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[Although the Gramm-Leach-Bliley Act has already been the subject of numerous research projects and countless related articles, a white paper published June 2001 is possibly the most comprehensive and objective to date. Not only does it outline the possible involvement of banks in the real estate brokerage industry but provides a balanced outline of both sides of the debate. The document is supported by significant authors’ comments, facts, tables and appendices. This article is a synopsis of the white paper. Complimentary copies of the entire 24 page white paper can be downloaded from ww.RealSure.com EDITOR] History Rarely has pending legislation suggested changes to the financial services arena as controversial as the recent Gramm-Leach-Bliley Act (GLB Act). The proposed rule would declare real estate brokerage, real estate management, and employee relocation to be activities that are “financial in nature” or “incidental to a financial activity” under the GLB Act. This would allow financial holding companies and national bank subsidiaries to enter these businesses. The impact on the real estate brokerage industry has escalated and this GLB Act has become one of the most highly profiled changes positioned to impact the real estate brokerage industry since its inception. Spurred by the 1929 market crash and in the belief that the stock market speculation by the banks led to their
collapse, the 1933 Banking Act was aimed
at restoring confidence in the banking system. It established the Federal
Deposit Insurance Corporation, which insured customer accounts and
prohibited banks from both accepting deposits and underwriting securities. In
a section called the Glass-Steagall Act
(GS Act), it forced the separation of commercial and investment banking. Following World War II, banks sought ways around the restrictions by forming holding companies that in turn engaged in commercial activities. Then in 1956 the Bank Holding Company Act (amended in 1970) placed further restrictions on what banks can do in the insurance business and once again reinforced the division of commercial and investment banking activities. Since the 1980’s there has been extensive debate about the shortcomings of the GS Act and over the last two decades, The Board of Governors of the Federal Reserve System (FRS) and the Secretary of the Treasury have softened some of the GS Act separation. By the mid 1990s many economists and policymakers viewed the terms of the GS Act to be largely unnecessary and in November 1999 President Clinton repealed the GS Act and introduced the Gramm-Leach-Bliley Act (GLB). This specifically allows a bank holding company or a foreign bank that qualifies as a financial holding company to engage in a broad range of activities that are defined by the GLB Act to be “financial in nature” or “incidental to a financial activity.” The Current Controversy The current controversy started on December 31, 1999 when the Federal Reserve System and the Secretary of the Treasury issued a proposed rule at the request of the ABA and Fremont National Bank & Trust to define real estate brokerage activities as financial in nature under the GLB Act. Section 103(a) of the GLB Act already enumerates certain activities that are considered to be “financial in nature” or “incidental to a financial activity” under the statute. Included among those activities are traditional banking functions, activities that had previously determined to be “closely related to banking” or permissible for banking holding companies to engage in, securities and insurance activities, and merchant banking activities. Taking
Position Against The historical advocate against involvement in real estate brokerage by financial institutions has been the National Association of Realtors® (NAR). It has, however, received significant support for this position from various large real estate trade associations including: CCIM Institute, the Institute of Real Estate Management, the International Association of Shopping Centers, the National Affordable Housing Management Association, the National Association of Home Builders, the National Auctioneers Association, and the National Leased Housing Association. Due to a massive grass roots campaign (an alleged 100,000 communiqués hit Washington) orchestrated by the NAR, the original public comment date of March 2001, was delayed until May 2001. Following are the main arguments and viewpoints supporting the NAR’s contention that financial institutions should not be permitted to practice real estate brokerage. (i) The GLB Act does not specifically authorize financial holding companies (FHC) to engage in real estate brokerage. (ii) It would be inappropriate for the Board of Governors to now permit FHCs to provide real estate brokerage services because the Board prohibited bank holding companies from acting as a real estate broker in 1972. (iii) Financing real estate or any other tangible assets or durable goods does not transform that asset into a financial instrument. (iv) Banks offering a wider range of commercial type services will face more risk and be financially more fragile and the country could experience another Savings and Loan (S&L) fiasco as was experienced in the decade of the 80s. (v)
Pitting federally subsidized, highly advantaged financial institutions (with a
high barrier to entry) against unsubsidized, less advantaged real estate
brokerage firms (with a relative low barrier to entry) is a recipe for trouble.
