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Testimony of Governor Laurence H. Meyer

Real estate brokerage activities
Before the Subcommittee on Financial Institutions and Consumer Credit, Committee
on Financial Services, U.S. House of Representatives
May 2, 2001

Mr. Chairman and members of the Subcommittee, thank you for the opportunity to testify
on behalf of the Federal Reserve Board with respect to the joint proposal by the Board and
the Secretary of the Treasury relating to real estate brokerage and management. The
proposal is an invitation for public comment on whether the Board and Treasury should find
that real estate brokerage and real estate management are activities that are financial in
nature or incidental to a financial activity, and hence permissible for financial holding
companies and financial subsidiaries of national banks. The agencies published the request
for comment on January 3, 2001. Because of the significant public interest in the proposal,
we extended the public comment period through May 1, 2001.
To help understand why the agencies requested comment on this proposal, I think it would
be helpful to outline the legal framework established by the recently enacted Gramm-LeachBliley Act ("GLB Act"), and the basis for the proposal. The GLB Act amended the Bank
Holding Company Act to allow a bank holding company or foreign bank that qualifies as a
financial holding company to engage in, and affiliate with companies engaged in, a broad
range of financial activities. The activities specifically authorized by statute include lending;
insurance underwriting and agency; providing financial advice; securities brokerage,
underwriting, and dealing; and merchant banking activities.
In addition, the GLB Act permits financial holding companies to engage in other activities
that the Board determines, in consultation with the Secretary of the Treasury, to be
"financial in nature or incidental to a financial activity." The GLB Act includes this
flexibility because Congress recognized the practical difficulties of comprehensively
defining in legislation a complex concept like financial activities for a financial marketplace
that is continually evolving. Further, the act allows financial holding companies to engage in
other activities that the Board determines are "complementary" to a financial activity and
would not pose a substantial risk to the safety and soundness of depository institutions or the
financial system generally. Complementary activities are non-financial activities that are
related to or complement financial activities. Congress considered, but did not enact, a
provision that would have allowed the more general mixing of banking and commerce.
The real estate brokerage and management proposal is one of several initial proposals by the
Board and Treasury relating to the definition of activities that are financial in nature or
incidental or complementary to financial activities under the GLB Act. The first of these
proposals (which the Board recently finalized) related to acting as a so-called "finder."
Finder activities, which generally are permissible for banks to conduct directly, involve
putting buyers and sellers together in transactions negotiated by the buyers and sellers
themselves. The second of these proposals involved defining three types of activities that

Congress determined as a general matter to be financial, but required the Board to define
more specifically -- including safeguarding and transferring financial assets and facilitating
financial transactions for third parties. The third proposal requested comment on whether the
Board should determine that certain types of expanded data processing activities are
complementary to financial activities.
With each of these proposals, the Board and, for the financial activity determinations, the
Secretary of the Treasury, are exploring a new standard for defining permissible activities.
The GLB Act establishes certain factors that the Board and Treasury must consider, but it
otherwise leaves the agencies with significant discretion and very little guidance regarding
what is and what is not a financial activity.
The factors that the agencies must consider are very broad. For example, in determining
whether an activity is financial in nature or incidental to a financial activity, the agencies
must consider 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, efficiently deliver financial information and services through
the use of technological means, or offer customers any available or emerging technological
means for using financial services. In addition, the agencies must consider changes or
reasonably expected changes in the marketplace in which financial holding companies
compete, as well as changes or reasonably expected changes in the technology for delivering
financial services. Finally, the statute requires that the Board consider the unspecified but
wide-ranging purposes of the Bank Holding Company Act and the GLB Act, which opens
up consideration of other matters beyond those on the statutory list. These statutory factors
do not provide the Board with a facile decisionmaking formula for determining whether an
activity is financial in nature or incidental to a financial activity.
One thing that is clear is that Congress intended the "financial in nature" test to be broader
than the previous test for authorizing new activities for bank holding companies under the
Bank Holding Company Act. Before passage of the GLB Act, bank holding companies were
permitted to engage only in activities that the Board determined were "closely related to
banking." The closely related to banking test was tied to the activities of banks. In
considering whether an activity was closely related to banking, the courts focused on three
factors: (i) whether banks conduct the proposed activity, (ii) whether banks provide services
that are operationally or functionally similar to the proposed services, and (iii) whether
banks provide services that are so integrally related to the proposed services as to require
their provision in a specialized form. The text and legislative history of the GLB Act
indicate that Congress intended the new "financial or incidental" standard to represent a
significant expansion of the old "closely related to banking" standard.
The GLB Act neither specifically authorizes nor specifically forbids financial holding
companies or financial subsidiaries of national banks to engage in real estate brokerage and
management activities. While the GLB Act and its legislative history do not contain any
direct evidence of congressional intent with respect to real estate brokerage and
management activities, the statute's prohibition on financial subsidiaries engaging in real
estate investment and development is indirect evidence of legislative intent. The existence of
this limited real estate provision in the GLB Act suggests that Congress thought about real
estate activities in connection with the act and determined to leave unresolved the question
of whether financial holding companies or financial subsidiaries should be permitted to act
as real estate brokers or managers.

