Testimony of
Edward L.
Yingling
On Behalf of the
AMERICAN BANKERS ASSOCIATION
Before the
Subcommittee on Commercial and Administrative Law
of the
Committee on the Judiciary
Testimony of Edward L. Yingling
On Behalf of the American Bankers Association
Before the
Subcommittee on Commercial and Administrative Law
of the
Committee on the Judiciary
United States
Mr.
Chairman, thank you for inviting the American Bankers Association (ABA) to
testify this afternoon. My name is
Edward L. Yingling, and I am the Executive Director of Government Relations at
the
Mr.
Chairman, in addition to my role in government relations at the
In
my testimony today I would like to make the following points:
In
enacting GLBA, Congress created a flexible, yet conservative regulatory process
to allow banks to offer new services – a process that the Federal Reserve Board
and the Treasury Department have correctly followed.
We
have grave concerns about the broader effects of the current controversy and
whether it sets a precedent that could hinder future approvals of new services
under GLBA. The Act was designed to keep
our financial system up-to-date by delegating those decisions to the FRB and
the Treasury. This goal is being
frustrated by efforts to take the case for determining what is financial in
nature back to Congress, placing Congress in the very role that it delegated in
GLBA to the agencies with the greatest level of expertise.
The
request by the American Bankers Association and others to have real estate
brokerage and management approved fully meets the statutory standard contained
within GLBA.
I. Overview
We
believe it is quite evident that the Federal Reserve Board (FRB) and the
Department of the Treasury are following the process laid down in GLBA, as well
as the normal process under established principles of administrative law. Of course, we do not know, nor does anyone
know at this point, what the result of this regulatory process will be,
although we believe there is a strong case that real estate brokerage and
management activities should be approved under the standards of GLBA.
While
much of the public discussion during consideration of GLBA was on securities
and insurance activities, which had been the focus of the most controversy over
a number of years, it is quite clear that GLBA had a more general and broader
purpose. In fact, the provision of GLBA
under which the real estate issue has been raised is really the heart and soul
of that Act. The primary purpose of GLBA
was to create a mechanism to bring our financial services laws up-to-date both
at the time of its enactment, and also going forward. It was widely believed that the
contentiousness, turf wars, and delays that preceded GLBA were harmful to our
financial system, our economy, and the consumers of financial services. Therefore, Congress provided a mechanism to
keep our financial system up-to-date going forward, and, importantly in this
context, to remove the need to have Congress referee between industries every
time any change to our financial system was proposed. It is ironic, but really very sad, that on
the first issue of modernization raised under this new regulatory process, the
Congress is being asked to ignore this primary purpose of GLBA, and to once
again become a referee, deciding whether or not a specific industry should be
exempt from the criteria Congress set up less than three years ago.
In
enacting GLBA, Congress created a flexible, yet conservative, process. In order for a new activity to be approved, not
one agency, but two, must approve it.
The two agencies chosen were, not surprisingly, the FRB and the
Treasury. These are the two agencies
that have the most expertise with respect to the entire financial services
industry, as well as the economy. They
are also two conservative agencies. It
is worth noting, since the National Association of Realtors (NAR) has raised
the specter of banking and commerce, that the FRB has, for many years, been the
primary opponent of breaching the wall between banking and commerce. Based on this record, one would certainly
expect the FRB to look very closely at any question relating to commercial
activities.
It
is important, of course, to look at the specific language in the statute. Under the statute, the FRB and the Treasury
determine whether or not a potential new activity is “financial in nature or
incidental to a financial activity.” In
making that determination, GLBA directs the regulators to consider a variety of
factors. Those factors include: 1) the purposes of the GLBA; 2) changes, or
reasonably expected changes, in the marketplace in which financial holding
companies compete; 3) changes, or reasonably expected changes, in the
technology for delivering financial services; and 4) whether the proposed activity
is necessary or appropriate to allow a financial holding company to compete
effectively with any company seeking to provide financial services in the
United States.
