If the Federal Reserve and the Treasury are designed to favor bank interests -- and they are -- then no one should be shocked when later this year it's announced that bankers should be allowed to offer real estate brokerage and management services.

Such approval, if it happens, gets us to a central question: If banks can offer realty services, should they and under what conditions?

Let's start by agreeing that certain subjects, while generally interesting, are not a matter of debate in this instance.

• What bankers charge for realty services is their business. Real estate already has an array of service and pricing models and there is no reason why bankers who enter the business must conform to one approach or another.

• Agency questions -- who represents who, what form of representation is best, etc. -- will continue whether banks offer or do not offer realty services. There is no reason why a bank once licensed as a realty brokerage should not offer whatever form or forms of service it elects. The baseline point is that such decisions should be made by the real estate licensee, regardless of whether the licensee is or is not a bank.

The issue here -- and the only issue -- is money and who gets it, brokers or bankers.

Given that banks have lobbied for the authority to broker and manage real estate, you can bet that many banks will want to enter the real estate business. But is that good for consumers and shareholders?

More competition is good for consumers -- if we assume that consumers have equal access to all competitors. And certainly shareholders benefit when companies add new services and revenues -- provided such new services produce additional profits.

But in the case of banks, such assumptions are not guaranteed.

It used to be that a bank was a bank. It was the place where you had a checking account and got business loans. Savings and loan associations, S&Ls, were places where by law you had a savings account and received a generous .25 percent more interest than banks were allowed to pay depositors. S&Ls provided mortgages and car loans, but not checking accounts.

And so for generations the world of financial services was neatly divided. But in the 1970s something new began to emerge on Wall Street. Instead of putting your money into a bank or S&L, you could now put your dollars into a mutual fund. And some mutual funds paid far more than those old-style savings accounts.

Mutual funds also did something else. They allowed you to withdraw your money. In essence, you could have an account that offered better interest rates than banks or S&Ls as well as a limited checking account feature.

Meanwhile, S&Ls decided that they too needed to offer more financial services. So, instead of just financing homes, some S&Ls began offering NOW services -- essentially interest-bearing checking accounts.

S&Ls also did something else: They started to finance the big projects once handled only by commercial banks, a change which eventually led to the S&L crisis, closed huge numbers of S&Ls, and eventually cost taxpayers more than $200 billion.

With S&Ls offering checking accounts and mutual funds offering better rates, banks were losing turf and so they needed to expand. Why just be a bank, bankers reasoned, when you can be a financial services center and also sell mutual funds, insurance, and stocks? Also, why operate in just one state? Wouldn't it make more sense to have inter-state banking with services and facilities in numerous states?

Among the results of these thrusts and counter-thrusts was that consumers could now take their money to any of several places and essentially get the same services. The old financial borders fell, banking decisions became less local, banks merged, branches closed, and the cost of services skyrocketed.

Not to be outdone, real estate brokers have also chipped away at the old financial fiefdoms. Many large brokers have mortgage loan subsidiaries and today individual agents can be empowered to make loans directly to consumers through such services as OnePipeline.

Given this background it's hardly amazing that banks now want to broker and manage real estate. And if we imagine that banks do receive authority to enter the real estate business, then we need to look at the four central issues regarding such expansion.

1. Will banks be licensed as realty brokers?

The absolute, non-negotiable, non-debatable standard that any final ruling must contain is that everyone in real estate operates under the same set of standards. This means that banks or their real estate subsidiaries must be licensed as brokers in each state where they provide realty services, and that all individuals who perform regulated real estate activities within a bank must be properly licensed as well. Each state now has in place both laws and regulators who can oversee those providing realty services, whether in banking or not.

2. Can banks tie realty and non-realty services?

There is no real estate firm, and probably no combination of firms, which have the economic clout of a major bank -- among the top 15 banks each has assets in excess of $50 billion and 3,400 banks have assets above $100 million. Such size is not an academic matter, it can allow banks to gain unfair competitive advantages if not properly regulated.

As an example, imagine that Smith Industries is building a new plant. It seeks funding from a commercial bank to finance construction and will also maintain its business accounts with the bank. It has, as the expression goes, a relationship with the bank.

Suppose there are three banks in town that magically all offer roughly the same services and fees, including this arrangement: We can cut the rate on your construction loan if you will assign all your employee relocation business to our real estate subsidiary and if you will allow us to be your broker in the acquisition of local property for the plant.

Here's another one: The bank says, "look if you buy the plant property through our real estate brokerage, we'll lower the mortgage rate for your top five local executives by x percent and waive all points."

Such tying arrangements, by their nature, must be prohibited because they make competition by non-banks difficult if not impossible.

3. Can banks deny services to competitors?

Go back to Smith Industries, our new corporate neighbor now moving to town. Broker Jones finds them an exceptional property, they want to buy, and all that's required is some financing. The nearest bank with the best rate says, "sure we'll put up the money, but our real estate department must get a piece of the brokerage fee for their referral work."

Or, consider a denial-of-service situation from the other direction.

There are two brokerages with buyers making an offer on one property. The property has been listed by a bank subsidiary. Both offers are identical. The bank's realty company says, "look, we'll recommend the offer which requires the use of a mortgage from our subsidiary. We'll argue against any offer which seeks financing elsewhere."

Plainly any effort to require services outside of brokerage as a condition of a transaction, or to require brokerage services as a condition of doing business with a bank, must be prohibited.

4. Who will hold the escrow money?

In real estate transactions the common practice is for buyers to offer a deposit when making an offer as evidence of their willingness to complete the sale. The listing broker takes the deposit and upon acceptance of the offer places the money in an "escrow" or trust account with a bank or S&L. In the event of a dispute, the money is turned over to a court or state real estate department.

But what if the broker IS the bank or a bank subsidiary? In essence, the deposit is not being held by someone other than the broker -- a bad idea because a brokerage may have a claim to some or all of the deposit. In this situation, it must be mandated that escrow accounts for banks and their real estate subsidiaries must be held by an unrelated third party for the protection of buyers.

Thursday: What If Banks Enter Real Estate?

For more articles by Peter G. Miller, please press here

Published: January 24, 2001

Use of this article without permission is a violation of federal copyright laws.

Peter G. Miller, also known as OurBroker®, is the author of six real estate books -- including The Common-Sense Mortgage -- and is the original creator and host of America Online's Real Estate Center. Peter's weekly columns appear in more than 100 newspapers nationwide, he is also published in a variety of other media outlets and he is a frequent speaker at national events and conventions. Peter welcomes your questions, comments, and news releases via e-mail at .