new activities under GLBA. Both sides
involved are continuing their legislative and public relations campaigns, nonetheless11.
Despite deferral of the proposal, Congress continues to explore it procedurally and
substantiatively. The Subcommittee on Commercial and Administrative Law of the
House Judiciary Committee held an “Oversight Hearing on Proposed Federal
Reserve/Treasury Department Real Estate Brokerage and Management Rule,” May 16.12
The Subcommittee on Financial Institutions of the Senate Banking Committee followed
with a Hearing on “Bank and Financial Holding Company Engagement in Real Estate
Brokerage and Property Management,” May 23, 2002.13 And on July 9, the House
Appropriations Committee approved an amendment to the (unnumbered) Treasury, Postal
Service, and General Government Appropriations bill, prohibiting the Treasury
Department from using fiscal year 2003 funds to issue the controversial rule. This
amendment, offered by Representative Anne Northup, was adopted by voice vote despite
jurisdictional questions about it.14
10 “Fed Nominee to Abide by Ethics Ruling on Consideration of Real Estate Brokerage,” Ibid.,
Oct. 18, 2001, p. A-14.
11 R. Christian Bruce, “Realtors Group to Continue Campaign Against Real Estate Brokerage for
Banks, “ BNA’s Banking Report, May 6, 2002, p. 772.
12 Bruce, “Ease Up on Advocacy of Real Estate Rule, House Subcommittee Chair Warns
Bankers,” Ibid., May 20, 2002 , p. 862.
13 Karen L. Werner, “Senators Evaluate Possible Implications of Allowing Banks Into Real Estate
Brokerage,” Ibid., May 27, 2002, p. 912.
14 Werner, “House Appropriators Vote to Prohibit Rule Allowing Banks into Real Estate
Brokerage, Ibid., July 10, 2002, p. A-15.