As
discussed more fully below, we believe that real estate brokerage and property
management, in the context of the changes taking place in the marketplace for
these services, clearly meet the criteria of the statute. However, that is something for the regulators
ultimately to determine. One thing is
for certain – it is quite clear that a strong case can be made that these
criteria are met.
While
many of the issues are discussed further below, at this stage it is worth
emphasizing a couple of points. First,
while the purchase of a home has many aspects, it is clearly the most important
financial transaction for the great majority of people. It is not only the largest monetary
transaction in which most people engage, but also the mechanism through which
they accumulate a great portion of their wealth over time. Second, the criteria in the statute
specifically refer to competing with companies providing financial services in
the
The
NAR has tried to make a simplistic argument that the proposal involves
“commerce” and is, therefore, beyond the scope of GLBA. However, the issue is not at all that
simple. GLBA does not prohibit
commercial activities; rather it sets out specific criteria to determine
permissible activities. The authors of
GLBA clearly recognized that there was no exact or permanent line to define
financial services. That is why they set
up a mechanism to have the FRB and Treasury make determinations going forward,
and why they developed the specific criteria that are in the statute.
Despite
comments to the contrary, anyone who paid attention to the debate over the many
years that led up to GLBA would not have been surprised to see the current
proposal. I can add from personal
experience that over ten years ago I negotiated, at length, with my counterpart
at the NAR, the rules under which banks would enter the real estate brokerage
business. This negotiation took place
with respect to criteria in a previous version of GLBA which was, in fact, much
more restrictive than the criteria enacted in 1999. Thus, over ten years ago, the NAR recognized
that even a more restrictive version of financial modernization could be
interpreted as permitting banking companies to offer real estate
brokerage. Furthermore, in 1995, NAR
testified on another forerunner of GLBA before the House Banking
Committee. In that testimony, NAR stated
unequivocally that the language must be clarified to exclude brokerage and
management. It was not clarified then,
nor was it in GLBA. That bill, the “Financial Services Competitiveness
Act of 1995,” contained similar, but less broad, language to that ultimately
enacted in GLBA.
The
NAR has conducted an extensive lobbying and public relations campaign on this
issue. Yet, it has been unable to point
to any specific language in the legislative history that supports its argument
that Congress intended to exclude real estate brokerage. In fact, Congress did specifically exclude
one aspect of real estate – real estate development and investment – in
GLBA. Certainly the real estate
brokerage issue would have been raised in that context, if it were going to be
raised.
The
FRB and Treasury have correctly followed the letter and intent of GLBA, as well
as all administrative law requirements, in this matter. Their approach is precisely what Congress
intended. It is NAR’s efforts to have
Congress serve as referee that is a prime example of what Congress was seeking
to avoid in enacting GLBA.
II. Legal Analysis
The Regulatory Process
The
FRB and Treasury began the regulatory process over two years ago, on March 17,
2000, when the agencies published an interim rule in the Federal Register
enumerating those activities determined specifically under the statute to be
“financial in nature or incidental to such financial activity,
” as well as proposing a process by which any party could seek to have
additional activities included in the list.
This process was approved by the FRB and Treasury without amendment and
republished in the Federal Register on
The
regulatory process adopted by the FRB and Treasury requires the petitioner to
do the following: 1) identify and define the activity for which the
determination is sought; 2) provide specific information about what the
activity would involve and how it would be conducted; and 3) explain in detail
why the activity should be considered financial in nature or incidental to a
financial activity and provide information that is sufficient to support a finding
that the activity is financial.
On
On
While
I will outline the compelling market and technological factors in a moment, the
point that existing federal and state laws protect consumers from the
potentially adverse effects of combining banking and real estate brokerage is
also an important one. The simple fact
is the same potential for abuse the NAR alleges will occur if banks offer real
estate brokerage services exists any time one of the many real estate firms
engaged in financial services deals with a customer. However, while these firms, along with some
insured depository institutions, have been selling real estate and funding
mortgages for years, there has been no outcry about these conflicts of
interest. Why? — Because the Real Estate Settlement Procedures Act (RESPA)[1]
requires realtors affiliated with lenders to disclose that fact to customers
before the purchase occurs.
