Banking interests represented by the Financial Services Roundtable have succeeded in getting a proposal on the discussion agenda of the Federal Reserve Board today which asks that some restrictions on bank holding companies be relaxed, allowing them to own and operate real estate brokerages and property management companies, limited to activities which do not require licensure.

At the crux of the issue is whether or not banks will be allowed to provide real estate services. The proposal is vehemently opposed by the National Association of Realtors which has been invited by the Board to offer a letter in response to the proposal.

"We're absolutely outraged that the greedy banking lobby would take advantage of the electoral confusion in Washington to bring this issue up again," says N.A.R. spokesperson Steve Cook. "Three times in the past three years Congress has clearly said banks should not be in the real estate business, so now they are trying to slip through by regulation what they couldn't get by legislation."

While the N.A.R. carries on its battle, Realtors meanwhile may well worry that while the proposal would have to go through an approval process, it could pass and go into effect as early as summer 2001 with potentially devastating eoncomic consequences for all or most licensed brokers and agents, as well as for eRealtor, the N.A.R.'s transaction platform still in development.

The banking industry's proposal would allow the holding companies' real estate brokerages to facilitate real estate transactions between principals, giving unprecedented transactional assistance to for-sale-by-owners and their buyers as well as commercial property transaction principals. In short, banks would be competing directly with real estate brokers.

At stake is a yet-to-be-determined slice of Realtors' commissions in the real estate transaction. The implications for residential real estate alone are staggering. In 1999, the total value of homes sold in the U.S was $908.8 billion. The total value of commissions is estimated to be about $46.3 billion (approximately six percent times 85 percent of total homes sold.) Fifteen percent of total homes sold are for-sale-by-owner homes which by the N.A.R.'s definition are homes which have been presented to the market by their owners, and are sold without the services of licensed real estate brokers. These homes total about $136.32 billion, a figure Realtors do not want to see enlarged as consumers find that they can take advantage one-stop-shop banking services which would include transaction assistance if the proposal passes.

Not only would Realtors' commissions be at risk, but consumers would also be at risk, says the N.A.R. Realtors fear that a number of things could happen to consumers from overpaying for or underselling their homes, to exposing themselves to a wide range of liabilities associated with ignorance of real estate disclosures and other issues related to property conveyances.

The Gramm-Leach-Bliley Act (GLB Act) of 1999 amended the Bank Holding Company Act (BHC Act) allowing bank holding companies or foreign banks which qualify as financial holding companies to engage in a broader range of activities, defined by the GLB Act as "financial in nature or incidental to a financial activity." Provisions and tests required to determine whether an activity is financial in nature or incidental to a financial activity are open to interpretation, and that is what allowed the banking interests to put the proposal on the Federal Reserve Board's agenda, says the N.A.R.

According to the N.A.R., though the Gramm-Leach-Bliley Act removed barriers to affiliation between banks, securities and insurance firms that were the crux of the now-repealed Glass-Steagall Act, it did not include real estate brokerage as new powers for financial services firms and national banks. The new banking law specifically prohibited banks and financial services firms engaging in real estate development and investment. The new law authorizes the Federal Reserve Board, the Treasury, and the Federal Trade Commission to develop regulations implementing the various provisions of the new banking law.

"The question is what is the definition of "financial,"" says Cook. "and whether banks will be able to enter into real estate services."

Today, the Federal Reserve Board (in consultation with the Treasury Department as required by the GLB Act) is proposing a regulation to determine which activities are permissible for financial holding companies to "act as a finder" under the Board's Regulation Y. In plain language, the Board will determine whether owning and operating real estate sales and property management brokerages fall into the category of acceptable activities for banks.

According to the N.A.R., a number of bank and holding company executives often cite the "act as a finder" provision of the BHC Act as an opening in the law that would permit banks and financial holding companies to engage in real estate activities, post-GLB Act. The affect on real estate brokerages could potentially be more devastating as financial holding companies would be able to act as intermediaries in bringing buyers and sellers together in the real estate transaction that the buyers and sellers themselves negotiate and consummate. According to the proposal, "Acting as a finder" has two functions: locating and matching third parties that are interested in engaging in a business transaction between themselves and serving as a conduit of transaction-related information between third parties that are interested in conducting a business transaction. A "finder" cannot negotiate on behalf of either party concerning a transaction or bind a party to the terms of a transaction.