Soon after passage of the GLB Act, three trade associations -- the American Bankers
Association, the Financial Services Roundtable, and the New York Clearing House
Association -- asked the Board and Treasury to determine that real estate brokerage
activities are financial in nature. The American Bankers Association also asked the agencies
to define real estate management activities as financial in nature.
The Board and Treasury responded to these requests by seeking public comment on the
proposal. We have found the public comment process to be a useful means of gathering
information from experts, practitioners, and analysts with an understanding of the relevant
issues and activities. We recognize that, hard as we regulators try to foresee and address
potential issues raised by our regulatory actions, we can benefit from the information and
thinking of others. Our final rules often include significant modifications as a result of the
comments we received on the proposed rules.
In this spirit, we sought public comment on the real estate proposal. During the comment
period, the public had an opportunity to present views on the merits of determining whether
real estate brokerage and management activities should be deemed to be financial in nature
or incidental to a financial activity.
As I indicated earlier, the comment period on the proposal closed only yesterday. I can,
nevertheless, give you a flavor of the arguments made by commenters.
Commenters in favor of the proposal, most notably bank and financial services trade
associations at this point, have presented a variety of arguments in support of finding that
real estate brokerage is a financial activity. First, these commenters argue that real estate
brokerage activities are financial in nature because some depository institutions, including
thrifts (through service corporations) and some state banks, already engage in real estate
brokerage. Second, these commenters argue that banks have expertise in these activities
because national and state banks have long been involved in brokering real estate assets that
are acquired through the foreclosure process or that are part of trust estates. Third,
commenters in support of the proposal argue that bank holding companies and their
subsidiaries engage in virtually every other aspect of real estate transactions, including
mortgage lending, holding bank premises, making community development real estate
investments, performing real estate appraisals, providing real estate settlement and escrow
services, providing real estate investment advice, and providing title insurance, private
mortgage insurance, and homeowner's insurance. This indicates, in the view of these
commenters, that real estate transactions are financial transactions and, consequently, that
brokerage of real estate is a financial activity. Moreover, these commenters contend that real
estate brokerage is simply a specialized form of another permissible financial activity -acting as a finder -- and a more general form of a permissible banking activity -- assisting
third parties in obtaining commercial real estate equity financing.
As I noted earlier, in determining whether an activity is financial in nature or incidental to a
financial activity, the GLB Act specifically instructs the Board to consider whether the
activity is necessary or appropriate to allow a financial holding company to compete
effectively with any other financial services provider operating in the United States. In this
regard, commenters have provided evidence that a number of diversified financial firms
provide real estate brokerage services in addition to more traditional banking, securities, and
insurance services. These commenters also asserted that buyers and sellers of real estate are
increasingly looking to a single company to provide all of their real estate-related needs.