The
RESPA disclosure,[2]
which must be on a separate piece of paper, must state the relationship between
the real estate agent and the lender and provide the estimated charges or range
of charges by the lender. It must also
notify the customer that he or she is not
required to use the lender and is free to shop around for a better deal. If the
real estate agent requires the use of its affiliated lender, that agent
violates the kickback and unearned fee provisions of Section 8 of RESPA. The customer is expected to sign an
acknowledgement of the disclosure.
Bank
involvement in real estate brokerage and management services is also consistent
with safe and sound banking. First,
providing these services will help to diversify the income stream of these
institutions and help to improve their financial base. Real estate brokerage and management services
are activities where a bank acts only as an agent for a third party, but
does not take an ownership position in the property. By their very nature, agency activities pose
very little risk to the safety and soundness of depository institutions.
Second,
under GLBA, the bank regulators must deem a bank to be well-capitalized and
well-managed before a banking organization can participate in any of the
expanded financial activities permitted under the GLB Act, including real
estate brokerage and property management.
Thus, only financially strong institutions would be authorized to engage
in these activities.
Third,
banking organizations are also subject to Sections 23A and 23B of the Federal
Reserve Act, which limit the amount of credit and other forms of support a bank
could provide to a real estate brokerage affiliate or subsidiary. Such limits ensure the safety and soundness
of the bank will not be negatively impacted by its subsidiaries or affiliates.
Fourth, many banking organizations already have
years of experience in providing real estate activities. In fact, the purchase,
sale and management of real estate are frequently significant aspects of
fiduciary asset management in many bank trust departments. Because banks currently have trust personnel
who provide real estate brokerage and management services on a daily basis to
trust customers, providing the service outside of the trust department would
not be a new activity in which banking organizations lack expertise. Thus, no
new safety and soundness issues would be raised.
Finally, a precedent already exists for bank
involvement in real estate activities.
In over half of the states, state banking regulators have the authority
(either explicitly, through regulatory
interpretations, and through wildcard and parity statutes) to allow
state-chartered banking organizations to engage in real estate activities. (See
the attached state-by-state listing developed by the Conference of State Bank
Supervisors.) Moreover, savings
institutions and credit unions already have brokerage authority. Thus well over a majority of federally
insured depository institutions already have this authority. Allowing all banks the same rights and privileges
should enhance the competition for real estate services.
In
July, it will be two years since the filing of the original petition requesting
a determination that real estate brokerage and management be deemed financial
in nature. It is now certain that this
determination will not be made until 2003.
As you are aware, in a letter to Congressman Michael G. Oxley, dated
A
fundamental purpose of GLBA was to enable banking institutions to compete with
other financial services providers, and
As
an industry we have grave concerns about the broader effects of this
controversy and whether it sets a precedent that could hinder future approvals
of new powers under GLB. The Act was
designed to keep our financial system up-to-date by delegating those decisions
to the FRB and Treasury. This goal is
being frustrated by efforts to take the case for determining what is
appropriate back to Congress, placing Congress in the very role that it delegated
to the agencies with the greatest level of expertise to make these decisions
based on specific statutory criteria.
H.R. 3424 not only frustrates the GLBA process, it
reduces consumer choice. Consumers would
have fewer choices of whom to do business with; agents would have fewer choices
of whom to work for; and businesses would have fewer choices for joint
marketing, fewer potential merger partners, and fewer potential buyers. We believe a competitive market is the best
way to provide quality real estate brokerage and management services.
The Statutory Standard
Congress
did not give the FRB and the Treasury unfettered discretion to make the
determination that an activity is appropriate for approval. GLBA specifically sets forth certain traditional
banking activities that Congress knew were clearly financial in nature.