"There are two items on the Fed's agenda that concern us," explains Cook. "The "finders" proposal is the least egregious. A second item would "permit financial holding companies to provide general real estate brokerage and real estate management services." The only way that this could be allowed under the legislation is if the Fed defined real estate services as "financial services" rather than "commercial services," which are specifically prohibited by the law."

Another objection the N.A.R. has to the proposed rule is that it does not authorize a financial holding company to engage in any activity that would require the company to register or obtain a license as a real estate agent or broker under applicable law, which opens the door for unlicensed personnel to facilitate transactions. The N.A.R. has long regarded licensing as a cornerstone of professionalism in the real estate industry.

The proposed rule is explicit regarding real estate activities: "The Board has made no determination to date regarding whether real estate agency, brokerage, investment or development activities are financial activities permissible for financial holding companies, and nothing in the proposal is intended to authorize a financial holding company to engage in these activities by, for example, owning or operating real property that serves as a shopping mall, a retail store, a manufacturing plant, or product distribution center." The Board will monitor financial holding companies' activities to ensure those finder activities "do not become impermissibly involved in real estate or commercial transactions" through the holding company's finder services.

That's small consolation to Realtors who may one day see many of their non-negotiating duties handled by banks instead of themselves, which is anticipated to cause a rise in non-brokered property transfers. There are also implications for the N.A.R's real estate transaction platform, eRealtor, which is currently under development. If the banks have their own financial standards, the industry could propose its own transaction standard, rendering the development of the eRealtor platform less compelling for Realtors and their consumers to use.

The issue of whether or not banks should be allowed to operate brokerages and property management companies and engage in real estate activities not requiring licensure ranks alongside the mortgage interest rate tax deduction in terms of lobbying priorities for the N.A.R, which has vowed to continue the fight.

Published: December 13, 2000

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Blanche Evans is the award-winning senior editor of Realty Times, the Internet's leading independent real estate news service. She is featured daily on the Realty Times Video Network in the "Realty Viewpoint" segment. Blanche has been named one of the "25 Most Influential People In Real Estate" by REALTOR Magazine, and has been twice recognized as a "notable." In 2005, she was named "Top Reporter Covering the NAR" by Delahaye-Bacon's. Blanche is a renowned author of five real estate books. Her newest, Bubbles, Booms and Busts: Make Money In Any Real Estate Market, McGraw-Hill, was rave-reviewed by The New York Times. She was also selected from hundreds of real estate experts to contribute to Donald Trump's book, Trump: The Best Real Estate Advice I Ever Received: 100 Top Experts Share Their Strategies, Rutledge Hill Press, and is featured on page 68. Order Now Review - Honors In 2006, Blanche was selected among scores of candidates to author two consumer real estate guidebooks for the National Association of Realtors: The NAR Guide to Home Buying, and The NAR Guide to Home Selling, Wiley & Sons. She is currently planning two new books for the NAR and its members.       Known for her keen insight into real estate industry issues and for her ability to make complex subjects easy to understand, Blanche is a sought-after keynote and continuing education speaker. Real estate organizations from MLSs, to brokerages, to franchisors, to associations hire her to provide up-to-the-minute analysis of real estate industry news and advice on how to improve revenues. Her passionate delivery, peppered with stinging wit, is a huge hit with audiences and fans. Don Klein, CEO Greater Nashville Association of Realtors, Blanche Evans, Richard Courtney, president 2007, GRAR "The GNAR membership meeting last week featured Blanche Evans as the keynote speaker. Her comments and insights resonated extremely well with those in attendance and we have had many requests for copies of her PowerPoint Presentation. She was a terrific part of the membership meeting and convention program!" - Don Klein, CEO Greater Nashville Association of Realtors Coverage from WSMV, Nashville - 8-14-2007 That Interview Guy - Get Inside The Head Of Today's Generation 2007 AE Institute Session - To purchase 2006 AE Institute Session - Parts 1 2 3 4 5 6 7 8 9 HouseValues Mastermind call - Parts 1 2 Blanche's fireside chat with Jeremy Conaway, HAR - Click here. To contact Blanche, email her at . For more articles by Blanche, click here.