WikiLeaks Document Release
http://wikileaks.org/wiki/CRS-RS21104
February 2, 2009
Congressional Research Service
Report RS21104
Should Banking Powers Expand into Real Estate Brokerage
and Management?
Walter W. Eubanks, Government and Finance Division
April 24, 2007
Abstract. In late 2000, the Federal Reserve and the Treasury proposed to increase banking powers. They
proposed allowing banking companies to engage in real estate brokerage and management, as activities that are
financial in nature. The substantiative issues are the respective nature of banking and of real estate activities
and the potential impact on consumers. Procedural questions involve the intent of Congress in P.L. 106-102,
which delegated authority to both agencies to issue new regulations. The reintroduced Community Choice in
Real Estate Act, H.R. 111/S. 413, 110th Congress, would permanently remove these real estate activities from
consideration under the marketadaptive powers of the regulators. In the mean time, Treasury spending bills
have forestalled any such regulations for six fiscal years, most recently in P.L. 110-5.
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Prepared for Members and Committees of Congress
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In late 2000, the Federal Reserve and the Treasury proposed to increase banking powers. They
proposed allowing banking companies to engage in real estate brokerage and management, as
activities that are financial in nature. The substantiative issues are the respective nature of
banking and of real estate activities and the potential impact on consumers. Procedural questions
involve the intent of Congress in P.L. 106-102, which delegated authority to both agencies to
issue new regulations. The reintroduced Community Choice in Real Estate Act, H.R. 111/S. 413,
110th Congress, would permanently remove these real estate activities from consideration under
the market-adaptive powers of the regulators. In the mean time, Treasury spending bills have
forestalled any such regulations for six fiscal years, most recently in P.L. 110-5.
This report will be updated as events warrant. (Note: this report was originally authored by
William D. Jackson.)
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Framework of Legislation and Regulation ...................................................................................... 1
Proposed Brokerage and Management Regulation ......................................................................... 1
Arguments Concerning the Nature of the Industries................................................................. 2
Favoring the Proposal ......................................................................................................... 2
Opposing the Proposal ........................................................................................................ 3
Arguments Concerning Customers (Consumers/Businesses) ................................................... 3
Favoring the Proposal ......................................................................................................... 3
Opposing the Proposal ........................................................................................................ 4
Developments and Legislation ........................................................................................................ 4
2002 .................................................................................................................................... 4
2003 .................................................................................................................................... 4
2004 .................................................................................................................................... 4
2005 .................................................................................................................................... 5
2006 .................................................................................................................................... 6
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2007 .................................................................................................................................... 6
Author Contact Information ............................................................................................................ 6
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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
organizational form of financial holding companies (FHCs). GLBA also permitted FHCs, like
financial subsidiaries of banks (FSs), to engage in a variety of activities not previously allowed to
banks or companies owning banks.2 Under GLBA, the Federal Reserve (Fed) and the Treasury
Department, which contains the Office of the Comptroller of the Currency (OCC), have authority
to issue regulations expanding activities for FHCs and FSs, respectively.
In GLBA, �103 requires that the Fed find that new activities for FHCs are financial in nature,
incidental to a financial activity, or, both "complementary" to a financial activity and not posing a
substantial risk to safety and soundness. �121 repeats the standard for the OCC governing FSs.
Congress crafted GLBA as a compromise to allow financial affiliations while avoiding a general
mixing of "banking" with "commerce." It 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
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In December 2000, the Fed and the Treasury released a proposal to allow banking companies into
new real estate businesses, under ��103 and 121.4 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 (not 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 is
not purchase or sale of property as an owner, and it 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. About half the states seem to allow these activities for the
1
113 Stat. 1338-1481.
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 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 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
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, January 3, 2001, pp. 307-314.
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financial institutions that they charter and regulate; however, actual practice of bank realty
powers appears very rare.5 Conversely, real estate brokers and managers cannot offer essential
banking services--accepting deposits and making commercial loans--and 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) requested this authority. In their view, it would allow financial institutions to
offer a fuller range of financial service, using many skills that banks already have. They argue
that these activities are financial in nature and would lower the costs of realty transactions. Other
supporters are the America's Community Bankers, Consumer Bankers Association, Independent
Community Bankers of America, Realty Alliance, and Real Estate Services Providers Council.