Some commenters also argue that real estate is a financial asset and that, therefore,
brokering real estate is a financial transaction. These commenters assert that real estate
brokerage is permissible as part of the statutorily listed financial activities permissible for
financial holding companies. The GLB Act authorizes financial holding companies to
engage in exchanging, transferring, or safeguarding financial assets and arranging, effecting,
or facilitating financial transactions for others.
Some of the same considerations that support a finding that real estate brokerage activities
are financial in nature also were presented by commenters as support for a similar
determination on real estate management. Thrift service corporations are authorized to
engage in general real estate management, and banks have acquired some experience in
managing real estate in their trust departments and with respect to assets acquired through
foreclosure. In addition, many aspects of real estate management are similar in nature to
existing banking activities. For example, collecting rental payments; maintaining security
deposits; making principal, interest, tax, and insurance payments; and providing periodic
accountings are functionally similar to collecting loan or lease payments, disbursing escrow
payments, and performing related accountings.
Although some of the comments favor the proposal, the vast majority of the comments have
been submitted by individual real estate agents opposed to the proposal.
Commenters have raised the following principal objections to the proposal. First, some
commenters claim that real estate brokerage and management are commercial activities and
that authorizing real estate brokerage activities would inevitably lead to authorizing
financial holding companies to negotiate and broker the sale of any type of asset. These
commenters contend that authorizing financial holding companies to engage in the activities
would violate the spirit of the GLB Act, which maintained a separation between banking
and commerce. These commenters also argue that real estate brokerage activities are
different from the finder activities permitted for banking organizations because an integral
part of real estate brokerage activities is the negotiation of a contract between the buyer and
seller -- a level of involvement in the transaction that has not been permitted to banking
organizations acting as a finder.
In addition, some commenters draw attention to various forms of conflicts of interest that
may result from allowing banking organizations to engage in real estate brokerage or
management. In particular, these commenters express concern that financial holding
companies acting as buyers' brokers may pressure or require buyers to use the financial
holding company's mortgage product (to the exclusion of loans from other lenders) or may
fail to refer buyers to other lenders who might have more competitive mortgage products. A
financial holding company acting as a seller's broker also may favor the buyer over the
seller because the company also is providing a mortgage loan to the buyer or is attempting
to sell another financial product to the buyer.
Other commenters question the ability of banking organizations to broker real estate with
the same level of competence, alacrity, and personal service as independent real estate
agents. Many commenters warn that allowing banking organizations to act as real estate
brokers would lead to bank domination of the field, in part because banking organizations
providing real estate brokerage services would have an unfair competitive advantage over
independent real estate agents due to the ability of banks to raise low-cost FDIC-insured
deposits. Under this line of argument, the proposal would result in an increased

concentration of power in the financial services industry, a decrease in the competitiveness
of the market for real estate brokerage services, and job losses for a large number of
independent real estate agents. Finally, commenters argue that allowing banking
organizations to enter into the real estate brokerage and management businesses would pose
risks to the safety and soundness of the nation's depository institutions.
Many of the commenters opposed to the proposal focus on whether real estate brokerage is a
financial activity. If one accepts their contention that brokering real estate is really a
commercial activity, the question can then be raised whether real estate brokerage should be
permitted as an activity that is "complementary to a financial activity." As I noted earlier,
this complementary category was included in the GLB Act to allow financial holding
companies to engage in activities that are themselves commercial activities but that also are
related to or complement financial activities.
Many of the points raised by commenters opposed to the proposal certainly would be
relevant to an analysis under this "complementary" standard, which requires the Board to
find both a connection to a financial activity and that the complementary activity would not
pose a substantial risk to depository institutions or the financial system and would result in
net public benefits. Because the agencies received requests to define real estate brokerage
and management activities as "financial in nature," that is the proposal on which the
agencies have sought public comment.
These are difficult issues, and both sides feel very strongly about their position. While we do
not relish being in the middle, we believe that a debate on these matters is the best way to
identify and sort through the issues and to reach an informed decision, and is precisely the
type of debate envisioned in the GLB Act.
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