GRAND RAPIDS — Be careful what you ask for.
The Federal Reserve Board and Treasury Department have received an earful since soliciting in December comments on a joint proposal that would allow national banks and their subsidiaries to act as real estate brokers and managers.
The agencies are now trying to determine whether real estate brokerage and management services are financial in nature or “incidental to financial activity” and, therefore, permissible for financial holding companies.
Although deadline for comment was originally March 2, in response to the thousands of comments received, the agencies extended the comment period through May 1.
As of last week, the Federal Reserve had received more than 40,000 letters of comment and e-mails, the majority of them from Realtors and real estate organizations, said Lynn Barron, manager of the clearing and correspondence section.
Barron said it’s unusual for the board to receive that many comments on a single proposal. Most proposals generate about 100 comments; consumer related issues sometimes generate as many as 1,500.
However, there appears to be some reluctance to speak out on the issue locally.
A commercial real estate agent, who declined comment on the proposal, may have summed it up best when he said he counts banks among his Grand Rapids clients and wasn’t about to jeopardize those local relationships.
Perhaps the same is true, only vice versa, for local bankers.
But the banker and real estate trade associations at the state and national levels are speaking up loudly, waging aggressive campaigns on behalf of their respective members. They’ve drawn lines in the sand and stand ready and willing to duke it out.
Michael DeFors, senior vice president of government affairs for the Michigan Bankers Association (MBA), said the rule, if adopted, would advance competition among financial services providers, add price competition to the market and allow homebuyers the convenience of one-stop shopping.
The American Bankers Association (ABA) launched a nationwide campaign that included support from America’s Community Bankers, the Consumer Bankers Association, the Financial Services Roundtable and state-level trade associations.
DeFors likens this fight to the fight banks and insurance agents waged a few years ago as to whether banks should be allowed to sell insurance.
“However, after all was said and done, the lessons learned from that battle turned out to be nothing more than a battle to preserve agent turf,” DeFors noted.
“In fact, what has evolved has been a growing recognition of the benefits of partnering between the two industries resulting in a healthier market for the consumer. We believe the same will happen with real estate brokerage and ultimately, all parties will benefit.”
Something the real estate associations may not tell you, said ABA spokesperson Catherine Pulley, is that there are 26 states that already permit federal savings institutions, state-chartered commercial bank and credit unions to engage in real estate brokerage and management.
“I haven’t heard of Armageddon coming in those states,” she added.
There are national and state chartered banks, savings banks and credit unions, all of which operate under different charters, DeFors explained. The chartering statutes that give the different institutions authority to engage in specific activities often vary as well.
“This proposal would allow for a broader brush and alleviate some of those constraints,” DeFors said, which means all banks could participate.
Of 1,000 responses to a National Association of Realtors (NAR) e-mail survey in January, more than 900 participating Realtors opposed the measure, according to NAR.
Steve Cook, NAR’s vice president for public affairs, said in the sense of getting members activated, this is the largest campaign the organization has ever undertaken. He said more than 81,000 e-mails from the organization’s 750,000 members have been sent to a combination of the Federal Reserve Board, the Treasury and members of Congress.
Generally, the real estate side maintains that real estate brokerage and management are neither financial instruments nor financial products; they’re commercial services.
According to NAR President Richard Mendenhall, commercial activities relate to transactions in tangible assets, such as property and cars. Financial activities relate to intangible assets, such as cash, stock and other assets that have only notational value.
NAR maintains that that when Congress ammended the Bank Holding Company Act in the 1999 Gramm-Leach-Bliley bill, it deemed that real estate was not “financial in nature.” That bill repealed the barriers which separated banking, insurance and securities.
The ABA, however, counters that the process of finding a home, obtaining a mortgage and providing insurance is a financial activity or at least “incidental to” financial services.
A form letter that thousands of NAR members have forwarded to the Fed states that banks wouldn’t be “motivated” to help homebuyers get the best possible deal and that the primary goal of bank-owned brokerages would be “to sell buyers their own loans and get the best terms for their parent companies, not the consumer.”
NAR further maintains that control on real estate transactions by large diversified holding companies and their financial subsidiaries have “the potential for concentration of economic power and conflicts of interest.”
Under current law, subsidiaries of a bank holding company can share personal financial data without consumers’ consent, so privacy protection is another issue NAR is underscoring in its campaign.
A study conducted in mid-March by Yankelovich Partners on behalf of the association found that of 2,049 Americans surveyed:
- 81 percent indicated they are concerned that their bank could use their private financial information to sell real estate services to them.
- 89 percent said they are concerned about potential violations of their privacy.
- 61 percent said they did not believe current federal banking laws protect consumers’ privacy.
- 81 percent expressed a preference in maintaining a separation between banking and real estate.
Dave Bos, Western Michigan director of legislative advocacy for the Michigan Association of Realtors, said the banker/broker issue is the same one Congress debated — and rejected — two years ago when it passed the Gramm-Leach-Bliley Act.
“The proposal was shot down back then. Not even two years later it comes up again through the Federal Reserve,” he said.
NAR claims that financial holding companies, national banks and their subsidiaries are trying to accomplish through the regulatory process what they could not achieve through the legislative process.
Pulley said the thrust of ABA’s campaign is that the measure would increase competition and provide more consumer choice in the real estate market. But the issue is just as importantly one of fairness, she said.
“Real estate brokers offer financial services, and if banks can do everything in financial services and real estate brokers already engage in it, then it doesn’t really make sense to keep banks out of it,” Pulley stressed.
As she pointed out, real estate services companies, such as Coldwell Banker and Century 21, already offer consumers mortgage, brokerage, title insurance and property insurance services.
“To me, if it walks like a financial service and it talks like a financial service, it must be a financial activity,” Pulley said. “Basically what they’re doing is trying to stop competition while engaging in lending and brokerage for themselves.”
The issue of licensing — or lack of it — is one of several myths the ABA hopes to dispel.
Pulley said that contrary to some of the rumors floating around, bank-affiliated real estate brokers would be subject to all applicable real estate rules, including licensing, qualifications and sales practices.
She said banks would hire licensed real estate brokers on staff or acquire real estate brokerage subsidiaries for those services.
Not only would existing real estate broker rules apply, DeFors argues, but he also contends that consumers would benefit from the additional protections contained in the Bank Holding Company Act.
The Federal Reserve Board’s Barron said it will take several months for the agencies to sort through and analyze the comments and several months more before they take action on the proposal one way or the other.