The National Association of Realtors (NAR) opposes the proposal, arguing that no law, including
GLBA, authorizes banking firms to provide real estate brokerage and property management,
which it argues are nonfinancial in nature. From its perspective, the proposal would create
anticompetitive and anticonsumer concentrations of power dominating the realty industry and
increasing costs to consumers. Other opposing entities are the Building Owners and Managers
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Association, Consumers Union, Institute of Real Estate Management, International Council of
Shopping Centers, National Affordable Housing Management Association, and National
Association of Homebuilders.
(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. (Found parties must negotiate terms, including prices, for themselves.)6
(4) Bankers already act as intermediaries in arranging commercial real estate equity financing
(transfer of title, control, and risk arrangements for projects) and often finance the underlying
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, most visibly mortgages.
5
Conference of State Bank Supervisors, "Real Estate Brokerage Chart," available at http://www.csbs.org/government/
legislative/realestate/re_chart.htm.
6
12 CFR 225.86(d).
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(6) Some savings associations and state-chartered banks already provide these real estate services.
Twenty-seven states and the federal Office of Thrift Supervision appear to allow the activities at
issue for deposit-based financial institutions, at least statutorily.
(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. When bankers sponsored Real Estate
Investment Trusts in the 1970s, most collapsed with large losses.
(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 engage in any activity
requiring registration or licensing as a realty agent or broker.
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(4) One study states that the real estate industry is highly competitive and efficient, much more
productive than financial services generally.7 If so, bankers would presumably bring almost no net
benefit to real estate brokerage and property management.
(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.
(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. Consumers, including buyers of these services, generally prefer
more competitors in a field to fewer.8
(2) Clients of banks need not face complications of start-from-scratch checking of
creditworthiness, which their bankers already know. The credit approval/underwriting process is
the stage of real estate purchase that is usually the most delayed.
7
A conclusion of a study by Leonard Zampano of the University of Alabama presented at the NAR Midyear
Legislative Meetings and Trade Expo, Washington, DC, May 17, 2001.
8
American Bankers Association, "Consumers Want More Real Estate Competition, New Survey Reveals," at
http://www.aba.com/Press+Room/051501realestate.htm.
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(3) Laws against forcing customers to obtain both nonlending services and loans from banking
companies (which observers call "tying") would still restrain market power of companies
providing banking and realty services jointly. Meanwhile, many real estate brokers seem to have
close ties with favorite mortgage lenders, title companies, etc., making it easy for customers to
deal with almost one-stop financial shopping.
(1) Customers might believe that obtaining realty brokerage or property management services
from bankers would ease credit approval for their financing. Better, unbundled deals may be
available from competition among multiple providers.
(2) Customer service could suffer with fewer specialized providers. Bank credit standards might
not be appropriate for realty transactions requiring flexibility, especially when tightening credit
quality concerns ("credit crunches") cut back bank lending.
(3) Low- and moderate-income households lacking bank relationships might not benefit from
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bundled realty services designed for bank clients of greater resources.
The House Subcommittee on Commercial and Administrative Law held its Oversight Hearing on
Proposed Federal Reserve/Treasury Department Real Estate Brokerage and Management Rule.
The Senate Subcommittee on Financial Institutions held its hearing, Bank and Financial Holding
Company Engagement in Real Estate Brokerage and Property Management, the House
Subcommittee on Financial Institutions and Consumer Credit held a hearing on H.R. 3424. The
Community Choice in Real Estate Act of 2001 (which had a Senate version, S. 1839) would
continue to keep banks out of real estate management.
Representative Calvert and Senator Allard reintroduced the Community Choice in Real Estate
Act, now numbered H.R. 111 and S. 98, to prohibit FHCs and national banks from engaging,
directly or indirectly, in real estate brokerage or real estate management activities. Both measures
were identical to their predecessors. The 108th Congress passed the basic federal spending
package, P.L. 108-7. It retained the prohibition amendment, disallowing any funds for Treasury
Department issuance of the bankers' real estate regulation in FY2003.
Representative Northup reintroduced the amendment into the Transportation Appropriations bill
H.R. 2989. The measure prohibited FY2004 funds from being used to implement the proposed
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rule. The House approved that measure.9 Senate approval resulted in P.L. 108-199, continuing no-
spending language.