(vi) Vertical integration of the transaction will magnify the market power of integrated firms thereby raising barriers to entry, limiting choice, and possibly increasing costs for consumers. (vii)
Banks will make real estate commissions a loss leader
to undercut independent real estate brokers, gain the business, and then cross
sell the banks’ products. (viii)
Real estate brokerage is a cyclical volatile business subject to economic down
turns. This could pose safety and soundness risks to banks. (ix) Large real estate brokerage firms do not have significant advantages over smaller real estate firms. Therefore it would seem that banks are unlikely to benefit from economies of scale, cross selling, or diversification. (x) The Agencies should delay their finding until such time as FHCs gain experience in conducting the various other new activities authorized by the GLB Act. Taking Position in Favor In requesting the change, the ABA has been the strongest proponent in favor of permitting financial institutions to become involved in real estate brokerage. Other associations supporting this position include: America’s Community Bankers (ACB), the Consumer Bank Association (CBA), the Financial Services Roundtable, and the New York Clearing House Association. Following are the main arguments and viewpoints supporting the ABA’s contention that financial institutions should be permitted to practice real estate brokerage: (i) Financial institutions will enhance competition, change the market place, and raise the bar, forcing improvements in efficiency, pricing and service levels – all to the benefit of consumers. (ii) Real estate is a financial asset because: (a) the home is the largest asset for many individuals; (b) real estate serves as the underpinning for hundreds of billions of dollars of mortgage-backed securities; and (c) real estate serves as a means of wealth creation by increasing in value over time and providing tax benefits. (iii)
The sale or lease of real estate is a financial transaction because it is the
most complex and financially difficult transaction most individuals will make. (iv)
Real estate brokerage is a financial complement to a bank’s current business
lines. (v)
Integrated real estate and financial services already exist with many
large companies such as Cendant, GMAC Home Services and Long & Foster owning
and operating both brokerage and mortgage operations and thus offering to the
consumer the benefits of one-stop-shopping. (vi) Bank-affiliated real estate brokerages will be subject to stronger consumer protections and anti-tying provisions. (vii)
Numerous states have already permitted state-chartered banks to own and operate
real estate brokerage companies. Banks Future Involvement? Some 26 states such as New Jersey and Iowa already permit state-chartered banks to engage in real estate brokerage. To date it would seem that their involvement in real estate brokerage has not had a major impact on the industry and there is no evidence of abuse or harmful effects. The argument raised is that selling is fundamentally a commercial transaction. If banks are permitted to enter real estate brokerage they would be mixing commerce and finance, resulting in a violation of the longstanding federal policy of keeping the two separate. Another concern is whether or not such a future move would put Banks in a significantly preferred competitive position against traditional entrepreneurial brokerages. The fear is that through sheer power and size, huge banks could buy up existing brokerages and thereby control a significant portion of the industry. The counter argument is whether restricting their involvement in real estate brokerage is an unfair regulatory intrusion on their rights. Some feel that bank-controlled real estate brokerages could then become marketing arms of mortgage departments and could develop more interest in making the loan or selling mortgage insurance than helping the customer negotiate the best transaction. This could lead to higher costs for consumers, as banks could cross-sell other products and services through this new captive real estate brokerage subsidiary. The counter to this argument is that real
estate brokerage can only be conducted today pursuant to various state laws and
regulations including licensing, qualification, and sales practices. Those laws
currently applicable to real estate brokers would equally apply to bank-owned or
affiliated real estate brokerages. In effect, consumer protection could be
heightened because of additional protections currently contained under the Bank
Holding Company Act. These
protections currently do not apply to non bank-affiliated real estate
brokerages. Conclusion Your
opinion on whether or not banks should be allowed to engage in real estate
brokerage will follow the side of the argument that is most favorable to your
position. You can be assured that banks will in the future play an increasing
role in the real estate brokerage industry - in one form or another. Different
financial institutions will most certainly select different courses of action.
However, whether they choose to conduct real estate brokerage in-house with
salaried employees, separately through holding company subsidiaries or
indirectly through new transactional related services, expect their impact to be
considerable. The United States and its consumers operate
within one of the most fragmented financial systems in the world. Much of its structure that remains in place today dates as
far back as the early 20th Century. At
the end of the day, whether or not you are in favor of the approval of this
legislation, improving the overall home buying and financing process on the
behalf of the consumer should be the ultimate driver of the magnitude of such
change. |