In
addition to these currently-recognized activities, the Act authorizes
activities that the FRB and Treasury determine, by regulation or order, to be
“financial in nature or incidental to such financial activity.” This authority to permit new financial
activities is considerably broader than the FRB’s comparable authority before
GLBA was enacted, which had only extended to a new activity that was “so
closely related to banking as to be a proper incident thereto.”
One
specific aspect of this new authority is that the FRB is directed to define the
extent to which three types of activities are “financial in nature:” 1)
lending, exchanging, and engaging in certain other transactions with financial
assets other than money or securities; 2) providing any device or
instrumentality for transferring money or other financial assets; or 3)
arranging, effecting, or facilitating financial transactions for the account of
third parties.
The
FRB and Treasury, in their request for public comment, note that many of the
essential aspects of real estate brokerage are already permissible under
national bank “finder” authority. The regulators
already authorize financial holding companies, as well as national banks and
their subsidiaries, to act as finders in bringing together buyers and sellers
for financial or nonfinancial transactions.
Permissible finder activities include “identifying potential parties,
making inquiries as to interest, introducing or arranging meetings of
interested parties, and otherwise bringing parties together for a transaction…”[3]
This description of finders authority is the essence of every real estate
transaction.
Apart
from their authority with respect to these three specified activities, the FRB
and Treasury have broad discretion to determine that other types of activities
are “financial in nature or incidental to such activity.” In making such a determination, the
regulators are directed to consider a number of factors. Among the specific factors to be considered
are:
Ø
Changes or
reasonably expected changes in the marketplace in which financial holding
companies compete or the technology for delivering financial services; and
Ø
Whether the
proposed activity is necessary or appropriate to allow a financial holding
company to –
·
Compete
effectively with any company seeking to provide financial services;
·
Efficiently
deliver information and services that are financial in nature through the use
of technology, including applications involving systems for data transmission
or financial transactions; and
·
Offer
customers any available or emerging technological means for using financial
services or for the document imaging of data.
The
GLBA standard is a significant expansion of the FRB and Treasury’s capacity to
consider the competitive realities of our nation’s financial marketplace when
determining permissible activities for financial holding companies and financial
subsidiaries. It is our contention that
the marketplace, and the technology associated with it, in the case of real
estate brokerage and property management, have already changed and will
continue to change dramatically in ways that significantly impact the ability
of banks to effectively compete with other companies that provide financial
services.
Finally,
in addition to the newly-authorized financial activities described above, the
Act authorizes financial holding companies to engage in certain nonfinancial
activities. Specifically, a financial
holding company may engage in a nonfinancial activity, or acquire a company
engaged in a nonfinancial activity, if the FRB and Treasury determine by
regulation or order that the activity: 1) is complementary to a financial
activity; and 2) does not pose a substantial risk to the safety or soundness of
depository institutions or the financial system generally.
III. The
Marketplace and Technology
Clearly,
combining real estate brokerage and banking services is not a new or unusual
activity. Real estate firms do it. Insurance companies do it. Securities firms do it. And well over half the federally insured
depository institutions in this country, including many of the largest banks
and savings institutions, can do it. The
In
1990 there were 150,000 residential real estate firms. Today there are about
half that many. In this new, competitive environment, bankers and real estate
professionals have much to offer to each other – and to consumers. Banks could provide needed capital and
cross-marketing opportunities to support the growth of local real estate firms.
Real estate professionals could provide the personalized services and
experience that is their strength. Many
real estate brokers have told the
The benefits of competition are well known. In a free market, businesses choose to offer
new products if they believe they can provide better services at competitive
prices. Obviously, not all banking
organizations will choose to offer real estate services, but those that do will
enter the market because they believe they can meet or beat the
competition. Increasing the number of
providers raises the bar for all the participants, forcing improvements in
efficiency, pricing and service levels – all
to the benefit of homebuyers.