For the next fiscal year (FY2005), no-spending language reappeared as Section 523 of H.R. 5025,
the Transportation, Treasury, and Independent Agencies Appropriations Act. Its ban on Treasury
regulatory issuance via a spending cutoff was in the original measure, which cleared the
subcommittee. Stronger, permanent, prohibitory language was included in Section 217 of the
counterpart S. 2806, which, if Congress had approved it, would have had the force of law to
prevent the proposed activity in the future. Following conference approval, the FY2005 omnibus
spending measure, P.L. 108-447, adopted the House version.10 The final version of the Treasury
appropriations language thus included the third moratorium, until the end of FY2005.
Representative Calvert reintroduced the Community Choice in Real Estate Act, H.R. 111. Senator
Allard reintroduced its companion bill, S. 98. Conversely, Representative Oxley introduced H.R.
2660, the Fair Choice and Competition in Real Estate Act of 2005, on May 26. It would amend
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the Bank Holding Company Act of 1956 (the foundation for GLBA) to allow real estate
brokerage activities and real estate management activities for financial holding companies and
financial subsidiaries of national banks.11 The House Committee on Financial Services held a
hearing, Protecting Consumers and Promoting Competition in Real Estate, on June 15.12 In its
first report on real estate brokerage, the Government Accountability Office found that state-
chartered bank activity (where permitted) had little effect on competition or consumers.13
On December 5, the OCC relaxed prohibitions on bank investments in real estate development
projects. The agency wrote two interpretive letters allowing national banks to develop a hotel and
a mixed-use project. The Bank of America proposed to invest in a 150-room hotel, and PNC
sought to develop a facility with a hotel, retail office space, offices, and condominiums. A third
interpretive letter was written dated December 21, 2005, allowing Union Bank of California to
invest in a wind energy project in which the bank would own 70% of the project, including the
land and wind turbines. The OCC defended its approval of the December 5 interpretive letters,
citing 12 U.S.C. � 29 that allows banks to invest in bank premises. Among the justifications for
approval of the wind project was that 12 U.S.C. � 29 provides that national banks may purchase,
hold, and convey real estate and that this acquisition of interests in real estate is not speculative.
Those developments would appear essentially to end the stricture against national bank ownership
and leasing of real estate, thereby moving further toward allowing bankers into real estate
brokerage, etc.14
9
Division F, Title II, Section 538. Congressional Record, November 25, 2003, p. H12415.
10
Division H, Section 519, Congressional Record, November 20, 2004, p. H10358.
11
Karen L. Werner, "Reps. Oxley, Frank Introduce Measure To Allow Real Estate Brokerage for Banks," Daily Report
for Executives, May 31, 2005 , p. A-11.
12
See http://financialservices.house.gov/hearings.asp?formmode=detail&hearing=395.
13
Real Estate Brokerage: Factors That May Affect Price Competition, GAO-05-947.
14
R. Christian Bruce, "OCC Defends Letter on Real Estate Powers While Realtors Call for Action From Congress,"
Daily Report for Executives, February 2, 2006, p. A-31.
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In the FY2006 appropriations process for H.R. 3058, covering the Treasury, conferees adopted
House language prohibiting the Treasury from finalizing the contentious rule in FY2006 (Section
718). Conferees rejected stronger language in the Senate version (introduced in the form of an
amendment)of the measure (Section 723) that might have permanently prevented a decision on
the issue, therefore issuance of any permissive regulation. President Bush signed this measure
into law (P.L. 109-115) on November 30, 2005.
The Community Choice in Real Estate Act of 2007 was reintroduced in both houses of the 110th
Congress as S. 413 by Senator Hillary Clinton and as H.R. 111 by Representative Paul Kanjorski.
Like the previous versions of these bills, these new proposals would amend the Bank Holding
Company Act of the United States to prohibit financial holding companies and national banks
from engaging, directly or indirectly, in real estate brokerage or real estate management activities.
In the mean time, the rule in FY2006 (Section 718) was continued under the Revised Continuing
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Appropriations Resolution, 2007 (P.L. 110-5). In short, the House appropriations bill, which for
the past six years has included a one year prohibition on funding the Treasury to complete the
rulemaking that was authorized by the 1999 Gramm-Leach-Bliley Act was extended another year.
Walter W. Eubanks
Specialist in Financial Economics
weubanks@crs.loc.gov, 7-7840