If banks were allowed to offer real estate brokerage
and management services there would be more choices for everyone.
Ø
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.
Ø
More Choices for Real Estate Agents
Real
estate agents pride themselves on being independent contractors, choosing the
best companies to work for. If there are
more companies to choose from, agents’ employment opportunities will be much
broader. Banks will only be able to
attract good agents by offering competitive commissions and other
incentive-based compensation packages.
And because the real estate business requires expertise, licensing, and
other requirements, banks would look to hire experienced real estate
agents. Banks know that converting tellers
to real estate agents would be a poor business strategy.
Ø More
Choices for Real Estate Companies
Forward-looking
businesses are always looking for opportunities to improve their franchise
value – strengthening, expanding, merging, or even selling their business. Allowing banks to engage in real estate
brokerage and management services gives real estate companies more options for
bringing additional capital and technology to the table, through joint
ventures, for example. Banks also
represent potential buyers if agencies choose to sell their businesses. Indeed, in some communities, partnering with
the local bank may be the only way for the local real estate brokerage to
compete with the growing national chains.
This is one reason why many real estate firms also oppose H.R. 3424 and
S. 1839. It is interesting to note that
many insurance agencies thought that bank involvement was going to hurt their
business – until they realized that it provided many more options than they had
before.
The Marketplace is Changing – Real Estate and Banking Services
Combined
Ironically,
the NAR is now objecting to the very combinations that their members have
undertaken – offering brokerage, mortgage banking, and, often, insurance under
one roof. As I previously noted,
securities firms, insurance companies, credit unions, savings associations and
state-chartered banks in half the states can offer end-to-end services.[4]
Take, for example, two of the biggest real estate
companies in the
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 very positively by homebuyers, but banks, mortgage companies
and real estate companies are all viewed equally
as appropriate providers of these services.
Restricting
some banking organizations from offering the same end-to-end combination of
real estate services and mortgage lending as others will place those banks at a
tremendous competitive disadvantage – losing not just an opportunity in the
brokerage field, but also the opportunity to interact with the customer in the
first place and to offer one of the most traditional of banking products – the
mortgage loan.
Simply
put, if real estate services and other financial products are already combined
by real estate firms, securities firms, insurance companies, credit unions,
savings associations and state-chartered banks in half the states, there is no
reason why all banks should not be accorded the same opportunities to provide
these products to their customers.
Many Real Estate Agents Support Open Competition and Oppose H.R. 3424
Many agents and real estate companies are not
concerned by the prospect of banking organizations offering real estate
services. Many look forward to the
opportunity to partner with a local bank.
Independent agents who provide good service today know that they will be
competitive with anyone, whether the
competitor is another independent agent or one affiliated with a bank. Here are a few examples of comments filed by
real estate agents with the regulators on this proposal:
Ø
A real estate broker in North Carolina writes: “I am a 38-year veteran of the real estate
industry and do not agree with our National Association of [Realtors]…There are
several reasons I feel this way, primarily because our small family-owned
business has always faced stiff competition from large real estate firms, yet
we have been able to earn a good, honest living. I believe that competition is the American
way and if you’re good at what you do, you can survive whether large or small.”
Ø
A real estate broker in
Ø
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.”
Ø
A broker from
Ø
Another real estate agent writes:
“NAR [National Association of Realtors] predicted the doom and gloom
many, many years ago when franchise brokerage was in its formative stages. ERA, RE/MAX, Coldwell Banker et al were all
predicted to end ‘mom and pop’ real estate firms. These franchises have come,
many have gone or merged with others.
And yet still, ‘mom & pop’ brokerage firms continue to survive
because of the personal attention. I
welcome the competition, and I will continue to survive.”
Many Real Estate Companies Also
Support Open Competition and Many Oppose H.R.
3424
For example, Paul Harrington, president of DeWolfe
New England, which is one of the largest real estate firms in the Northeast,
was quoted in the Boston Globe as saying: “We believe that banks ought to be
able to compete with us as long as there are safeguards to insure that deposits
are not being improperly invested. It
would be hypocritical for us to say otherwise because we promote the fact that
we offer customers convenience through one-stop shopping.”[5]
The Realty
This is an Issue for All Banks, Not Just Large Banks
Despite the rhetoric
about “big” banks, small banking organizations have a deep interest in this
issue. It is also a misconception that all national banks are large. More than 40 percent of all banks – over
4,000 institutions – have fewer than 25 employees. As Chart 1 demonstrates,
over ninety percent of national banks are community banks. These are truly small businesses that would
like the option to broaden the financial products they can offer their
customers and to compete with real estate firms offering loans and homeowners
insurance.
In fact, the ability to offer real estate brokerage
may be more important for smaller institutions.
Rural communities may lack real estate agents or are served only by
branches of brokers in other towns because there is insufficient business to
warrant a local brokerage office. In
such small communities, the bank is perceived as the place that will have the
greatest amount of information on what properties are for sale, including
farmland acreage in agricultural communities.
As such, in communities where there are no real estate
firms, community banks would typically contemplate establishing a subsidiary
and hiring real estate brokers (fully subject, of course, to state real estate
licensing provisions). In other
instances, small banks are likely to partner with existing real estate brokers
to provide these services.
Moreover, of the ten largest banking companies, four
already have depository institutions which have authority to engage in real
estate activities. There certainly has
been no market disruption from the fact that well over half of the depository
institutions in this country have the ability to offer real estate brokerage
and management services today.
The GLB Act Was Designed to Allow Flexibility to Adjust to the
Marketplace
Technological innovations have also had a dramatic
impact on real estate markets. Perhaps
the biggest change is the development of the secondary market for mortgage
loans and the efficient process that bundles individual home loans into highly
liquid, globally-traded securities (see Chart 2).
The increasing
importance of the secondary market has facilitated the rapid growth of mortgage
lending outside traditional banking and savings institutions (see Chart
3). In fact, securitization has
significantly changed the very nature of mortgage funding, enabling real estate
firms to establish their own mortgage companies and to offer end-to-end real
estate transactions – helping a buyer find a home, finance it, and insure it.
The result is that traditional deposit-based lenders – banks and thrifts – are
often bypassed completely. These are
exactly the kinds of technological changes the GLB Act authorized the Treasury
and the Fed to address.
The dominance of the secondary market is clear
evidence that this form of funding for plain vanilla mortgage loans is
generally superior in terms of costs to funding with bank deposits. If banks somehow enjoyed some special benefit
from deposits, or deposit insurance (which banks pay for through premiums and
extensive regulatory costs), banks would not be selling into the secondary
market, and the secondary market would not control an ever-increasing share of
the marketplace. More importantly,
access to this secondary market source of funding is available equally to mortgage
and banking organizations, and is clearly why real estate companies
increasingly are affiliating with mortgage banking companies.
Conclusion
Mr.
Chairman, increased competition clearly benefits consumers and the
economy. It is a catalyst for
innovation, more customer choice, better service, and competitive prices.
In
fact, promoting competition in financial markets was the primary motivation for
passage of the GLB Act. Congress also
recognized the need for regulatory flexibility in an environment where the
bright lines between financial activities and between financial providers has
all but disappeared. Providing real
estate brokerage and property management is no exception to this rule. We strongly believe that both real estate
brokerage and property management meet the criteria set forth by Congress in
enacting the GLB Act.
Not
only would consumers benefit from bank involvement in real estate services, but
also bank involvement is consistent with safe and sound banking. All consumer protections that apply to
independent realtors would apply to bank-affiliated real estate agents – plus
bank-affiliated agents would be subject to additional anti-tying
regulations. And because brokerage and
management are agency activities, they pose no financial risk to the safety and
soundness of the banking organization.
I
thank you, Mr. Chairman, for this opportunity to present the views of the
American Bankers Association.